18 May 2020

China regulatory and legal round-up | May 7, 2020

General Corporate and Foreign Investment

Shanghai published Regulations on Optimizing the Business Environment of Shanghai

On April 10, 2020, the People’s Congress of Shanghai passed the Rules on Optimizing the Business Environment of Shanghai (《上海市优化营商环境条例》), which came into effect on the same day.  The Rules echo the Regulations on Optimizing the Business Environment (《优化营商环境条例》) issued by the State Council on October 22, 2019 which came into effect on January 1, 2020.  Aiming to stimulate enterprise growth, safeguard legitimate rights and interests of market entities, and to promote high-quality economic development, the Rules contain updates to five major aspects, including business environment, governmental services, public services, regulatory enforcement, and legal guarantees. 

Among other things, the Rules emphasize that all market participants, including domestically-funded enterprises and foreign-invested enterprises, will be treated equally in terms of:

  • entry into the market (other than industrial sectors falling within the Negative List),
  • application of national and local incentive policies,
  • access to productivity factors (such as funds, technologies, human resources, land use rights and other natural resources), and
  • access to public services resources.

Local people's governments at all levels in Shanghai Municipality and their relevant departments shall abide by policy undertakings they make to market participants and the various contracts made with them, and shall not default on payments owed to market participants for goods, works, services, or the like.  The Shanghai government will establish a comprehensive one-stop online service platform, which will enable market participants to complete all governmental formalities online, except for those involving State secrets.  The Shanghai government will further the reform of “separating permits from business licenses,” and continue to simplify permit-related formalities to facilitate enterprises’ business activities after they obtain their business license. 

Ministry of Transport and Communications published the Notice on Providing Better Services to Stabilize Foreign Trade

On April 20, 2020, the Ministry of Transport and Communications, together with the Ministry of Commerce and other related departments, issued the Notice on Providing Better Services to Stabilize Foreign Trade《关于当前更好服务稳外贸工作的通知》.  The Notice states that the transportation sector will play a leading role in stabilizing foreign trade and emphasizes the following five aspects: (i) securing and smoothing international transportation channels for foreign trade, (ii) facilitating foreign trade transportation, (iii) reducing importing and exporting logistics costs, (iv) creating a good external environment and enhancing international cooperation, and (v) strengthening the relevant mechanisms to enhance transportation assurance.

Foreign Exchange

SAFE launches eight measures to further facilitate cross-border trade and investment

On April 10, 2020, the State Administration of Foreign Exchange (“SAFE”) issued the Circular of the State Administration of Foreign Exchange on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business (《国家外汇管理局关于优化外汇管理 支持涉外业务发展的通知》), to simplify the foreign exchange business handling process, optimize foreign exchange business services, and further facilitate cross-border trade and investment.

The main aims of the Circular include:

  • promoting the facilitation of payment of income under capital accounts;
  • canceling the registration requirements of special foreign-exchange refund business;
  • simplifying the registration administration of certain businesses under capital accounts;
  • relaxing the controls on the purchase and payment of foreign exchange for domestic foreign exchange loans with export background;
  • facilitating the use of electronic documents for foreign exchange business;
  • optimizing foreign exchange settlement for cross-border e-commerce for banks;
  • relaxing review and endorsement procedures for business; and
  • supporting banks to pursue innovation in their financial services.

Specifically, regarding the use of receipts under capital accounts and RMB funds derived from the settlements for domestic payments, the Circular proposes measures that are to be applicable nationwide. Enterprises which meet certain conditions may directly process a payment on the basis of payment instructions, without first submitting materials on a transaction-by-transaction basis to the regulator.  Also, by optimizing the review process for payment of funds, the Circular allows the use of foreign exchange funds in capital accounts and promotes the efficient use of business capital

Tax

Tariff incentive to stimulate domestic sales of export-oriented goods

The sweep of COVID-19 across the world has caused China’s exports to plummet in the past few months.  This has led exporters to explore redirecting goods originally earmarked for export into domestic markets.  To stimulate domestic sales, the Ministry of Finance (“MOF”), the General Administration of Customs (“GAC”) and the State Administration of Taxation (“SAT”) have jointly issued the Announcement on Expanding the Pilot Program for the Policy of Selective Levying of Tariff on Commodities for Domestic Sales (Announcement of the MOF, the GAC and the SAT [2020] No.20) expanding the pilot program to cover all comprehensive bonded zones. As such, for goods manufactured or processed in comprehensive bonded zones for export purposes but later sold domestically, enterprises have the choice to pay the import tariff either by declaring import of the materials used for manufacturing/processing such goods, or by declaring import of the goods.  Enterprises should make the best choice for them after evaluating the total tax implications on imports and by comparing different levying methods.

