China Regulatory and Authorized Spherical-up | March-April 2021

Foreign Investment and General Corporate

1. National Development and Reform Commission Circular to Optimize the Handling of Confirmation Letters on Domestic and Foreign-funded Projects Encouraged by the State

On March 16, 2021, the National Development and Reform Commission (“NDRC”) issued the Circular about Optimizing the Handling of Confirmation Letters on Domestic and Foreign-funded Projects Encouraged by the State (关于优化办理外商投资项目《国家鼓励发展的内外资项目确认书》的通知) (the “Circular”) (see here for the full text in Chinese)

The Circular is intended to implement the Foreign Investment Law of the People’s Republic of China, deepen reform of foreign investment management system, raise the level of foreign investment services, and improve the convenience for handling the Confirmation Letters on Domestic and Foreign-funded Projects Encouraged by the State (the “Confirmation Letters”) for foreign-funded projects. The Circular outlines the following relevant points:

• Project confirmation letters for encouraged foreign investment projects with a total investment amount from US$30 million to US$300 million will be delegated by NDRC to the development and reform commissions of the respective provinces, autonomous regions, centrally-administered municipalities, and municipalities with independent planning and Xinjiang Production and Construction Corps. 
• Pursuant to the provisions, the project owners will need to present:

a)        the project confirmation letter issued by the development and reform authorities,
b)        the list of imported equipment, and
c)        any other relevant documents to process the relevant tax reduction and exemption formalities with the Customs

• The project owners will also need to ensure the authenticity, accuracy and completeness of the construction contents, total investment of the project, amount of foreign exchange used, imported equipment, and other information. Any non-compliance by the project owners will be included in the national credit information sharing platform.
• The provincial development and reform authorities will:

1. issue project confirmation letters strictly pursuant to the policies, 
2. improve the online platform as soon as possible to facilitate online declarations, 
3. process and progress enquiries related to the status of project confirmation letters of foreign investment projects, and
4. strengthen the supervision through and after the project. 

2. Release of Measures for the Supervision and Administration of Online Transactions 

On March 15, 2021, the State Administration for Market Regulation (“SAMR”) officially released the Measures for the Supervision and Administration of Online Transactions (网络交易监督管理办法) (the “Measures”) (see here for the full text in Chinese) [KWM1]  which come to effect on May 1, 2021. 

The Measures are important departmental rules for the implementation of the E-commerce Law, specifying and improving relevant laws and regulations, and formulating a series of specific systems and norms to regulate transactions, clarify the responsibilities of online transaction operators, and protect the rights and interests of consumers. The Measures consist of 56 articles across five chapters and, among other things, provide for the registration of online transaction operators, regulate new business forms and address measures for the protection of personal information. Some details are as follows:

• The Measures apply to the business activities of selling goods or providing services in information network activities such as online social networking and online live streaming. For example, the Measures require the operators to display the information of the goods or services as well as the information of their actual business entities and after-sale services in a noticeable way, or to provide hyperlinks to the above information. Online transaction service providers will be required to keep the live video of online transaction activities for no less than three years from the date of completion of live streaming, so as to fully safeguard consumers’ right to know.
• As an anti-monopoly effort, the Measures require business operators to choose one platform from a range of competitive platforms in the market. They also stipulate that the platforms will not prohibit or restrict business operators using its platforms from carrying out business activities on multiple platforms at their own discretion, or only allow them to carry out business activities on specific platforms by searching for  a lower market price, removing goods from shelves, restricting operations, shielding stores, raising service charges or otherwise, so as to ensure the fair competition in the market.
• The Measures optimize the commodity evaluation system of the platforms, clearly stipulating that online trading operators will not fabricate transactions or user comments, adopt misleading displays, carry out false marketing or fabricate traffic data such as hits and followers, or fictitious transaction interaction. These stipulations guarantee consumers’ right to know, and are conducive to consumers making more appropriate purchasing decisions.

