19 July 2020

China regulatory and legal round-up | July 19, 2020

General Corporate

Notice on Further Improving the Foreign Investment Information Reporting System

On June 30, 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) and the State Administration for Market Regulation (SAMR) jointly published the Notice on Further Improving the Foreign Investment Information Reporting System, Strengthening and Improving Operational and Post-Operational Supervision Work.

The notice seeks to clarify the responsibilities of various authorities and agencies in implementing the foreign investment information reporting system, including the work to be undertaken by those authorities. It comes after the new PRC foreign investment law regulatory regime cancelled MOFCOM’s power to review the establishment of foreign investment entities, including its approval and record filing powers.

The Notice aims to help effectively implement the PRC foreign investment law and its supporting regulations. It requires that local commerce and market supervision authorities:

  • clarify the division of responsibilities;
  • establish a sound communication and coordination mechanism;
  • accelerate system transformation; and
  • improve services in multiple channels in order to ensure that the information reporting obligors are aware of their reporting obligations and the reporting process.

Replication and Promotion of the Sixth Batch of Reform Pilot

On June 28, 2020, the State Council issued the Notice on Implementing and Promoting of the Sixth Batch of Pilot Free Trade Zones’ Pilot Reform Experience.

The construction of pilot free trade zones (FTZs) is a strategic measure of the Chinese government, designed to deepen reform and opening-up, and test the pilot reform measures.  The central government from time to time approves the nationwide implementation of certain pilot reform measures that have been tested in the FTZs to be both successful and efficient. The first batch of pilot reform measures implemented nationwide was published in April 2015, and the current one is the sixth batch of measures.

The sixth batch of pilot reform measures being promoted under the Notice covers five major areas, including:

  • investment management;
  • trade facilitation;
  • financial opening and innovation;
  • operational and post-operational supervision; and
  • human resources.

Examples of these measures include:

  • financial leasing and automobile exports;
  • allocation and supervision of bonded goods in the aircraft industry;
  • central warehouses for the return of cross-border e-commerce retailed commodities;
  • import and export declaration navigation services;
  • two-stage supervision model for fresh aquatic products;
  • management model of “one guarantee and multiple uses” for trade in goods; and
  • online filing of administrative licenses for border inspection.

Foreign Exchange & Customs

Pilot Scheme of “Cross-border Wealth Management Pass” Launched by the PBC, HKMA and AMCM in Guangdong Hong Kong Macau Greater Bay Area

On June 29, 2020, the People's Bank of China (“PBC”), the Hong Kong Monetary Authority (“HKMA”) and the Monetary Authority of Macao (“AMCM”) jointly announced the launch of a pilot program, the "Cross-border Wealth Management Pass", in the Guangdong-Hong Kong-Macau Greater Bay Area.

The Cross-border Wealth Management Pass program is designed to encourage individual residents of the Guangdong-Hong Kong-Macau Greater Bay Area to engage in cross-border investment into wealth management products sold by banks in the Greater Bay Area.

The program consists of both “Southbound Trading” and “Northbound Trading”:

  • Southbound Trading means that mainland residents in the Greater Bay Area will be able to purchase qualified investment products sold by banks in Hong Kong and Macau by opening a special investment account with a bank in Hong Kong or Macau; and
  • Northbound Trading means that residents of Hong Kong and Macau will be able to purchase qualified wealth management products sold by mainland banks in the Greater Bay Area by opening special investment accounts with mainland banks.

The Cross-border Wealth Management Pass program is designed to comply with local laws and regulations on the administration of personal wealth management products, while respecting international practices in all three locations.

The launch of the pilot program in the Guangdong-Hong Kong-Macau Bay Area is a sign that China's financial market is gradually opening up and becoming more conducive to cross-border investment by individual residents in the Bay Area. The pilot program also demonstrates an openness to facilitating the business expansion of various foreign-funded banks in Hong Kong and Macau.

