0 IntroductionThe purpose of this essay is to advise a potential investor on the legal aspects relevant to making an investment in the Peoples’ Republic of China (PRC). The first part discusses the main methods of establishing operations in the PRC. It identifies the main legal and procedural steps. The essay also details intellectual property law in the PRC focusing on the protection of patents, copyright, trademarks and trade secrets. The essay notes the importance of human rights recognition in a business.
2.0 BackgroundThe Sino-Foreign Equity Joint Venture Law in 1979 was seen as a first step by the Chinese government to build a legal structure governing foreign investment. The PRC has continued to develop its legal system that protects investor’s rights as well as the rights of their foreign partners.
Zhixin (1988) notes that a substantial number of foreign-related tax laws and regulations have been enacted to develop international economic relations. 3.0 Establishing operations in the PRCThere are five main methods of establishing operations in the PRC, these include: Setting up a representative office;Setting up a branch office under the Company Law; Establishing an equity joint venture;Entering into a cooperative joint venture; and,Setting up a wholly foreign owned enterprise.
3.1 Representative OfficeMany firms choose to set up a representative offices in China initially as this helps the firm gain experience and acquire a better understanding of the size and potential of the market in the PRC. These offices function as a liaison between a firm’s home office and trade organisations and related industries in China. Representative offices are useful for conducting market research and establishing contacts with prospective customers and potential partners. 3.1.1 Registration requirementsRepresentative offices are subject to restrictions.
They cannot engage in certain activities and may not receive fees for services they provide, directly generate income, or sign contracts that would generate income. Representative offices, are however allowed to negotiate contracts which are later signed in the name of the home office located outside the PRC. Representative offices also need to be registered. Upon registration it may then lawfully: employ Chinese nationals, open a bank account, import personal effects duty-free, import office equipment without an import license, and obtain direct telecommunication lines, display signs with the company name, or to use business cards that identify the company’s presence in China. Completed registration of the representative office also allows the representative of a company to obtain a multiple entry visa or legally rent an apartment with a commercial domicile registration booklet. Representative offices also provide intangible benefits. It may no other purpose but to present an image to the prospective Chinese customers and potential partners.
The visual impression of a representative office is very important in China because the Chinese are often unable to visit the home office of the foreign company, and therefore are only able to judge the viability of a company by their operations in China. 3.2 Branch OfficeThe PRC’s Company Law allows a foreign branch office to be set up that would have manufacturing and selling capabilities, but would not be considered a Chinese legal person. The rationale behind this law was to allow companies to conduct business (sales and manufacturing) in China while not requiring them to make the more sizable investment required to set up a wholly foreign owned enterprise. The branch is not considered a Chinese legal person but relies rather on the legal person of the foreign corporation. In this way the foreign corporation open to liabilities from its China operations, should things go wrong. It is important to note a difference between a branch office and a representative office.
A representative office does not have the power to engage in manufacturing operations or sell products on it’s own behalf. Employees of the representative office are permitted to engage in sales negotiations, but when it comes time for an order, technically an officer from the foreign company (not a representative) should sign the sales contract. Sales must all be invoiced and shipped from overseas (companies are usually required to have operations in Hong Kong). A representative office does not have the power to import products, keep inventory, or sell samples (however they can give them away for samples etc). From a certain perspective, a branch office is much more powerful than a representative office because under the Company Law they have the power to participate in all of these activities. 3.3 Equity Joint VentureThe second most common manner in which foreign companies enter the China market are equity joint ventures.
This type of venture help foster good relations and are thus the preferred manner for cooperation. Joint ventures combine market knowledge, preferential market treatment, and manufacturing capability of the Chinese side along with the technology, manufacturing know-how, and marketing experience of the foreign partner. The operation of joint ventures is normally limited to a fixed period of time from thirty to fifty years. In some exceptional cases an unlimited period of operation can be approved.