The release of the Measures will provide a strong legal foundation for improving the supervision system, refining and streamlining of online transactions while maintaining a fair online competition and creating a safe and secure consumer environment.

 [KWM1]KWM Response:

It is fine to delete “at the 3.15 evening party” here.

For your further understanding, “3.15 evening party” refers to a public welfare party on the evening of March 15 each year jointly hosted and broadcasted by China Media Group and other China authorities, in order to protect the rights and interests of consumers.

Customs and Foreign Exchange

3. 33 financial measures to support Hainan reform and opening-up

On April 9, 2021, the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly issued the Opinions on Financial Support for Hainan in Fully Deepening Reform and Opening-up (《关于金融支持海南全面深化改革开放的意见》) (the “Opinions”) (see here for the full text in Chinese). The Opinions set out the overall principles of serving the construction of Hainan Free Trade Port, deepening financial reform, and opening-up – with institutional innovation at its core. Overall, 33 specific measures were released, which are based on six principles:

• enhancing the convertibility of RMB and supporting the liberalization and facilitation of cross-border trade and investment; 

• improving the financial market system of Hainan;

• expanding the opening-up of Hainan’s financial industry;

• strengthening the innovation in financial products and services;

• enhancing the level of financial services; and 

• strengthening financial regulations to prevent and resolve financial risks.

In terms of improving the convertibility of RMB and supporting the liberalization and facilitation of cross-border trade and investment, the Opinions propose the following measures:

• To further facilitate trade settlement: banks may, based on the payment instructions, proceed the settlements of real and compliant trade in goods and services for quality clients on a pilot basis, so as to realize the change from pre-review to post-review.

• To explore the foreign exchange control for new forms of cross-border investment: Qualified Foreign Limited Partners (QFLPs) within the Hainan Free Trade Port are allowed to freely make outward and inward remittance of funds under the balance management mode, and the foreign exchange registration formalities will be simplified. A basic quota for the Qualified Domestic Limited Partner (QDLP) pilot program will be granted to the Hainan Free Trade Port, and an additional QDLP quota may be issued each year.

• To improve the policy framework for macro-prudential management of full-covered cross-border financing: the upper limit of cross-border financing for non-financial enterprises (excluding real estate enterprises and local government financing platforms) registered in the Hainan Free Trade Port will be appropriately raised.

• To explore the pilot of cross-border asset management business: overseas investors are encouraged to invest in wealth management products issued by financial institutions in the Hainan Free Trade Port, private asset management products of securities and futures business institutions, publicly offered securities investment funds, insurance asset management products and other asset management products.

• To explore the relaxation of policies on individual cross-border transactions: foreign individuals working in the Hainan Free Trade Port are supported to make domestic investments including securities investment. Eligible non-residents are allowed to purchase real estate in the Hainan Free Trade Port based on their actual needs.

• To carry out the pilot program of cross-border capital pool business with the integration of RMB and foreign currencies in Hainan: qualified multinational enterprise groups are supported to carry out the business of adjusting and collecting surpluses and deficits of RMB and foreign currencies in a centralized manner among domestic and overseas members.

• To support qualified non-banking financial institutions to carry out pilot foreign exchange settlement and sales business: qualified non-bank financial institutions are allowed to participate in the interbank foreign exchange market and conduct   RMB against foreign exchange spot business and related derivatives trading in accordance with the laws and regulations.

Tax

4. Release of the List of Matters Subject to “No Penalty for Violation for the First Time”

On March 31, 2021, the State Taxation Administration (“STA”) published the Announcement on Issuing the List of Matters Subject to “No Tax Administrative Punishment for Any Violation Committed for the First Time” (《税务行政处罚“首违不罚”事项清单》) (STA Announcement [2021] No. 6) (“STA Announcement”) (see here for the full text in Chinese), which has come into force as of April 1, 2021.

