Doing Business In... 2019 Comparisons

Last Updated July 15, 2019

Law and Practice

Authors



McDermott Will & Emery (Shanghai) provides a full range of legal services and business advice to Chinese companies and multinational corporations doing business in China through its strategic alliance with MWE China Law Offices in Shanghai. The founding partners of MWE China Law are long-established Chinese lawyers with in-depth knowledge of the Chinese cultural, legal and regulatory system, and the global experience to provide a Western-style approach to clients from around the world. In addition to their extensive legal training and experience, all lawyers at MWE China Law are licensed to practise in China. MWE China Law offers diverse sector experience in almost every significant regulated and unregulated industry in China, including banking, finance and insurance, healthcare, pharmaceuticals, medical devices, technology, manufacturing and distribution. The firm counsels clients in all key areas of law, including antitrust and competition, capital markets, corporate (including mergers, acquisitions and joint ventures), labour and employment, intellectual property, litigation and arbitration, real estate, regulatory compliance, tax, venture capital and private equity. As part of the alliance with McDermott, the Shanghai office is prepared to help clients wherever their business interests take them.

The modern Chinese legal system is defined as a socialist legal system with Chinese characteristics, which is based on the civil law model. The legislative system of China mainly consists of the Constitution, basic laws (and legislative interpretations), administrative regulations, and local laws and regulations. Among all these legislative documents, the Constitution has the highest legal authority, and no other laws or regulations may set up rules in conflict with the Constitution.

According to the Organization Law of the People’s Court, people's courts in China are divided into:

  • the Supreme People's Court;
  • local people's courts at various levels;
    1. higher people's courts at provincial level;
    2. intermediate people's courts at municipal level; and 
    3. primary people's courts at district or even lower level); and
  • special people's courts (military courts, intellectual property courts, financial courts, etc).

The primary people's courts normally hear cases of first instance, unless otherwise provided for by laws. China adopts a two-tier trial system for most court cases, which means a case shall be tried by two level of courts to become final and legally binding.

People's procuratorates are state organs for legal supervision, which have similar divisions to the people’s courts. Their duties include conducting criminal investigations for certain cases, reviewing criminal cases and deciding on the arrest of criminal suspects, deciding whether to initiate criminal legal proceedings, public prosecution, and legal supervision over litigation activities, the enforcement of judgments, etc. 

The Supreme People's Court and the Supreme People’s Procuratorate may issue judicial interpretations of the laws and regulations during their application, which have legal effect in China. Court cases, on the other hand, do not have legal effect, but normally serve as practical guidance and points of reference in practice. 

Generally, foreign investments in China do not require approval from the Chinese authorities unless they are in an industrial sector that is covered by the Special Administrative Measures (Negative List) for Foreign Investment Market Access (Version 2018) (the “Foreign Investment Negative List”), or where an approval is also required for a Chinese domestic investor investing in that same industry (ie, covered by the Negative List for Market Access (Version 2018)).

The Foreign Investment Negative List sets out limited scope of industries into which foreign investment is either restricted or prohibited. The prohibited industrial sectors include news publishing, the development and application of human stem cells, gene diagnosis and therapeutic technologies, etc. Sectors and industries that are restricted to foreign investment and subject to foreign investment approval include banking, insurance, securities, healthcare institutions, general aviation services sectors, etc. Approval needs to be obtained prior to initiating the investment. 

For foreign investment in banking, insurance, healthcare institutions and a few other sectors, there are specific rules governing investment and operation activities by foreign investors in China.

China recently adopted its new Foreign Investment Law, which will go into effect on 1 January 2020. At this moment, it is not clear about the details of the foreign investment approval regime (eg, review criteria, timeframe) for foreign investment in China in the specific areas covered by the Foreign Investment Negative List. It is generally understood that such approval will be rendered by the Ministry of Commerce of China or its local counterparts. 

There will be adverse consequences for foreign investors making investment in industrial sectors covered by the Foreign Investment Negative List without approval. 

If is an investment is made without approval in a restricted industrial sector under the Foreign Investment Negative List, the foreign investor will first be ordered to make corrections and take the necessary measures to meet the mandatory requirements for foreign investment, if any, and to obtain an approval within a prescribed period of time. If the foreign investor fails to do so, they shall be ordered to cease the investment activity and unwind their investment within a prescribed time limit.

