China is basically a civil law jurisdiction. Under the PRC Constitution and the Law of Organisation of the People’s Courts, the judicial system is made up of the Supreme People’s Court, the local courts, military courts and other special courts. The local courts are comprised of the strict courts, the intermediate courts and the high courts. The high courts supervise the strict and intermediate courts. The Supreme People’s Court is the highest judicial organisation in the PRC and supervises the administration of justice by all of the courts.

The courts employ a two-tier appellate system. A party may appeal against a judgment or order of a local court to the court at the next higher level. Second judgments or orders given at the same level and at the next higher level are final. First judgments or orders of the Supreme People’s Court are also final.

If any party to a civil action refuses to comply with a judgment or order made by a people’s court or an award granted by an arbitration panel in the PRC, the aggrieved party may apply to court for enforcement of the judgment, order or award. Subject to the statute of limitations, if a person fails to satisfy a judgment made by the court within the stipulated time, the court will, upon application by either party, mandatorily enforce the judgment.

A foreign individual or enterprise generally has the same litigation rights and obligations as a citizen or legal entity of the PRC. A foreign judgment or ruling may also be recognised and enforced by the PRC courts according to the PRC enforcement procedures if the PRC has entered into, or acceded to, an international treaty with the relevant foreign country, which provides for such recognition and enforcement, or if the judgment or ruling satisfies the court’s examination according to the principle of reciprocity, unless the court finds that the recognition or enforcement of such judgment or ruling will result in a violation of the basic legal principles of the PRC, its sovereignty or security, or for reasons of social and public interests.

With the promulgation of the PRC Foreign Investment Law (FIL), which came into force on 1 January 2020, the previous case-by-case investment approval system has been replaced by a new system of “Pre-establishment National Treatment plus Negative List” for foreign investment. Under this system, except as required under the Negative List, the competent PRC authorities are to treat foreign investors the same as Chinese investors.

The Negative List refers to the “Special Administrative Measures for Foreign Investment Access”. Foreign investors are not allowed to invest in fields that are “prohibited” by the Negative List, and the restrictive measures for such “restricted” fields mainly include special permits from the competent authority, shareholding ratio limits, requirements on corporation form and governance rules, etc.

The latest version of the Negative List issued at the state level covers 31 sub-items under 12 major categories. The major “prohibited” industries thereunder include the distribution and retail of cigarettes and other tobacco products, internet news and information services, online publishing, domestic legal business, social survey, news agencies and publishing industry; the “restricted” industries include K12 education, medical service, telecoms and internet services, airline companies and airports, and nuclear power plants. It is also worth noting that there are a number of “Pilot Free Trade Zones” in China that have a standalone negative list, allowing for a more relaxed range of foreign investments.

In addition to the “Special Administrative Measures for Foreign Investment Access” (which apply exclusively to foreign investors), foreign investments are also subject to the “Market Access Negative List”, which is a document delineating industries that are prohibited or restricted to private investment by either Chinese or foreign investors. Any industry not included on the list is presumed to be open to investment without requiring additional administrative approvals. According to the latest version of the Market Access Negative List, there are six prohibited items and 111 items requiring permission for access. For example, some business in the news media sector is only open to Chinese state-owned enterprises, such as news agency, news gathering, editing and publication and broadcasting operation, while banking, insurance, civil aviation, gas and oil exploration, grain export and the manufacturing, distribution and import of medicine, among others, are subject to a prior approval, permit or licence from the relevant government authority in charge of the industry.

Notably, there are specific laws and regulations governing the restricted industries. For example, a prior approval from the State Financial Regulatory Administration (formerly known as the China Banking and Insurance Regulatory Commission) is required for a foreign-invested bank, and an industry player who wishes to manufacture a medicine product needs to apply for a Manufacture Licence of Pharmaceutical Products from the China Food and Drug Administration Bureau.

In addition to the formalities required under the “Special Administrative Measures for Foreign Investment Access” and the “Market Access Negative List”, a foreign investment may also be subject to the “Fixed Assets Investment Approval/Filing”, “National Security Review” and/or “Merger Control Review”, depending on the investment’s particulars, such as the target, amount, industry, location, market status of the parties, etc.