The STA Announcement is in accordance with the newly revised Law of the People’s Republic of China on Administrative Penalty (《中华人民共和国行政法》) (see here for the full text in Chinese), and the Rules for the Exercise of Discretion in Administrative Penalty for Taxation (Announcement No. 78 [2016]) (《税务行政处罚裁量权行使规则》) （the “Announcement”） (see here for the full text in Chinese), which introduce the policy of “No Penalty for Violation for the First Time” . That is, the penalty can be exempted for the violation of law for the first time if the action results in only minor harmful consequences and corrective action is taken in a timely manner. To further implement this policy from tax perspectives, the STA Announcement specifies a list of 10 items, covering various types of minor tax violations, which can be exempted from tax penalty for a first time violation. This is a landmark development which represents the current tax administration trend of Chinese tax authority to improve tax compliance by means of education, reminders and other non-punitive measures, and will play a positive role in promoting the efficiency of tax law enforcement.

5. Further details released for Substantive Operation for Preferential Tax Treatment in Hainan Free Trade Port

Following the issuance of the Notice on Preferential CIT Policies for the Hainan Free Trade Port (关于海南自由贸易港企业所得税优惠政策的通知)[Cai Shui [2020] No. 31](see here for the full text in Chinese) and the Announcement on Issues Relating to Corporate Income Tax Incentives for Hainan Free Trade Port (关于海南自由贸易港企业所得税优惠政策有关问题的公告) [Announcement [2020] No. 4 of Hainan Tax Bureau of State Taxation Administration] (see here for the full text in Chinese) (“HTB”) that provides the preferential enterprise income tax (“EIT”) treatment for Hainan Free Trade Port (“Hainan FTP”), the HTB and two other Hainan governmental authorities jointly promulgated the Announcement on Issues Related to the Substantive Operation of Enterprises in Industries Encouraged by Hainan FTP (关于海南自由贸易港鼓励类产业企业实质性运营有关问题的公告) (HTB Announcement [2021] No.1) (“No.1 Announcement”) on March 5, 2021. This No.1 Announcement clarifies the requirements for substantive operation under various circumstances to obtain the preferential EIT treatment. The No.1 Announcement takes effect from January 1, 2020 and will operate until December 31, 2024.

In general, if all aspects of a resident enterprise registered in Hainan FTP are located in Hainan FTP, including production and operation, personnel, accounting and assets,  that enterprise will be regarded as having substantive operation in Hainan FTP. Consequently, the enterprise may be eligible for the EIT benefit (15% preferential tax rate) in Hainan FTP. The No.1 Announcement also clarifies the substantive operation standards for branches and non-resident enterprises’ premises in Hainan FTP. It is advisable that enterprises established, or to be set up, in Hainan FTP, assess whether their operation and management arrangements meet the legislated criteria to guarantee the eligibility for Hainan FTP tax benefits.

6. Extra Tax Deductions for Manufacturing Industry Research and Development Expenses

To encourage investment in research and development (“R&D”) and boost innovation in the manufacturing industry, the Ministry of Finance and the STA jointly published the Announcement on Further Improving the Policies Regarding Weighted Pre-tax Deduction of Research and Development Expenses (财政部 税务总局关于进一步完善研发费用税前加计扣除政策的公告) (Announcement [2021] No.13 of the Ministry of Finance and STA) (“No.13 Announcement”) on March 31, 2021 (see here for the full text in Chinese).

The No.13 Announcement further increases the ratio of pre-tax deduction of R&D expenses incurred by manufacturing enterprises from 75% to 100%. Specifically, with respect to R&D expenses not capitalized as intangible asset costs, an extra 100% of the actual expenses incurred can be deducted for EIT purposes, and if the said expenses have been converted into intangible assets, they can be amortized and deducted at the rate of 200%. As such, for every RMB 100,000 spent on R&D, the taxpayer will be able to deduct RMB 200,000 from its taxable income. This so-called R&D super deduction policy is exciting news for enterprises in the manufacturing sector. 

Moreover, for taxpayers to claim these benefits as early as possible, the qualified enterprises may opt to benefit from the tax incentive on a semi-annual basis. That is, taxpayers may enjoy the preferential policies for the first half year when filing EIT prepayment return of the third quarter (prepayment on a quarterly basis) or September (prepayment on a monthly basis), or enjoy the whole year super tax deduction when making the annual EIT filing.