 Extension of tax incentive available to enterprises in western region

On April 23, 2020, the Ministry of Finance, the State Taxation Administration and the National Development and Reform Commission (“NDRC”) jointly issued Announcement [2020] No.23 to extend the tax incentive for China’s western region for another 10 years, from January 1, 2021 to December 31, 2030.  As such, enterprises set up in western region in encouraged industries could be entitled to a reduced enterprise income tax rate of 15%, instead of statutory enterprise tax rate of 25%.  This incentive was first implemented in 2001 for 10 years, and has been extended for another 10 years to 2020.  To qualify, enterprises must have 60% of their revenue from major businesses falling within the Catalogue of Encouraged Industries in Western Region.  Foreign-invested enterprises are also eligible for this tax incentive.  [Note: Western regions include Inner Mongolia Autonomous Region, Guangxi Zhuang Autonomous Region, Chongqing Municipality, Sichuan Province, Guizhou Province, Yunnan Province, Tibet Autonomous Region, Shaanxi Province, Gansu Province, Qinghai Province, Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region]

Labor

Can employees with COVID-19 be dismissed? Supreme People’s Court says “no”

On April 16, 2020, the Supreme People’s Court issued the Guidance I on Issues Relating to Proper Adjudication of Civil Cases Involving COVID-19 https://www.chinacourt.org/law/detail/2020/04/id/150152.shtmlhttps://www.chinacourt.org/article/detail/2020/04/id/5032205.shtml], which provides ten specific measures on trials of civil cases during the COVID-19 outbreak.

To protect employees’ rights of equal employment, the Guidance emphasizes that, an employer’s sacking of an employee on the grounds that employee is a confirmed COVID-19 patient, is suspected to have COVID-19, is an asymptomatic COVID-19 infected person, is a person under quarantine or from an area where the outbreak is relatively serious will not be upheld.  This applies to all employers nationwide, including foreign enterprises.  In addition, the Guidance stresses that the Employment Law and the Employment Contract Law shall be rigorously applied in employment cases.  The Guidance also provides rules on the application of force majeure and punitive damages, the suspension of statute of limitations, and adoption of flexible preservation measures.

IP

CNIPA releases 2019 China Patent Investigation Report

Recently, China National Intellectual Property Administration (“CNIPA”) publicly released the 2019 China Patent Investigation Report. The Report shows an increase of 10.2% in patent holders who believe that the current level of intellectual property protection is more appropriate when compared to the previous year.  Patentees have also acknowledged the effects and benefits of strict IP protection. China has increased the penalties of infringement in order to optimize conditions for doing business, so that enterprises have strong incentives in continuing to invest in IP protection.

The main conclusions of the report include the following:

  • New achievements have been made in the protection of IP rights. The survey shows that China's IP protection has resulted in raising the cost of infringement and optimizing the protection of the environment.  The effect of legal deterrent has begun to emerge, and the rate of e-commerce patent infringement has reduced.
  • More than 90% of patentees recognized the legal role and significance of the patent invalidation procedures. Local patent holders who have suffered infringement as well as foreign-funded, Hong Kong, Macao and Taiwan business enterprises have overall an increasingly positive view of the invalidation procedures.
  • The overall level of patent applications is stable. While universities and scientific research institutions still have room for improvement in patent applications, the main factor holding back the effective implementation of patent rights is information asymmetry.
  • The international patented technology sector in China has a number of challenges: there are more imports of patented technologies than exports; there are difficulties in introducing patented technologies in strategic emerging industries; and international patented technology transactions are concentrated in specific regions, with Europe, America and Japan being the main targets for most transactions.
  • The implementation of the national intellectual property strategy promotes China’s competitiveness. Since the release of the Outline of the National Intellectual Property Strategy in 2008, the overall level of intellectual property development in China has improved.  Enterprises and university patentees are being recognized for their impact on adding to economic growth.