The Chinese authorities generally do not condition their approval of investment in China to certain commitments by the foreign investors. However, for certain specific industries, certain conditions must be met before the Chinese authorities will grant their approval. For example, a foreign investor that plans to establish a wholly owned bank in China must, among other things, be a commercial bank itself and have total assets of not less than USD10 billion at the end of the year prior to its application to set up such a banking subsidiary in China.

As a general rule, an investor may challenge the Chinese authorities’ decision on an application for foreign investment through either “administrative reconsideration” or “administrative litigation”. An administrative reconsideration is conducted by the administrative organs of the Chinese government, while an administrative litigation will be handled by the Chinese court. In practice, however, it is rare for a foreign investor to challenge the authorities’ decision not to approve an investment.

The most commonly used type of corporate vehicle available to foreign investment is the limited liability company, which does not issue shares – rather, its shareholders own equity interests. A limited liability company may have one or more shareholders. A limited liability company has registered capital, for which there is no mandatory minimum amount, and shareholder(s) need to contribute within the time schedule provided in the limited liability company’s articles of association. The liability of shareholder(s) of a limited liability company is limited to the extent of the registered capital committed by the shareholder(s).

For the incorporation of a limited liability company invested in by foreign investors, an application shall be made to the local administration for market regulation (ie, the enterprise registration authorities) for company establishment. If everything is in order, a business licence will then be issued when the limited liability company is formally incorporated. With the business licence, a filing shall also be made at the local counterpart of the Ministry of Commerce of China regarding the establishment of a foreign-invested enterprise. Thereafter, various post-incorporation processes need to be completed, such as registration at the local tax authorities, engraving of the company chops, and opening bank accounts with a local bank (and through the local bank, at the foreign exchange authorities of China). The company can start to be operated only upon completion of the post-integration steps.

Private companies are subject to routine reporting and disclosure obligations under the Chinese law. 

A limited liability company shall conduct an annual filing each year at the local administration for market regulation. In addition, when there is any change to the basic corporate information of a limited liability company, such limited liability company shall conduct filings at the local administration for market regulation regarding such corporate change(s). 

Private companies wholly or partially owned by foreign investor(s) are also required to conduct filings at the local counterpart of the Ministry of Commerce regarding corporate changes. Moreover, according to the recently adopted Foreign Investment Law, which will go into effect on 1 January 2020, a foreign-invested limited liability company will also be subject to a foreign investment information reporting requirement, the details of which are expected to be further clarified by the Chinese government.

As the most common legal entity for foreign investors in China, a limited liability company has a three-tier management structure. 

The authority of a limited liability company is its shareholders’ meeting or, if it is owned by one shareholder, its sole shareholder. 

A limited liability company shall also have a board of directors or an executive director, which shall report to the shareholders’ meeting or the sole shareholder. The board of directors or executive director may appoint a general manager of the company, who will manage the daily operations. 

A limited liability company shall also have a board of supervisors, or one or two supervisors, who are appointed by the shareholders’ meeting or the sole shareholder. The supervisor is intended to safeguard the interests of the shareholders by supervising the finances of the company as well as the conduct of its directors and managers. A supervisor may not concurrently serve as a director or manager of the same company.

The Company Law of China contains the main rules governing the liabilities of directors, supervisors and officers of a limited liability company, who must comply with the provisions of laws and administrative regulations, as well as the articles of association of the company. They owe fiduciary duties to the company. 

A director, supervisor or officer who violates the provisions of laws and administrative regulations or the articles of association of the company in his/her performance of duties and powers, causing damages to the company, shall bear the liability to fully compensate the company's loss.

For shareholders, the corporate veil may be pierced under certain circumstances and consequently a shareholder may be held liable for certain liabilities of the company. 

The general requirements under the Chinese law are that the shareholder(s) of a limited liability company shall abuse neither the independent legal person status of the company nor the limited liability of the shareholder(s) to cause damages to the interests of the limited liability company’s creditors. Any shareholder who abuses the independent legal person status of the company and the limited liability of a shareholder to evade debts and cause damages to the interests of the creditors shall be held jointly liable for the debt of the limited liability company.

The establishment, performance, expiration and termination of the employment relationship between a company and an employee is mainly governed by the Employment Contract Law (the “ECL”), the landmark national statute law that has been effective since 1 January 2008. 