Data Protection

7. Issue of the Regulations on Scope of Necessary Personal Information for Common Types of Mobile Internet Applications

On March 22, 2021, the Cybersecurity Administration of China (“CAC”), the Ministry of Industry and Information Technology (“MIIT”), the Ministry of Public Security, and SAMR jointly released the Regulations on Scope of Necessary Personal Information for Common Types of Mobile Internet Applications (Apps) (《常见类型移动互联网应用程序必要个人信息范围规定》) (the “Regulations”) (see here for the full text in Chinese). The Regulations specify the scope of necessary personal information collected by 39 kinds of Apps running on mobile terminals, such as map navigation, online car-hailing services, instant messaging, online communities, online payment, online shopping, food and beverage delivery and so forth. The Regulations also, for the first time, explicitly include ‘applets’ in the regulatory scope of Apps, and emphasize that App operators shall not refuse to provide the basic function services to users if they reject the collection of non-essential personal information. 

We suggest that enterprises in China should strictly follow the relevant requirements of the Regulations when developing and operating Apps, and explicitly define the scope of collected and used personal information to protect users’ privacy.

8. MIIT Reports and Removes 60 Infringing Apps

On March 11, 2021, MIIT notified the public of a list of 136 Apps companies that violated users’ rights and interests.  Each of the 136 App companies were re-inspected by a third-party testing institution to determine if they had improved their practices. The investigation found that there are still 53 Apps that have not adequately rectified their practices to meet the requirements of MIIT. During this process, the Zhejiang Communications Administration Bureau independently found that there were 7 further App companies that had not rectified their practices. On April 6, 2021, MIIT organized the removal of these 60 non-compliant App companies in accordance with the requirements of the Cybersecurity Law and the Interim Provisions on the Management of Preset and Distribution of Mobile Smart Terminal Applications and other legal and normative documents (see here for the full text in Chinese). 

We suggest that enterprises in China continue to pay attention to the enforcement activities related to the special campaign of Apps, collect and use personal information in a lawful and compliant manner, and protect the rights and interests of users’ personal information.

9. Second Drafts of Personal Information Protection Law and the Data Security Law Announced

On April 22, 2021, the Legislative Affairs Committee of the Standing Committee of the National People’s Congress held a press conference to introduce legislative work to support data security(see here for the full text in Chinese). This work comprises the second draft of the Data Security Law (the “DSL”) and the draft Personal Information Protection Law (the “PIPL”).

It is intended that the DSL will:  

• specify the meanings of relevant terms such as “data security”;
• modify the data classification system and the important data protection system; and  
• enrich the provisions for the security administration of data exports. 
• It is intended that the PIPL will: 
• improve the principles that should be followed when processing personal information;
• enrich provisions related to legal processing of personal information, consent withdrawal, automatic decision-making, and the cross-border provision of personal information; 
• add provisions related to the protection of personal information of the deceased;
• clarify the responsibilities of the national cyberspace administration authorities in coordinating and promoting the protection of personal information; and 
• modify the civil liability consequences for infringing the rights and interests of the personal information subjects. 

We suggest that enterprises in China continue to follow the formulation of the PIPL and the DSL, and pay attention to the issues concerning the protection of personal data and important data.