These exceptions usually occur when the transfer of advanced technology is involved. The profit and risk sharing in a joint venture are proportionate to the equity of each partner in the joint venture, except in cases of a breach of the joint venture contract . Share holdings in a joint venture are usually non-negotiable. The only exception to this is via approval from the Chinese government.
During the life of the joint venture contract, investors are restricted from withdrawing registered capital. Upon registry of a joint venture, the entity is then considered a Chinese legal entity and must abide by all Chinese laws. As a Chinese legal entity, as they abide by Chinese labor law, a joint venture is free to hire Chinese nationals without the interference from government employment industries.
Joint ventures are allowed certain privileges prevented to representative offices such as the ability to purchase land and build their own buildings.3.4 Cooperative joint ventureIn a cooperative venture, the parties involved may operate as separate legal entities and bear liabilities independently rather than as a single entity. A cooperative venture may also be registered as a limited liability entity resembling an equity joint venture in operation, structure, and status as a Chinese legal entity. In some situations the option of establishing a Cooperative (Joint) Venture is more advantageous than establishing a normal Joint Venture. Chinese law was designed to be flexible so that unforeseen complications could be solved by bending the law, rather than rewriting it.
That is pretty way of saying the Chinese left a lot of loopholes in their law to get around the hang ups that Chinese regulatory bodies create. One of those loopholes was the creation of a Cooperative Venture (CV). Under the CV structure, a foreign investor does not need to set up a new corporation in China. The foreign investor and the Chinese partner participate in the joint venture by doing business using the Chinese business license under a cooperative, contractual arrangement. 3.
5 Wholly foreign owned enterpriseWholly foreign owned enterprises are permitted to register in cases where at least half of their annual output is exported or if the nature of their operations relies heavily on advanced technology and the application of this high technology is beneficial to China. Like joint ventures, wholly foreign owned enterprises are in most cases required to balance their foreign exchange and are allowed to occupy facilities other than those managed by the Foreign Management Bureau. As a Chinese legal entity they may sign separate contracts with the appropriate government authorities or Chinese business entities to acquire land use rights, rent buildings, and receive utility services. Wholly foreign owned enterprises enjoy exclusive management control of their business activities and have autonomy in their operation and management with less interference from the Chinese government. Because there is no Chinese partner to guide the project through the approval process and through the other regulatory issues associated with construction and operation of the enterprise, the logistics of establishing a wholly foreign owned enterprise can be difficult and costly. A wholly foreign owned enterprise is considered a Chinese legal entity and must abide by all Chinese laws.
They must employ Chinese labor in accordance with local and central government labor laws and are encouraged to establish trade unions (but not required to do so. 4.0 Intellectual Property Law in the PRC4.1 Intellectual propertyRecently, the PRC has acceded to a number of international treaties and conventions related to the protection of intellectual property rights.
China joined the Paris Convention for the Protection of Industrial Property which China in 1985, the Nice Arrangement concerning the International Classification of Goods and Services for Registration of Marks in 1988, and the Madrid Agreement for the International registration of Marks which China in 1989. In 1992 the United States and China signed the Memorandum of Understanding on the Protection of Intellectual Property. This agreement required China to make certain changes to its laws governing intellectual property protection and to accede to the Berne Convention, the Universal Copyright Convention, and the Geneva Phonograms Convention before 1994. 4.
2 CopyrightThe China Copyright Law was promulgated in 1991 and has been upgraded four times since then. In 1991 the China Copyright Law Implementing Regulations and the Computer Software Protection Regulations were passed. In 1992 the Computer Software Registration Procedures and the Implementations of International Copyright Treaties Provisions were approved. In 1991 the National Copyright Administration was set up and charged with responsibility for copyright matters including the formulation of regulations relating to copyright administration, investigation of major infringements, administration of matters relating to foreign copyrights, administration of state owned copyrights, and the supervision of lower level copyright authorities. Under China’s copyright law, the owner of a work should receive protection without being required to register the work with the copyright agency.