Due to China’s imbalanced development, the understanding and implementation of the national laws vary in different localities (usually at a provincial scale). As such, local regulations, rules, policies and judicial practices should be considered when incorporating or operating a company. For example, in Shanghai, when the employment contract expires and the employer decides not to renew, the employer does not need to give prior notice to the employee, while in Beijing the local rule requires the employer to provide the employee with 30 days’ prior notice.

Unlike some civil contracts which can be concluded verbally, employers must conclude written employment contracts with employees, or there could be legal consequences of monetary compensation and even making the term of the employment contract open-ended.

Employment contracts are classified into fixed-term contracts, open-ended contracts and project-based contracts. Under certain circumstances (eg, when an employee has worked continuously for the same employer for a period of at least ten years, or when renewing a fixed-term employment contract that has been concluded twice consecutively), an open-ended employment contract must be concluded, unless the employee proposes a fixed-term contract.

The employment contract should include the name, location and legal representative or primary responsible person of the employer, the employee’s information, term, job description, working place, working hours, rest and leave, remuneration, social insurance, labour protection, working conditions and protections against occupational hazards, etc.

In China, there are three kinds of working hour systems: the standard working hour system, the comprehensive working hour system, and the flexible working hour system. Different working hour systems have different arrangements for working hours, rest patterns and overtime pay rules.

The standard working hour system is the most common, and sets the daily working hours for each employee not in excess of eight hours and the average weekly working hours not in excess of 40 hours. In addition, the employer unit shall ensure that every employee has at least one rest day each week.

Outside of production and business operations, an employer may extend the working hours after consulting with the trade union and the employees, although the overtime shall in general not exceed one hour per day; in special circumstances where an extension of working hours is required, the overtime shall not exceed three hours per day under conditions that ensure the health of the employees, and the amount of overtime worked shall not exceed 36 hours per month. The overtime pay rules are summarised as follows:

  • for overtime work on work days, no less than 150% of the normal wage; 
  • for overtime work during rest days and where such rest days cannot be postponed and taken at another time, no less than 200% of the normal wage; and
  • for overtime work during an official public holiday, no less than 300% of the normal wage.

In general, “unilateral termination at will” by the employer is not applicable in China. The Chinese law imposes stringent restrictions on the termination of employment contracts. Employers must have a legal cause to terminate an employee, even during the probationary period.

Unilateral termination by the employer can only be carried out for statutory grounds, which are quite difficult to meet, or for a breach of specified terms under the code of conduct or policy of the company. 

The main statutory grounds for termination include contract expiration without renewal in the following circumstances:

  • the employee seriously violates the employer’s policies, rules and regulations;
  • the employee commits a crime;
  • the employee is proved to be incompetent;
  • the employee is unable to resume his/her original work duties or perform alternative duties assigned to him/her due to illness or non-work-related injuries after the expiration of the specified medical treatment period;
  • there is no job available due to the closing down, merger, acquisition or justifiable adjustment of business, etc.

In addition to the legal causes of termination, employers must also pay attention to the procedures of termination. For instance, where an employer that has established a trade union intends to unilaterally terminate an employee, such employer shall first notify the trade union in writing of the termination ground and consider the union’s opinions, if any.

When it comes to massive layoffs, the Chinese law also has strict requirements on both the substantial and procedural sides. First of all, the retrenchment number should reach 20 or more employees, or a number of employees fewer than 20 but comprising more than 10% of the enterprise's workforce. Secondly, the employer must have statutory circumstances, such as undergoing a bankruptcy restructuring, suffering serious difficulties in manufacturing or operations, etc. Thirdly, the employer must issue a statement to the trade union or to all employees giving 30 days’ prior notice, and must consider the opinion of the trade union or employees, and file a workforce reduction plan with the local labour authority.

The ECL provides the employees with legitimate severance under certain circumstances based on the service years of the employees (normally one month’s salary for each full service year; any period of more than six months will be counted as one year, and any period of less than six months will be counted as half of one year), such as contract expiration without renewal decided by the employer.

In accordance with the Rules on the Democratic Management of Enterprises (the “Rules”), effective since 2012, for all kinds of enterprises, employee representative congress is the organisation through which employees exercise their power of democratic management, and is the basic form of democratic management in the enterprises. Due to the low legal hierarchy of the Rules, the enforcement of the Rules is not strict. Most of the enterprises that establish and implement the employee representative congress are state-owned enterprises.

In China, wages, salaries, bonuses, year-end bonuses, labour dividends, allowances, subsidies and other income derived by individuals in relation to their position or employment are subject to statutory social security deduction and individual income tax (“IIT”). 