If the foreign investment is subject to the “Special Administrative Measures for Foreign Investment Access”, the foreign investor shall apply to the Ministry of Commerce or its local counterpart for approval. Generally, it takes 15 to 20 working days for the Ministry of Commerce to review the application and make a decision. If the foreign investment is subject to the “Market Access Negative List”, it must then be approved by the competent industrial authority, such as the Administration for Market Regulation, the State Financial Regulatory Administration, the China Securities Regulatory Commission, the Civil Aviation Administration, etc. Depending on the investment’s particulars (the target, amount, industry, location, market status of the parties, etc), the investment may also require prior approval from the National Development and Reform Commission, which is in charge of the “Fixed Assets Investment Project Approval/Filing” and “National Security Review”. The timing and procedure vary for each different authority. Once all the requisite approvals, permits and clearances are received, the foreign investor shall apply to the Administration for Market Regulation for the issuance of a Business Licence to its Chinese subsidiary.

Without the necessary approvals, permits and/or licences, the operation shall be considered illegal and therefore be vulnerable to administrative punishments, including fines, forfeit of illegal gains, order for suspension, etc. In extreme cases, it could constitute a criminal offence to operate without the necessary approvals.

Generally speaking, as the restrictive requirements are expressly set out in the “Special Administrative Measures for Foreign Investment Access” and the “Market Access Negative List”, the approval to be granted in accordance with the two negative lists will not be conditioned on special commitments from the foreign investor.

However, the clearance could be conditional in the case of the “National Security Review” and/or “Merger Control Review”. The conditioned commitments could be restrictions on the operation, the divestiture of certain business, etc.

The investor has the right to file a lawsuit with the court against the authority turning down an application for the requisite approvals, permits, licences or clearances. If the district court hearing the case rules against the investor, the investor may appeal to a higher level court. The legal proceeding to challenge such decisions may take one to two years.

The most common types of corporate vehicles available in China include the following.

• A Limited Liability Company (LLC) is established by up to 50 shareholders, each of whom has limited liability for the company up to the amount of their capital contribution. The scope and scale of financing for LLCs are small, making the vehicle suitable for start-ups (an LLC is suitable for greenfield projects).
• An Incorporated Company (INC) is formed by two to 200 promoters, whose entire capital is divided into equal shares, and all shareholders are liable for the debts of the company to the extent of their shares. The INC has a strict and complex formation process and is usually suitable for large companies for holding, joint venture, etc. An INC can publicly issue shares and become a public company.
• A Sole Proprietorship (SP) is financed, operated, owned and controlled by an individual, who bears the operating risks and owns all the operating revenues. The owner of an SP has unlimited liability for the debts of SP with their personal property.
• A Partnership includes a General Partnership (GP) and a Limited Partnership (LP). A GP is invested by more than two contributors, and the contributors are unlimitedly liable for its debts. An LP is established by two to 50 partners, including at least one General Partner who has unlimited liability for the debts of the LP, while the remaining partners are Limited Partners who are liable for the debts of the LP to the extent of their capital contributions.

In China, there are some differences in the incorporation process for different legal entities. The most complex process is for an INC, which is as follows.

• Approval of name: apply to the local market supervision department for approval of the company's business name, ensuring that the name complies with legal requirements and is not already taken by others.
• Preparation of articles of incorporation: draft the company's articles of incorporation (CAI), which specify shareholder rights, business scope, and other details.
• Shareholder agreement: shareholders enter into a shareholder agreement to define capital contributions, profit distribution and other matters among themselves.
• Subscription by promoters: promoters subscribe for shares according to the prescribed methods and proportions specified in the CAI.
• Convening the inaugural meeting: within 30 days of the full payment of shares, an inaugural meeting is held to review and approve the CAI and other documents, and determine other matters.
• Submission of registration application: within 30 days of the inaugural meeting, the board of directors should apply to the registration authority for establishment registration. Upon approval, the business licence will be issued.

The incorporation process for an LLC is similar to that for an INC but is simpler, involving:

• approval of the name;
• preparation of the CAI;
• payment of the registered capital – shareholders contribute the registered capital as stipulated in the articles of incorporation and obtain the relevant certificates; and
• submission of the registration application.

For a Partnership, the partners need to sign a Partnership Agreement after name approval, and then submit the incorporation application to the registration authority.

An SP can submit the incorporation application to the registration authority directly after name approval.

The legal entity is established after the registration authority approves and issues a business licence. The entity then needs to make seals, open bank accounts and complete tax registration and certain other matters.

In China, private companies have relatively flexible and less stringent reporting and disclosure obligations, compared to public companies. They are not required to publicly disclose financial and business information to investors, but they still need to comply with regulations related to taxation, administration of industry and commerce, and other aspects. The reporting and disclosure obligations for private companies mainly involve the following aspects.