The Enforcement of Intellectual Property Judgments solicits comments

On March 15, 2020, the Supreme People’s Court issued a notice asking for public comments on the Implementation plan for the enforcement of intellectual property judgments (draft for comments) (the “Implementation Plan”) and Guidelines for the enforcement of intellectual property judgments (draft for comments) (the “Guidelines”).

The Implementation Plan proposes to fully utilize informatization enforcement methods, improve the efficiency and standardization of the enforcement of intellectual property judgments, ensure their timely and effective enforcement, and comprehensively strengthen the legal effects of intellectual property protection. It also proposes to further consolidate the enforcement inspection and control model, the enforcement assets liquidating model, and the enforcement supervision and management model which have been established by the people’s courts in recent years with support of modern information technologies.

The Implementation Plan has many highlights, such as clearly implementing the enforcement of rulings including the seizure, freezing, impoundment of property and anti-infringement injunctions in intellectual property cases, speedy filing and execution in accordance with the case-filing register system.  At the same time, property preservation behaviors are strictly regulated, with unauthorized and excessive seizures being strictly prohibited. The Preservation measures are limited to the protection of the applicant’s legitimate rights and interests.

The Guidelines provide clear provisions on the scope of intellectual property cases, the enforcement of civil and administrative intellectual property rights cases, as well as the enforcement of property-related matters in intellectual property rights criminal cases to refine enforcement procedures.

Baidu won its appeal against Sogou in a patent infringement dispute regarding an input method editor

Brief of the Case

On November 16, 2015, Beijing Sogou Technology Development Co. ("Sogou") filed a lawsuit with the Shanghai Intellectual Property Court, charging that the input method editor designed by Baidu (“Baidu IME”) infringed its patent right of NO. ZL200810113984.9 and asked the court to order Baidu to cease infringing Sogou’s patent, and damages of10 million RMB.  At the first instance, after evidence exchange, a technical hearing, a technical appraisal, and a source code investigation, the Shanghai Intellectual Property Court issued a first-instance judgment and dismissed all Sogou’s claims.  Sogou appealed to the Shanghai High People's Court, requesting the Shanghai High Court to overturn the first-instance judgment, asking for a retrial or to uphold all of Sogou’s claims.

On March 30, 2020, Shanghai High Court made a second-instance judgment, dismissing all Sogou’s appeals.  The appeal judgement turned on the following issues: 1) whether the Baidu IME falls into the protective scope of the patent at issue; 2) whether the burden of proof decided by the court of first instance was reasonable; 3) whether the court of first instance hindered Sogou’s right to review and examine Baidu’s evidence, particularly on the source code of Baidu IME.  The Shanghai High Court’s detailed weighing of assignment of burden of proof and the balance of litigation rights of the parties in a computer software patent infringement case provides guidance for subsequent technical cases.

Key Points

In this case, the IP team of King & Wood Mallesons, as counsel for Baidu, formulated a thorough, detailed and innovative defensive strategy to ensure 1) the source code of Baidu IME wasn’t easily disclosed to its direct competitor Sogou, 2) the court understood the principle of why Baidu IME’s conduct was not infringing.  Baidu’s win in the case has put an end to a series of disputes between Baidu and Sogou on IME technology since 2015, which is the basis of a valuable precedent for subsequent software patent litigation.

Data Protection

MPS and CAC to Establish a Long-term Mechanism for a Joint Crack Down on and to Rectify Illegal and Criminal Activities Infringing on Citizens’ Personal Information

On April 15, 2020, the Ministry of Public Security (“MPS”) issued an announcement, which provides that the MPS and the Cyberspace Administration of China (“CAC”) will work together with the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Industry and Information Technology (“MIIT”), the State Administration for Market Regulation and other ministries to establish a long-term mechanism for cracking down on illegal and criminal activities that endanger the security of citizens’ personal information and data.   All ministries will rely on the mechanism, and will closely focus on hidden dangers threatening citizens’ personal information and data security, and build a comprehensive social governance system for protecting citizens’ personal information and data security.   Also, it is reported by the Xinhua News Agency on April 10, 2020, that the National Computer Virus Emergency Response Center (“CVERC”) has discovered 25 Apps involved in non-compliance with privacy regulations via Internet monitoring during the recent “Pure Network 2020” special campaign.  In the future, supervision and law enforcement activities against laws and regulations concerning citizens’ personal information and data security will become the new norm.  It is therefore suggested that enterprises serving Chinese market conduct internal assessment and strengthen the protection of personal information and data, through internal data mapping, interactive interface optimization, or other methods.