Social security includes insurance for unemployment, medical, occupational injury, maternity, pension and housing funds. While contribution requirements vary from place to place, both the employee and the employer are required to pay for the social security, which may respectively amount to around 10% and 35% of the salaries and wages. Furthermore, the calculation basis is subject to a minimum of 60% and a maximum of 300% of the local average monthly salary. 

Employees are also liable for IIT on their wages and salaries, which is levied at a progressive rate of 3% to 45%, subject to a general deduction of RMB60,000 per year and deductions of other allowed items, including the employee’s contribution payment to statutory social security. 

An employer is obliged to withhold and deduct the payable amounts of the employee’s social security contribution and IIT before making payments to the employee.

Tax resident companies include companies established under the laws of China and companies that are established under the laws of other jurisdictions but have their effective management located inside China, and are subject to the corporate income tax (“CIT”) in China, with a general rate of 25% on their taxable profits. Lower tax rates may be applicable as tax incentives to certain qualified companies. 

Non-tax resident companies are those that are established under the laws of other jurisdictions and have their effective management outside China. Non-resident companies having establishments in China are liable for 25% CIT on the China-sourced profits attributable to such establishments. If the non-resident company does not have any establishment in China but derives income from China, or if there is an establishment but the China-sourced income has no connection with such establishment, then the non-resident company only needs to pay Chinese CIT at 10% on the China-sourced income (also known as the “withholding tax”). The withholding tax generally applies to passive income received by the non-resident companies, including dividends, interests, royalties and capital gains, and can be lowered or exempted under the applicable tax treaty entered into by China. 

In addition to the CIT, the sale or importation of goods, the provision of services and the sale of intangible properties and immovable properties are also subject to value added tax (“VAT”), at the following rates:

  • 13% for the sale and importation of most goods, the provision of repairs, replacement and processing services, and the leasing of tangible movable properties;
  • 9% for the sale and importation of exceptional goods, the provision of transportation services, postal services, basic telecommunication services and construction services, the leasing and sale of immovable property, and the transfer of a land use right;
  • 6% for the provision of value-added telecommunication services, financial services, modern services and consumer services, and sales of other intangible properties; and
  • 0% for the exportation of goods and certain services.

VAT exemptions and other VAT incentives are available for qualified taxpayers. 

A general VAT taxpayer can credit the input VAT derived from its sourcing of goods and VAT-able services against its output VAT on its sales of goods or provision of VAT-able services. For the export of goods and zero-rated services, taxpayers may be entitled to a credit or refund of the input VAT incurred. 

Other taxes, as the case may be, include consumption tax, customs duties, land appreciation tax, real estate tax, stamp duty and local surcharges.

For CIT, reduced tax rates are usually available for qualified hi-tech enterprises, advanced services enterprises (although qualification is not easy) and enterprises that are active in encouraged sectors in the Central and Western regions. Super-deductions of R&D expenses, accelerated depreciation and foreign tax credit are also available for qualified companies. 

For VAT, exemption treatment may be applicable to qualified services provision, such as educational, medical, religious or culture-related services, certain financial services, technology-related services, and certain exported services, etc. Accordingly, the relevant input VAT incurred cannot be credited or refunded for these VAT-exempted sales. 

Only branch companies as dependent legal entities are allowed to file the CIT with the headquarters on a consolidated basis. Independent legal entities, such as companies, are not allowed CIT consolidation. 

According to the CIT laws and regulations, loans from related parties would need to comply with the thin capitalisation rules in China – namely, the loan/equity investment ratio for a company in China cannot exceed the prescribed ratio, which is 5:1 for financial companies and 2:1 for other companies. Otherwise, the interests derived therefrom may not be deductible by the Chinese company for CIT purposes, unless the borrower can justify that the excessive lending is at arm’s length.

The transfer pricing regulations in China require transactions between related parties to follow the arm's length principle, meaning the transactions need to be conducted on the same or similar terms as if the parties were not related. Two parties can become related parties either by way of shareholding percentage or by way of “control” – for example, through loans, IP licensing, business operations and management, etc. 

When the volume of related-party transactions reaches the threshold prescribed by law, the company shall prepare the contemporaneous documentation, with detailed analysis of the functions and risks of the related parties and the comparable prices. Furthermore, companies could apply to the Chinese government and implement the advance pricing arrangement in China.