In the case where the copyright is held by an individual, protection is provided during the life of the author and extends fifty years beyond his or her death. In the case where the copyright of the work belongs to a company, protection extends for a period of fifty years from the first publication of the work. The period of protection for cinematographic, television, video, or photographic works extends fifty years from the first publication of the work without regard to the owner of the copyright.
4.3 PatentsPatents in China are governed by the China Patent Law promulgated in 1985 and its Implementing Regulations that were passed the same year. Major improvements were made to the Patent Law as a result of the Memorandum of Understanding on intellectual property protection China signed with the US in 1992. Several amendments to the Patent Law came into effect in January 1993 as a result. China amended its Patent law to extend the duration of patent protection from fifteen to twenty years.
The “Patent Law” amendments also defined infringement in a broader sense to include unauthorised sale or unauthorised importation of products which infringe on the patent or products that were manufactured with the use of patented processes. Conditions were also placed on the granting of compulsory licenses and cross-licenses. The “Patent Law” requires that foreign parties utilise the services of a registered Chinese Patent Agent to submit the patent application.
Preparation of the application may be done by foreign attorneys or by the Chinese Patent Agent. The approval process for a patent application normally takes from twelve to twenty-four months to complete. 4.4 TrademarksLegislative protection of trademarks in China has made great advances since the late 1970’s. The China Trademark Law was promulgated in 1983 and followed by the China Trademark Implementing Regulations in 1988.
Significant revisions were made to the Trademark Law and came into effect in July 1993. Trademark registration in China is an integral part of the initial entry of any company into the China market. Often a foreign designed jointly manufactured product becomes so popular in the Chinese market that a competitive entity will copy the product and seek to trade based on consumer goodwill towards the product. Chinese and English versions of trademarks should be registered simultaneously. The inclusion of English in the trademark is crucial to emphasise the involvement of a foreign partner and the higher quality of a foreign designed product. Consumers in China generally only recognise that the English name is foreign and make purchase decisions based on the associated Chinese character trade name.
China’s Trademark Law requires that foreign companies utilise the services of registered agents to submit trademark applications. The trademark applications can be prepared by foreign attorneys or the Chinese agents. 4.5 Trade Secrets, and non-disclosure agreementsThe Chinese government adopted the “Law against Unfair Competition” which became effective in December 1993. Local unfair competition regulations also exist in many provinces but primarily concern false advertising, profiteering, and consumer protection and do not protect trade secrets. China is already obligated to protect trade secrets under the Paris Convention for the Protection of Industrial Property, however, the lack of national legislation in this area has made it difficult for foreign companies to protect their trade secrets. Most firms currently rely upon confidentiality clauses in contracts to protect business or technical information.
Trade secrets are most often protected through the use of Confidentiality Agreements or Non-Disclosure Agreements with the key personnel in the joint venture. These agreements are crucial and are usually initiated as a condition to the disclosure of any technical information during negotiation of technology transfer agreement. Confidentiality agreements and non-disclosure agreements do not require the approval by the authorities and are not subject to the same ten year limit which the technology transfer agreement is confined to. A confidentiality agreement can cover trade secrets for an indefinite period of time. However, a non-disclosure agreement with regard to technology revealed during negotiations is superseded by the provisions governing confidentiality in the technology transfer agreement if the negotiations are successful. The confidentiality provisions in the technology transfer agreement are subject to approval.
ConclusionThis essay examined some legal aspects relevant to making an investment in the PRC. It discussed the five main methods of establishing operations in the PRC. These included setting up a representative office or a branch office. Establishing an equity joint venture or entering into a cooperative joint venture. Lastly, foreign investors could also set up a wholly foreign owned enterprise.
The second part of the essay detailed intellectual property law in the PRC focusing on the protection of patents, copyright, trademarks and trade secrets. It notes that since 1970 the PRC has made giant strides in facilitating foreign investment in terms on enactment of legislation and compliance with international covenants protecting intellectual property.BibliographyChina International Economic Consultants Incorporated. (1986). The China investment guide. Essex, England: Longman Group.
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