• Tax declaration: private companies need to timely file tax declarations and submit the relevant tax declaration forms and documents to the tax authorities according to the laws and regulations.
• Reports to the administration of industry and commerce: private companies are required to submit annual reports to the local administration of industry and commerce, containing the basic information and operational status of the company. Changes to the company's name, registered capital, shareholders, etc, should be recorded and updated with the registration authority.
• Industry-specific regulatory requirements: depending on the specific industry and regulatory requirements, certain private companies may be subject to stricter supervision and need to fulfil specific reporting and disclosure obligations. For example, insurance companies are required to disclose their actual controllers, financial and accounting information, information about executives, etc, to the public.

In China, different legal entities have different management structures.

• LLCs and INCs usually have a three-tier structure that contains four bodies, as follows.
1. The shareholders' meeting (SM) is the highest governing body. It is composed of shareholders and is responsible for making decisions on important matters. There are some differences between the shareholders' meetings of LLCs and INCs in terms of the methods of convening and presiding over the meeting, attendees, and the exercise of power. In fact, the names of the two also differ in Chinese.
2. The board of directors (BD) is the decision-making body and is responsible for the SM. For LLCs with fewer shareholders or on a smaller scale, an executive director may be appointed instead of a BD.
3. The manager is appointed and dismissed by the BD and is responsible to it. An LLC may choose not to have a manager.
4. The supervisory board (SB) is the supervisory body that supervises the company's financial affairs and the legality of the actions of the BD and managers. For LLCs that have few shareholders and operate on a smaller scale, one or two supervisors may be appointed instead of a SB.
• In an SP, the business is owned and operated by an individual, with all decision-making rights and responsibilities borne by the individual business owner.
• Partnerships have relatively simple management structures, primarily based on joint decision-making by the partners.

The liabilities of directors, executives and shareholders of companies (including LLCs and INCs) are stipulated by Chinese laws, as follows.

• Liabilities of directors and executives:
1. duty of loyalty and diligence – directors and executives should act in the best interests of the company, and exercise due diligence;
2. confidentiality obligation – directors and executives should keep the company's trade secrets and relevant information confidential;
3. asset protection obligation – directors and executives should protect the company's property and assets, and take necessary measures to prevent conflicts of interest; and
4. compliance – directors and executives should ensure that the company's operations comply with laws and regulatory requirements.
• Liabilities of shareholders:
1. shareholders should fulfil their capital contribution obligations as stipulated in the CAI and pay the subscribed or held shares in a timely and full manner; and
2. shareholders should comply with laws and the CAI, exercise their rights in accordance with the law, and not abuse rights or misuse the company's legal personality and limited liability to harm the interests of the company, other shareholders or the company's creditors.

There is a concept of “piercing the corporate veil” in China, which means that a shareholder shall bear joint and several liability for the company's debts when they abuse the company's legal personality or limited liability, engage in malicious debt evasion and seriously harm the interests of creditors.

China is not a case law jurisdiction and the rules applicable to employment relationships include:

• laws, mainly the Labour Law and the Labour Contract Law;
• regulations and rules issued by governmental authorities to implement the laws;
• judicial interpretations made by the Supreme People’s Court and local courts;
• collective bargaining agreements, which PRC law encourages employees to enter into with their employers to set out matters generally applicable to all employees, such as remuneration, working hours, days off, holidays, health and work safety, insurance and welfare; and
• employment contracts, which PRC law requires employers to enter into with each individual employee.

Employment contracts entered into between employers and employees must be in writing according to PRC laws. If an employer fails to sign an employment contract with an employee within one month after the employee starts work, the employee is entitled to receive double their normal wage until a contract is signed.

Employment contracts shall be wholly or partially invalid where the mandatory provisions of the laws and administrative regulations are violated. Employment contracts are required by law to include certain material provisions, such as:

• the parties to the contract;
• the term of the contract;
• a job description and the place of work;
• working hours;
• rest and leave;
• labour remuneration;
• social insurance; and
• labour protection, working conditions and protections against occupational hazards.

An employer and an employee may choose to execute a fixed-term, open-ended or project-based employment contract. However, under the following circumstances, an employer must enter into an open-ended employment contract with an employee at their request:

• the employee has worked for the employer for more than ten consecutive years and will attain statutory retirement age in less than ten years’ time; or
• the employee has entered into a fixed-term labour contract twice consecutively with the employer.

PRC law implements the following three types of working hour systems, each of which permits different arrangements for working hours, rest periods and overtime pay:

• the standard working hour system;
• the comprehensive working hour system; and
• the flexible working hour system.

Standard Working Hour System

Employees may work up to eight hours each day and an average of 40 hours per week. Employers may temporarily adjust working hours and workdays in accordance with actual conditions, but employees must have at least one day off each week.