The Chinese CIT Law contains broad rules on anti-avoidance, thin capitalisation, transfer pricing and controlled foreign corporations. Among other things, the PRC tax authorities scrutinise and may apply anti-avoidance rules to assess tax in cases where taxable assets in China (including the equity of a Chinese company, real estate inside China and the assets of an establishment inside China) are indirectly transferred through the sale of the offshore holding company. If such indirect transfer is considered an abuse of organisational structure to evade PRC tax liability without a bona fide business purpose, the PRC tax authorities can deny the existence of the holding company and levy tax on the seller based on the principle of substance-over-form. 

Procedurally, the seller, the buyer and the Chinese company of an indirect transfer may voluntarily report the transfer to the tax authority. As the withholding agent of the indirect transfer tax (if any), the buyer is encouraged to report the case voluntarily, so that if they fail to withhold the payable taxes on behalf of the seller and the transfer is later determined by the tax authority to be taxable in China, the buyer could then be relieved or exempted from the potential liabilities.

If a transaction leads to a concentration of undertakings that reaches the following thresholds, it shall be notified to the State Administration for Market Regulation (“SAMR”) for antitrust review:

  • the aggregate global turnover achieved by all the undertakings to the proposed concentration exceeds RMB10 billion (approximately USD1.4 billion) and each of at least two of the undertakings to the concentration has turnover of more than RMB400 million (approximately USD58 million) within mainland China in the last financial year; or
  • the aggregate turnover in mainland China achieved by all the undertakings to the proposed concentration exceeds RMB2 billion (approximately USD290 million) and each of at least two of the undertakings to the concentration has turnover of more than RMB400 million (approximately USD58 million) within mainland China in the last financial year.

A concentration of undertakings refers to:

  • a merger of undertakings;
  • an undertaking acquiring controlling power of another undertaking by means of equity or asset acquisition; or
  • an undertaking acquiring controlling power of another undertaking orbeing able to exercise decisive influence over another undertaking by means of contract or other arrangements.

The establishment of a joint venture with two or more shareholders having joint control over the joint venture will be deemed a concentration of the controlling shareholders.

Restructuring within a group is exempted from antitrust notification.

A notification shall be made after the execution of the concentration agreement and before the implementation of the concentration. The concentration agreement refers to the definitive agreement with binding effect – eg, a merger agreement, a sale and purchase agreement, a joint venture contract, etc. As for an acquisition of a listed company by tender offer, the report of the acquisition by offer could be deemed as the concentration agreement. 

A full spectrum of merger review consists of three phases following the acceptance of a filing:

  • 30 days’ preliminary review (Phase I);
  • 90 days’ further review (Phase II); and
  • 60 days’ extended review (Phase III).

It generally takes SAMR one to two months to check whether a filing meets the documentation requirements before acceptance.

In practice, SAMR sometimes may require undertakings to withdraw a notification and then refile, so as to further extend the review period technically. 

If a notification is qualified as a simple case, it will normally be cleared in Phase I, on average within approximately 20 days from acceptance.

Undertakings with a competitive relationship are prohibited from concluding the following horizontal monopoly agreements:

  • on fixing or changing commodity prices (price fixing);
  • on restricting the amount of commodities manufactured or marketed (output limit);
  • on splitting the sales market or the purchasing market for raw and semi-finished materials (market allocation);
  • on restricting the purchase of new technologies or equipment, or the development of new technologies or products (technology restriction);
  • on the joint boycotting of transactions (boycott); and
  • other monopoly agreements. 

Undertakings are prohibited from concluding the following vertical monopoly agreements with their trading counterparts:

  • on fixing the prices of commodities resold to a third party (resale price maintenance – "RPM");
  • on restricting the lowest prices for commodities resold to a third party (RPM); and
  • other monopoly agreements. 

Monopoly agreements include agreements, decisions and other concerted conducts that are designed to eliminate or restrict competition.

There are exemptions for an agreement of undertakings to be deemed as a monopoly agreement, where they involve technology improvements, R&D of new products, improvements in the efficiency of small and medium market players, etc.

In practice, to crack down on monopoly agreements, SAMR adopts a doctrine of prohibition plus exemption, similar to per se violation. However, a court tends to adopts the rule of reason analysis.

To reach a monopoly agreement, without implementation, is subject to a fine of up to RMB500,000. The implementation of a monopoly agreement may lead to a fine of 1% to 10% of sales revenue in the previous year and the confiscation of any illegal gains.