IP

10. Chief Justice Zhou Qiang and Prosecutor-General Zhang Jun Delivers Work Reports 2021

On March 8, 2021, at the fourth session of the 13th National People’s Congress,  Chinese Chief Justice Zhou Qiang and Prosecutor-General Zhang Jun delivered the 2021 work reports of the Supreme People’s Court (“SPC”) (《最高人民法院工作报告》) ( the “Work Report of the SPC”) (see here for the full text in Chinese)) and the Supreme People’s Procuratorate (“SPP”) ((《最高人民检察院工作报告》) (the “Work Report of the SPP”) (see here for the full text in Chinese)). The work reports reviewed 2020 highlights of the work of courts and procuratorates in China and outlined proposed future work. The Work Reports outlined the following in relation to intellectual property developments:

• according to the Work Report of the SPC, in 2020, Chinese courts concluded 466,000 first instance intellectual property cases, representing an increase of 11.7% on an annual basis, and the damages in intellectual property cases increased by 79.3% on a yearly basis. The SPC issued a total of 10 judicial interpretations and regulations on evidence in civil intellectual property lawsuits and other issues. These judicial interpretations and regulations have further facilitated the parties to submit evidence, shortened the period of lawsuits, reduced the costs for enforcement actions of IP rights, and increased compensation awards;  
• as stated in the Work Report of the SPC, efforts will be made to strengthen judicial protection of intellectual property in all aspects, strengthen the construction of intellectual property courts, improve the judicial enforcement relating to anti-monopoly and anti-unfair competition, safeguard the legitimate rights and interests of consumers, maintain the market order of fair competition, and protect public interest;
• according to the Work Report of the SPP, in 2020, prosecutors across China prosecuted 12,000 people for intellectual property crimes, representing an increase of 10.4 percent annually Chinese and foreign companies enjoy equal intellectual property protections. In collaboration with the National Copyright Administration and other departments, the SPP supervised the examination of 49 major copyright infringement cases. The Intellectual Property Prosecution Office was established for the purpose of integrating the prosecution of criminal, civil, and administrative cases of intellectual property infringement strengthening judicial expertise with a dedicated team. The SPP issued judicial interpretations jointly with the SPC and has collaborated with the Ministry of Public Security to improve the standards for filing cases of trade secret infringement and to impose harsher penalties;
• as stated in the Work Report of the SPP, greater efforts will be made to crack down on intellectual property crimes. The SPP will focus on areas of significant public concern as well as frequent counterfeiting and infringement cases, will promote pilot programs to develop comprehensive judicial expertise in intellectual property, and improve the law-based protection of intellectual property. 

11. The SPC Publishes Typical Punitive Damages Cases for Intellectual Property Infringement

In order to enable a proper understanding and application of the Interpretation on the Application of Punitive Damages to Civil Cases of IP Rights Infringement, on March 15, 2021, the SPC published 6 typical civil cases of intellectual property infringement (《侵害知识产权民事案件适用惩罚性赔偿典型案例》) (the “Typical Cases”) (see here for the full text in Chinese) in which punitive damages were awarded. The key takeaways of the Typical Cases are as follows:

• Circumstances based on which intentional infringement is determined: the court will consider whether there is an employment relationship between the defendant and the plaintiff and whether, as a result, the defendant has had access to the infringed intellectual property; whether the defendant continues to commit infringement regardless of a judgment or administrative penalty that has taken effect; whether the defendant has fully imitated or plagiarized plaintiff’s products; and whether the defendant infringes the plaintiff’s well-known trademarks. 
• Circumstances that are considered as “serious”: the court will consider whether the defendant has gained significant profits from the infringement; whether the defendant’s behavior has caused severe damage to the plaintiff’s legitimate rights and interests, such as its goodwill and market share; whether the defendant obstructs evidence in litigation; and whether the objection to jurisdiction is abused in litigation. 
• Means to determine the amount of punitive damages: in determining the punitive damages to be awarded, the court will consider the actual losses the plaintiff has suffered; the profits the defendant has gained from the infringement; or multiples of the licensing fees. This is referred to as the “base amount”. 
• Determination of the amount of punitive damages: in calculating the punitive damages to be awarded, the amount should be twice the aforesaid base amount if the infringement is serious, three times the base amount if the infringement is very serious, and four  or five times the base amount if the infringement is extremely serious. In extremely serious circumstances, such as the existence of direct intention, infringement by a business, large scale of infringement, long duration of infringement, huge losses or profits, obstruction of evidence submission and so on, the amount of punitive damages can be five times the base.