Comprehensive Working Hour System

This system allows for employee working hours to be calculated per week, month, quarter or year. However, the average working hours per day and per month shall be similar to those under the standard working hour system. Prior approval from the local labour authority is required before an employer can implement this system.

Flexible Working Hour System

This system is usually applied to senior management personnel, field staff, salespersons and others whose work cannot be measured under the standard working hour system. Prior approval from the local labour authority is also required for this system. Employees under the standard and comprehensive working hour systems are entitled to overtime pay according to the following standards:

• for overtime worked during normal working days – no less than 150% of the hourly salary for each overtime hour worked;
• for overtime worked during any day off (generally Saturday and Sunday) and if no extra time off could be arranged in lieu thereof – no less than 200% of the hourly salary for each overtime hour worked, which does not apply to the comprehensive working hour system; and
• for overtime worked during public holidays – no less than 300% of the hourly salary for each overtime hour worked.

Even if employers pay overtime wages in accordance with the above provisions, according to PRC laws the monthly overtime hours of employees under the standard and comprehensive working hours systems shall not exceed 36 hours.

Generally, employees under the flexible working hour system are not entitled to overtime pay. However, local practice may differ in this respect and should be referenced as necessary. For instance, in Shanghai, employees under the flexible working hour system are eligible for overtime pay on public holidays, which should be paid at 300% of the employee’s normal wage.

PRC law does not generally recognise an employer’s right to provide at-will employment. Termination by employers is strictly regulated and must rely on a statutory basis and adhere to certain procedural requirements.

Mutual Termination

Employers and employees may terminate the employment relationship based on mutual agreement. Employees who agree to mutual termination are entitled to severance.

Unilateral Termination by an Employee

PRC law generally permits an employee to unilaterally terminate their employment relationship by resigning at will, provided that 30 days’ prior written notice is given to the employer. An employee who is still in their probationary period may resign by giving the employer three days' prior notice. Employees are also entitled to immediate termination in instances where the employer has acted in violation of laws or the employment contract, such as the employer failing to pay remuneration on time. The employer is required to pay severance to the employee for such causes of termination.

Unilateral Termination by an Employer

Employers can unilaterally terminate their employees in three ways:

• summary dismissal;
• termination with prior notice or payment of salary in lieu of notice; and
• lay-offs.

If an employer terminates the employment contract illegally, the employee is entitled to request the employer to pay compensation or to resume the performance of the employment contract.

Summary Dismissal

Employers are entitled to terminate employees with immediate effect without severance in the following circumstances:

• failure to satisfy conditions during the probationary period;
• serious violation of the employer’s policies and rules;
• wilful misconduct or gross negligence resulting in material losses to the employer;
• the existence of seriously conflicting employment relationships or a refusal to rectify upon request;
• the contract was concluded by fraud, threat, force or coercion; and
• the employee is investigated for criminal violations.

Termination with Prior Notice

Employers may also unilaterally terminate employees with prior notice of not less than 30 days (or payment of one month's salary in lieu of notice) on any of the following grounds:

• the employee suffers from a disease or non-work-related injury and is unable to perform their original duties or any other duties arranged by the employer after the statutory medical treatment period;
• the employee is found to be unqualified and remains unqualified after receiving training or an adjustment of their duties; and
• a major change in objective circumstances hinders the continued fulfilment of the original contract and, upon consultation, the employer and employee are unable to amend the employment agreement.

Employees so terminated are entitled to severance in accordance with the Labour Contract Law.

Lay-offs

PRC law permits employers to conduct “economic lay-offs” of more than 20 employees or over 10% of an employer’s total workforce simultaneously due to the following severe economic difficulties:

• bankruptcy and restructuring;
• serious difficulties in production and/or business operations;
• switching production, introducing major technological innovations or changing business models, if workforce reduction is still necessary after amending the employment contracts; and
• other significant changes to the objective economic circumstances relied upon at the time of execution of the employment contracts.

Note that the employer must first give 30 days’ advance notice to the trade union or all employees before implementing an economic lay-off plan, and then report the plan to the local labour bureau. Employees terminated in a lay-off are entitled to severance.

Other Legal Grounds for Termination

The employment relationship may also be terminated upon the expiry of the employment contract or in any of the following circumstances:

• the employee reaches their statutory retirement age;
• the employee dies or is declared dead or missing by a court;
• the employer is lawfully declared bankrupt;
• the employer’s business licence is revoked, the employer is ordered to close or is closed down, or the employer decides to dissolve; and
• certain other circumstances specified by law or administrative regulations.

Employees subject to termination on any of these grounds are entitled to severance.