Undertakings with dominant market position (DMP) are prohibited from the following conduct:

  • selling commodities at unfairly high prices or buying commodities at unfairly low prices;
  • selling commodities at prices below cost without justifiable reason;
  • refusing to enter into transactions with their trading counterparts without justifiable reason;
  • allowing their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them without justifiable reason;
  • conducting the tie-in sale of commodities or adding other unreasonable trading conditions to transactions without justifiable reason; and
  • applying differential prices and other transaction terms among their trading counterparts who are on an equal footing, without justifiable reason.

DMP refers to a market position held by undertakings that are capable of controlling the prices or quantities of commodities or other transaction terms in a relevant market, or preventing or exerting an influence on the access of other undertakings to the market.

DMP is presumed in the following circumstances:

  • the market share of one undertaking accounts for half of the total in a relevant market;
  • the joint market share of two undertakings accounts for two thirds of the total, in a relevant market; or
  • the joint market share of three undertakings accounts for three quarters of the total in a relevant market.

However, a presumed DMP could be rebutted if the undertaking has evidence to prove that it does not hold any DMP.

Abuse of DMP may lead to a fine of 1% to 10% of sales revenue in the previous year and the confiscation of any illegal gains.

Anti-Unfair Competition Law

In the past decade, the Anti-Unfair Competition Law has been one of the most frequently enforced laws in China, particularly regarding commercial bribery violations, advertisement violations, etc. The purpose of the law is to regulate unfair competition behaviour among market players. The Anti-Unfair Competition Law initially came into force in 1993, and has been amended twice – on 1 January 2018 and 23 April 2019. The first amendment included revisions of almost all of the provisions in the law, while the second amendment mainly enhanced trade secret protection and increased fines and damages for acts of unfair competition.

The Anti-Unfair Competition Law mainly regulates the following types of business activities:

  • acts that lead others to misidentify their goods as others' goods or to associate their goods with others;
  • using monies, assets or other means to bribe the employees of the transaction counterpart, or organisations or individuals that are entrusted by the transaction counterpart or have influential power over the transaction, so as to seek transaction opportunities or competitive advantage;
  • misrepresentation of products;
  • infringement of commercial secrets;
  • prize-giving sales;
  • fabricating or disseminating false or misleading information to harm the goodwill or product reputation of competitors; and
  • the disruption of the normal operation of the cyber products or services provided legitimately by other business operators in specified ways.

SAMR and its local counterparts have the authority to investigate violations of the Anti-Unfair Competition Law and impose administrative penalties according to the law, including monetary fines, the confiscation of illegal gains, orders to cease the wrongdoings, the revocation of a business licence, and/or recording the violation in the enterprise's credit systems.

The pillars of IP protection in China are the Patent Law and its implementing regulations, the Trademark Law and its implementing regulations, the Copyright Law and its implementing regulations, and the Anti-Unfair Competition Law.

The Patent Law affords protection to inventions and creations, including inventions, utility models and designs. An invention is a new technical scheme for a product or process, or the improvement thereof. A utility model is a new and practical technical scheme for the shape and/or structure of a product. A design is an aesthetic new design applicable to industrial use for the shape and/or pattern of a product, and the combination of colour, shape and pattern.

An invention patent is valid for 20 years and a utility model or design patent is valid for ten years, all starting from the date of application.

There are three ways to file a patent application in China:

  • direct filing with the Patent Office – a foreign applicant must file through a Chinese patent agent and the application must be in Chinese;
  • through the Paris Convention – within 12 months of an invention or utility model patent being filed for outside of China (or six months for a design patent), the applicant can file the same in China and claim priority over the overseas application; or
  • through a Patent Cooperation Treaty (PCT) application – a foreign applicant can file a PCT application in its home country and select China as one of the designated countries for the application to enter the National Phase in China. 

In cases of infringement, patent owners can either file complaints with the Intellectual Property Office for administrative action or file lawsuits in court. Statutory damages for patent infringement are between RMB10,000 and RMB1 million.

Registered trade marks in China include commodity trade marks, service marks, collective marks, and certification marks. Any mark that can distinguish the goods/services of one seller or provider from those of others, including any word, device, letter, number, 3-D mark, colour combination, sound, or any combination of said elements, can be registered as a trade mark in China.