The Customs suspended import of poultry meat from Tyson Foods Inc. (the U.S.), a poultry slaughtering enterprise with registration number P5842

As sporadic COVID-19 cases of unknown origin continue to be diagnosed in Beijing, China’s customs department has further strengthened its control over the import of food from foreign locations with severe outbreaks.

On June 21, 2020, the General Administration of Customs suspended the import of poultry from Tyson Foods Inc. (based in the United States), a poultry slaughtering enterprise with registration number P5842. The customs department will also temporarily withhold all products that have arrived or will arrive from this enterprise. This suspension is the result of the recent outbreak of a COVID-19 cluster infection among employees of Tyson Foods Inc. The List of Meat Products Imported to China from Countries or Regions Meeting the Evaluation Requirements (《符合评估要求的国家或地区输华肉类产品名单》) was updated to reflect the decision.

The suspension on Tyson Foods Inc. is not a standalone suspension: the General Administration of Customs has been updating the  List of Meat Products Imported to China from Countries or Regions Meeting the Evaluation Requirements (《符合评估要求的国家或地区输华肉类产品名单》)frequently of late.  While suspension decisions are made for  various reasons, some of the more recent ones were made due to COVID-19.  We suggest that foreign food processing enterprises in particular should heed the risk of an import/export suspension in China.  If any employees test positive for COVID-19, the risk of being suspended from exporting products into China cannot be ruled out.

Data Protection

Initial Deliberation of the Draft of Data Security Law by the Standing Committee of the National People's Congress

On June 28, 2020, the draft of the Data Security Law was submitted to the 20th Session of the 13th Standing Committee of the National People's Congress for initial deliberation. 

The Data Security Law aims to ensure the security of data-processing activities and provides for measures which both support and facilitate data security and development. The law will establish and improve the national data security management system and set out the responsibilities of organizations and individuals when carrying out data-related activities.

The current draft of the Data Security Law is likely to lay down more high-level and multi-faceted provisions on the data-processing activities of various subjects for protection of national security and maintenance of national sovereignty and interests. We suggest that multinational companies pay close attention to cross-border transfers of critical data (especially data that can reflect the development and trend of the industry to which they belong). We also recommend the prompt establishment of mechanisms for internal review.

Issuance and Implementation of the Code of Conduct for Online Live-streaming Marketing

On July 1, 2020, the Code of Conduct for Online Live-streaming Marketing (the "Code") was officially implemented. This represents the first domestic special regulation on online live-streaming marketing activities and was formulated by the China Advertising Association. 

The Code was released on June 24, 2020, and stipulates that online live-streaming sales activities must:

  • comprehensively, authentically and accurately disclose information on commodities and services;
  • protect consumers' rights to know and choose, in line with the law;
  • strictly observe the product responsibilities; and
  • strictly control the quality of the live-streaming products and services.

In order to comply with the Code, business operators are required to protect the legitimate rights and interests of consumers pursuant to the law, actively perform their commitments, and provide after-sale services, including by providing entitlements to replacements or returns of goods pursuant to the law.

E-commerce enterprises, internet service platforms and Multi-Channel Networks (MCN) engaging in online live-streaming marketing activities in China are advised to operate online live-streaming marketing activities according to the Code, and to strictly abide by various provisions of the Advertising Law of China.

Shenzhen Publishes the Regulations of Shenzhen Special Economic Zone on Data (Draft for Comments)

On July 15, 2020, the Justice Bureau of Shenzhen Municipality published the full text of the Regulations of Shenzhen Special Economic Zone on Data (Draft for Comments) on its official website.

The Shenzhen Regulations clearly define the concept of data and data rights for the first time, proposing that the privacy of natural persons involved in data development and utilization will be protected, and that natural persons are entitled to data rights over their personal data in accordance with the law.  In addition, the Shenzhen Regulations point out that public data is a type of state-owned asset, and propose to explore the establishment of a mechanism for data fusion and cross-border cooperation across Shenzhen, Hong Kong and Macau under the “One country; Two systems” framework.