MIIT Publicly Solicits Opinions on the Guidelines for the Network Data Security Standard System Construction 

On April 10, 2020, MIIT issued the Guidelines for the Network Data Security Standard System Construction (“Draft for Comments”) to solicit public opinions.  The network data security standards system will include four categories of standards: basic generality, critical technologies, security management, and critical areas.  The Draft for Comments set out the objectives of establishing and improving the system of network data security standards between 2021 and 2023, and also proposed standards in certain critical areas, such as the 5G network, mobile internet, internet of vehicles, internet of things, industrial internet, cloud computing, big data, artificial intelligence, and block chain.  We suggest that businesses which invest in and/or operate the above-mentioned critical fields in China pay close attention to the development of national standards and take measures to improve network data security in China, including but not limited to data classification, adopting critical technologies for ensuring network data security in the entire life-cycle of data processing, and establishing the internal administrative framework for network data security (such as data security assessment, monitoring, early warning and disposal, emergency response and disaster backup, security capability certification).

Cybersecurity Review Measures are promulgated

On April 27, 2020, the Cyberspace Administration of China (“CAC”), together with the NDRC among 12 ministries, jointly issued the Cybersecurity Review Measures (the “Measures”). The Measures confirm that the Cybersecurity Review Office under CAC is responsible for formulating relevant cybersecurity review rules and procedures and organizing cybersecurity reviews, and the subjects of cybersecurity review, namely critical information infrastructure operators (“CIIOs”); it shall assume the obligations of projecting risks and applying for review in advance with regard to the procurement of network products and services.  The Measures will come into force as of June 1, 2020, and we suggest that the relevant foreign CIIOs and network products and service providers in China pay attention to that date and plan their compliance programs accordingly in order to reduce the impact of legal, political, trade and other policies on the procurement or provision of network products and services, and to ensure the security of the supply chain and reliable supply channels.

Read more:

同道而相益,同心而共济—— 《网络安全审查办法》的创新与变化

Another 21 illegal Apps discovered by CVERC

The National Computer Virus Emergency Response Center (“CVERC”) found out through Internet monitoring during the special campaign of “Pure Network 2020” that a number of lodging/hospitality Apps and video conference Apps were not complying with privacy regulations including violating provisions of the Cybersecurity Law through the excessive collection of personal privacy information. Particularly, the apps’ failure to explicitly inform users all the data they were accessing; failure to specify rules for the collection and use of personal information; failure to provide effective functions such as correction or deletion of personal information and shutting down user accounts; and failure to establish and publicize a complaints handling mechanism for complaints about personal information security, or failure to review complaints and reports within the regulatory time limits.  In view of the fact that monitoring of privacy protection in Apps by various regulatory authorities has become a routine practice, we remind companies in China to keep an eye on relevant legislation and enforcement development to ensure that Apps are compliant in terms of privacy and personal information protection.

26 national standards including the Classification Guide for Classified Protection of Cybersecurity are promulgated

According to the Announcement of the National Standards of the People’s Republic of China ([2020] No.8) issued on April 28, 2020, by the State Administration for Market Regulation and the Standardization Administration of China, 26 national standards, including the Information Security Technology—Classification Guide for Classified Protection of Cybersecurity (GB/T 22240 -2020) were officially issued.  Most of the national standards released this time are recommended rather than mandatory. However, the State encourages enterprises to adopt recommended standards, which will generally serve as an important reference for law enforcement by regulators.  In particular, enterprises engaged in the research and development, production or procurement of automotive electronic systems, information systems for intelligent city construction, and remote face recognition systems may improve the overall system technology security assurance with reference to the relevant national standards.  In addition, enterprises may give themselves their own cybersecurity protection grades and improve their internal emergency drilling procedures by referring to the Classification Guide for Classified Protection of Cybersecurity and the Guide for Cybersecurity Incident Emergency Exercises.


Should you need any additional information, or if you would like to discuss how recent updates in Chinese law may affect your business, please feel free to contact us.

Disclaimer 

This client alert is not intended to be legal advice. Readers should seek specific legal advice from KWM legal professionals before acting on the information contained in this alert.

 

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