A trade mark registration is valid for ten years from the date it is approved. The registrant can file a renewal application within 12 months before the end of each successive ten-year period following the date of registration, or within a grace period of six months thereafter.

It usually takes one year for a trade mark application to be approved. An applicant can claim priority within six months after the same application is filed outside of China or the mark is used in an exhibition recognised by the Chinese authority. There are two ways to file a trade mark application in China:

  • direct filing with the Trademark Office – a foreign applicant must file through a Chinese trade mark agent and the application must be prepared in Chinese; or
  • through the Madrid System – a foreign applicant can file a Madrid application in its home country (if applicable) and select China as one of the designated countries for the application. 

In cases of infringement, trade mark owners can either file complaints with the Administration for Market Regulation for administrative action or file lawsuits in court. Sometimes criminal charges are also an option. Administrative penalties include no more than five times the illegal turnover or no more than RMB250,000 fines if the illegal turnover is less than RMB50,000. The maximum statutory damages for trade mark infringement are RMB3 million.

The Patent Law protects industrial design as a design patent, along with inventions and utility models. Currently, a design patent is valid for ten years from the date of application. In order to accede to the Hague Agreement, the latest draft Patent Law is increasing the validity period for design patents to 15 years.

Industrial design can also be protected by other laws. Given its creative and aesthetic nature, an industrial design can be regarded as a work under copyright law, consisting of device, shape, colour or the combination thereof. In addition, a unique design can identify the source of a product and distinguish the seller or provider, or can be used for such purpose, in which case such design can be regarded as a trade mark and therefore protected as one. Last but not least, a design can be the packaging and trade dress. When the product has enjoyed a certain degree of fame, it can be protected by the Anti-Unfair Competition Law.

Copyright is the exclusive right of authors in literary, artistic and scientific works. In China, works protected by copyright include the following:

  • written works;
  • oral works;
  • musical, dramatic, opera, dance or acrobatic artistic works;
  • art or architectural works;
  • photographic works;
  • film works and works created using methods similar to film making;
  • graphic and model works, such as engineering design plans, product design plans, maps, schematic diagrams;
  • computer software; and
  • other works.

The author’s right of authorship, right of revision and right to preserve the integrity of work are not restricted in time. The right of publication and other statutory copyrights of an individual are valid for the life span of the author plus 50 years. If it is a work of a legal person, then said rights are valid for 50 years after the first publication. In the case of film works and works created using methods similar to film making, the right of publication and other statutory copyrights are valid for 50 years after the first publication.

Copyright arises upon the creation of the works, and does not need to be registered. Nevertheless, one is allowed to register the copyright, which can be used as evidence of ownership in case of enforcement. In the case of a commissioned work, the commissioned party owns the copyright, unless agreed otherwise.

In the case of infringement, copyright owners can either file complaints with the Copyright Office for administrative action or file lawsuits in court. Sometimes criminal charges are also an option. Administrative penalties include no more than three times the illegal turnover or no more than RMB100,000 fines if the illegal turnover is not available. Maximum statutory damages for copyright infringement are RMB500,000.

Software is mostly protected by copyright. Software can also be protected through an invention patent, such as industrial control software, internal performance enhancement software, and external data processing software. Last but not least, software can also be protected as a trade secret.

Databases are principally protected by copyright, with an emphasis on “intellectual creation” when compiling the data. The protection of databases is also aided by the Anti-Unfair Competition Law and the Contract Law.

The protection of trade secrets can be seen in various laws, but principally in the Anti-Unfair Competition Law. Trade secrets are commercial information, such as technical information and business information, that is not known to the public and has commercial value, and which the rights holder has taken measures to keep secret. The misappropriation of trade secrets is subject to civil and/or criminal liabilities. 

The laws and regulations applicable to data protection in China are fragmented across multiple pieces of legislation. Before the Cybersecurity Law took effect on 1 June 2017, data protection was covered nationally under the Constitution, General Principles of the Civil Law, and the Tort Law, mainly in the context of privacy and defamation actions. The Cybersecurity Law is considered as the pillar that establishes a comprehensive legal framework for cyber sovereignty, network security and data privacy protection. It imposes various obligations on network operators and more stringent requirements for operators of critical information infrastructure (“CII”), and also includes data protection requirements.