We suggest that investors and related enterprises pay close attention to policy progress in Shenzhen and other places. The Shenzhen Regulations may be of great reference significance for local data governance policies. However, it remains uncertain whether the Shenzhen Regulations will be finally put into practice and implemented.

CAC Launches “Clear & Bright” Special Rectification Campaign for Minors

On July 13, 2020, the Cyberspace Administration of China (CAC) announced the launch of a two-month “Clear & Bright” special rectification campaign of the network environment for minors during their summer vacation (the “Special Campaign”). The Special Campaign focuses on the rectification of problems in the online environment, including educational platforms and the online learning sections of other websites.  

The 2020 Legislation Plan released by the State Council suggests that CAC also plans to formulate Regulations on the Protection of Minors Online this year.

We recommend that relevant enterprises promptly consider whether there is any harmful information related to minors on their platforms. In particular, enterprises that operate information release channels (such as live broadcasts, short videos, instant messaging tools and forum communities) should strengthen the management of any content targeted at minors. This includes managing any problems posed by:

  • malicious pop-up browsers/applications; and
  • encouraging minors to recharge and consume.

Other recommended management measures include the implementation of a real-name system and anti-addiction measures for online gaming platforms.

The Regulations for the Security Protection of Critical Information Infrastructure and the Regulations on the Protection of Minors Online in the Legislation Plan of the State Council for 2020

On July 8, 2020, the State Council issued its 2020 Legislation Plan, which includes plans to formulate the Regulations for the Security Protection of Critical Information Infrastructure (the “Regulations”), the Regulations on the Protection of Minors Online and other administrative regulations. The CAC had previously issued the Regulations for the Security Protection of Critical Information Infrastructure (Draft for Comment) in 2017. 

Relevant enterprises, especially those in the communications, energy and transport and finance industries, should pay close attention to the dynamics of the Regulations. In particular, enterprises in relevant industries should seek to enhance their security protection capabilities, including through the implementation of institutional mechanisms, standardized management, education and training, and technological innovation.

Tax

China fleshes out preferential tax policies for Hainan free trade port

In order to accelerate the construction of the Hainan free trade port and take concrete steps to implement the Master Plan released on June 1, 2020, the Ministry of Finance and the State Taxation Administration have jointly released two circulars about preferential tax measures for eligible enterprises and individuals in Hainan.

Under the Notice on the Hainan Free Trade Port’s Preferential Policies on Enterprise Income Tax, the enterprise income tax rate has been lowered to 15 percent for Hainan-registered companies in certain industries. To be eligible for the 15-percent tax rate, companies must ensure that their place of effective management is in the port. Effective management is the comprehensive management and control of the companies’ operation, staff, accounts and assets. Moreover, the Notice specifies that qualified income derived from any new outbound investments is tax-free in China.

The second notice, the Notice on the Hainan Free Trade Port’s Individual Income Tax Policy for High-end Talents and Urgently-needed Talents, specifies a further appealing tax incentive. This incentive caps the individual income tax rate at 15 percent for high-end talents and urgently-needed talents in Hainan, including income in the categories of wages and salaries, service income, royalties, operating income, etc.

Both circulars are effective from January 1, 2020 to December 31, 2024. It is anticipated that the new tax policies will attract investors and a talented workforce to Hainan and will help boost its economic growth. The tax policies signpost China’s commitment towards implementing the Master Plan and building Hainan Island into an upscale free trade port.

Labor

Implementation period of reduction or exemption of enterprises’ social insurance contribution in phases is extended to the end of 2020

On June 22, 2020, the Ministry of Human Resources and Social Security, the Ministry of Finance, and the State Taxation Administration jointly issued the Notice on Issues Relating to Extension of Implementation Period of Policies on Reduction or Exemption of Enterprises’ Social Insurance Contribution in Phases (“Notice”) (《关于延长阶段性减免企业社会保险费政策实施期限等问题的通知》.