Since the Cybersecurity Law generally lays out broad principles but leaves key issues related to implementation and scope unspecified, a handful of supporting measures and guidelines would fill in the gaps of enforcement. So far, the most significant pieces of such supporting legislation include the Regulations for Internet Security Supervision and Inspection by Public Security Organs, which is applicable to the security supervision and inspection by public security organs, and the Personal Information Security Specification, which is a national standard on personal information protection frequently adopted by the enforcement authorities. 

Additionally, some sector-specific regulations touch on the topic of protecting personal information. Affected sectors include telecoms, banking, healthcare, e-commerce, postal service, etc. For example, the E-Commerce Law sets forth provisions governing the process whereby e-commerce operators collect users' personal information, the processing and use of personal information, the obligation to protect and manage users’ personal information, the processing methods when exchanging information, and the rights of users. 

The Cybersecurity Law applies to the construction, operation, maintenance and use of the network, as well as the supervision and administration of cybersecurity within the territory of China. Therefore, if a foreign company constructs, operates, maintains and uses networks within China through its subsidiaries or branch offices, those entities are subject to the jurisdictions of the Cybersecurity Law and other related laws and regulations.

From another perspective, if the subsidiaries or branch offices of a foreign company do not construct, operate or maintain networks within China, but instead use the networks provided directly by the foreign company, they are still subject to the jurisdictions of the Cybersecurity Law and other related laws and regulations, although there will be relatively fewer legal obligations under such circumstances.

Notably, cross-border data transfer between Chinese entities and foreign companies is usually involved for multinationals, which raises data compliance issues such as the absence of consent from the data subjects before transfer and lack of a data transfer agreement between the data exporter and importer. In addition, certain types of data are required to be stored within China, and are subject to data security assessment before carrying out any cross-border data transfer.

The Cyberspace Administration of China (“CAC”), the Ministry of Public Security (“MPS”), the Ministry of Industry and Information Technology (“MIIT”) and the State Administration for Market Regulation (“SAMR”) are the four main supervision authorities, together with other industry administration authorities that supervise and manage data protection in accordance with their respective responsibilities.

The CAC operates at both national and local levels. The Cybersecurity Law enumerates the major responsibilities of the cyberspace administrations, such as to review important cross-border data sent by CII operators and important personal information about CII operators.

Within the area of cybersecurity, the MPS is responsible for “directing and supervising local public security organs in safety monitoring work related to public information networks.” In registration work, the MPS assumes two important registration functions – namely, the registration for international networking and registration for classified protection. The MPS also has the power of Law Enforcement Patrols and the power to impose administrative penalties. 

MIIT is an authority under the State Council, and is in charge of information affairs. Together with its subordinate local communications administrations and economic and information authorities at all levels, MIIT assumes part of the responsibility of maintaining internet security. MIIT has cybersecurity-related responsibilities, such as the building and management of the platform for the telecommunications network, the internet, and information security technology, cybersecurity protection, and the management and handling of emergencies.

SAMR is a newly established authority that merged the functions of the former State Administration for Industry and Commerce and a few other agencies. Together with its local authorities at all levels, SAMR performs supervision and management duties in accordance with the Cybersecurity Law, the E-Commerce Law, the Consumer Rights and Interests Protection Law and the Anti-Unfair Competition Law, and has corresponding power to impose administrative penalties for illegal activities, including violations of personal information protection.

MWE China Law Offices

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Shanghai Pudong New Area
P.R.China 200121

+86 21 6105 0500

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michellegon@mwechinalaw.com www.mwe.com
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McDermott Will & Emery (Shanghai) provides a full range of legal services and business advice to Chinese companies and multinational corporations doing business in China through its strategic alliance with MWE China Law Offices in Shanghai. The founding partners of MWE China Law are long-established Chinese lawyers with in-depth knowledge of the Chinese cultural, legal and regulatory system, and the global experience to provide a Western-style approach to clients from around the world. In addition to their extensive legal training and experience, all lawyers at MWE China Law are licensed to practise in China. MWE China Law offers diverse sector experience in almost every significant regulated and unregulated industry in China, including banking, finance and insurance, healthcare, pharmaceuticals, medical devices, technology, manufacturing and distribution. The firm counsels clients in all key areas of law, including antitrust and competition, capital markets, corporate (including mergers, acquisitions and joint ventures), labour and employment, intellectual property, litigation and arbitration, real estate, regulatory compliance, tax, venture capital and private equity. As part of the alliance with McDermott, the Shanghai office is prepared to help clients wherever their business interests take them.

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