According to the Notice, medium, small and micro-sized enterprises nationwide will be exempt from contributions for basic pension insurance, unemployment insurance and work-related injury insurance until the end of December 2020. For large enterprises nationwide (except for those in Hubei Province), contributions for these three types of social insurance will be reduced by half until the end of June 2020. Large enterprises in Hubei Province are exempt from contributions for these three types of social insurance until the end of June 2020.

In addition, social insurance premiums for enterprises with serious operation difficulties due to the impact of COVID-19 can be deferred until the end of December 2020, and no overdue fees will be charged during the deferral period.

All of these measures are designed to help ease the financial burden placed on enterprises during the COVID-19 outbreak and help stabilize employment.

IP

China’s Supreme People’s Court and Supreme People’s Procuratorate Released Draft Judicial Interpretation on Enforcement of Criminal IP Laws

On June 17, China’s Supreme People’s Court (SPC) and the Supreme People's Procuratorate (SPP) released draft Judicial Interpretation on Several Issues Concerning the Specific Application of Law in Handling Criminal Cases of Infringement of Intellectual Property (III) (Draft for Comment) (“Criminal IP JI”). Comments are due by August 2, 2020.

The Criminal IP JI covers trademark, copyright, and trade secret-related crimes. For example, Article 1 specifies the standards for determining the infringement of three-dimensional trademarks.

Almost half of the provisions of the Criminal IP JI are trade-secret related. The major provisions include Article 4, which clarifies the threshold scenarios that trigger trade-secret criminal enforcement. Other provisions set forth the rules of loss calculation (Art. 5), calculation of the proportional value of a trade-secret in combination with another technology (Art. 6), and other compensatory remedial measures (Art. 8). Article 11 of the Criminal IP JI also provides that a heavier punishment shall be imposed on the infringement of trade-secrets by foreign institutions, organizations or personnel, adopting the same rules set forth in Article 20 of the Sanctions JI (which is set out below).

China’s Supreme People’s Court Issued Draft Judicial Interpretations on Evidence Rules in IP Litigation and Sanctions for IP Infringement

On June 15, 2020, the SPC issued Some Provisions on Evidence in Intellectual Property Litigation (Draft for Comments) (“Evidence JI”) and the Opinions on Increasing the Level of Sanctions for Intellectual Property Infringement (Draft for Comments) (“Sanctions JI”). Comments are due by July 31, 2020.

The Evidence JI contains fifty-three articles and regulates the burden of proof, protective orders for evidence preservation, expert appraisal, extraterritorial evidence, exchange of evidence, etc.

The Sanctions JI contains twenty-one articles. Expedited proceedings and punitive damages are provided for claims against serial infringers. Article 20 also provides that serial infringers of IP rights, and those who steal commercial secrets for foreign agencies, organizations or individuals, shall be subject to severe penalties according to law and generally no probation shall be applied.

China is to Amend its Patent Law

According to the State Council’s 2020 Legislation Plan, the PRC Patent Law will be amended this year. The NPC Standing Committee (NPCSC) is currently soliciting public comments on the second draft amendment (Chinese version). The due date for comments has been extended to August 16, 2020.

Some highlights of the draft amendment include the introduction of:

  • an “open licensing” system (Chapter 6);
  • an increase in statutory damages (Art. 71); and
  • a flexible remuneration system (Art. 16).

Under the proposed “open licensing” system, a patent owner may submit to the Patent Administration Department of the State Council a declaration in writing of its willingness to license the patent to any party and specifying the royalties and payment methods available to any interested party. The Department can then announce the declaration and execute an open license of the patent.

The draft amendment removes the minimum statutory damages of CNY 100,000 (USD 14,000) and caps the statutory damages at CNY 5 million (USD 714,000).

With respect to the remuneration system for employee inventions, the draft amendment encourages employers to use “equity, options, and dividends” to enable inventors or designers to reasonably share in the proceeds of innovation.



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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