Severance

An employee whose employment is terminated unilaterally, by mutual agreement or for other reasons may be entitled to severance from their employer. Severance payments are typically calculated at the rate of one month’s salary for each full year of employment; for this purpose, a period of employment greater than six months counts as one year and a period of less than six months counts as one half year.

In principle, each month of severance payable is determined based on the employee’s average monthly salary over the previous 12 months. Limitations apply. An employee’s average monthly salary is capped at three times the local monthly average wage; where this cap applies, the number of eligible years of employment occurring after 2008 is also capped at 12.

PRC law does not require employees to be formally represented by either a trade union or an employee representative congress. Therefore, the identity, election and representative authority of employee representatives are not specifically defined.

According to PRC law, an employer is required to consult with all employees in the following situations:

• if the employer seeks to adopt or amend the employee manual, handbook or other sets of rules, or change substantial matters that involve the interests of employees, such as remuneration, working hours, days off and personal leave, work safety and health, insurance and benefits, training and discipline; and
• before implementing an economic lay-off plan.

Income earned by employees is subject to individual income tax (IIT) under Chinese law. The worldwide income of employees who are Chinese residents is generally subject to taxation in China, whereas only income derived from China is subject to tax payment in China for non-residents. An IIT exemption may also be available if a non-resident’s home country has a tax treaty with China.

According to the Individual Income Tax Law of the People’s Republic of China (the IIT Law), Chinese residents are those individuals with domicile in China or those who have stayed in China for 183 days or more in a given calendar year.

In the context of an employment relationship, employers are legally required to withhold IIT from employees’ payroll and pay IIT to the competent Chinese tax authorities on a monthly basis.

The calculation method for IIT varies based on the nature of the income in question. Wages and salaries are taxed at progressive rates, ranging from 3% to 45%.

Social Insurance Contribution and Housing Fund Contribution

Under Chinese law, both employers and employees are legally obliged to make contributions to social insurance programmes and housing fund programmes for employees on the basis of each employee’s average monthly salary in the preceding year (subject to statutory minimum/maximum amounts).

The social insurance contribution generally includes pension, unemployment insurance, medical insurance, work-related injury insurance and maternity insurance.

Various taxes must be paid by a company doing business in China.

Enterprise Income Tax

Enterprises doing business in China are subject to enterprise income tax in China. Resident enterprises shall pay enterprise income tax in China in relation to their income originating both within and outside of China. Non-resident enterprises may also be subject to enterprise income tax under Chinese law in certain circumstances. Specifically, if a non-resident enterprise has an establishment in China, it shall pay enterprise income tax in relation to income originating from China obtained by such establishment, and relating to income that occurs outside China but is effectively connected with such establishment. If a non-resident enterprise does not have an establishment in China, or has an establishment but the income in question has no actual connection with such establishment, it shall pay enterprise income tax in China on its income originating from China.

Resident enterprises include those that are set up in China in accordance with Chinese law, and those that are set up outside of China but have their actual administration office in China.

Generally, the rate of enterprise income tax is 25%. However, for qualifying small-size thin profit enterprises and qualifying hi-tech enterprises, the enterprise income tax rate is reduced to 20% and 15%, respectively. In addition, for income obtained by non-resident enterprises from China that is not connected to their establishment in China (if any), the applicable tax rate is reduced to 10%.

Withholding Tax

For taxes payable on income obtained by non-resident enterprises, the Chinese payer is obliged to withhold income tax and pay it to the competent Chinese tax authorities. This covers various forms of passive income – eg, royalties, dividends, interests, income from the transfer of property and other income sourced from China by non-resident enterprises.

Value-added Tax (VAT)

VAT is generally imposed in relation to the sale, import, processing and repair of goods, the sale of intangible property, the sale of real estate and the provision of services in China. VAT is calculated based on the sales value of the goods or services in question.

VAT taxpayers are either general VAT taxpayers or small-scale VAT taxpayers. A general VAT taxpayer may claim input VAT (which is the VAT paid for its purchase of taxable goods or services) as a credit, while a small-scale VAT taxpayer may not. Such input VAT credits can be utilised by a general VAT taxpayer to offset output VAT (which is the VAT paid for its sale of taxable goods or provision of taxable services).

The VAT rates that apply to general VAT taxpayers are 0%, 6%, 9% or 13%, depending on the nature of the goods or transaction in question. For example, the rate is 0% for the export of goods, while it is 9% for the transfer of land use rights. For small-scale VAT taxpayers, the applicable VAT rate is 3%.

Stamp Duty

Stamp duty is imposed on certain documents, certificates and licences, such as contracts for sales of goods or contracts for the transfer of shares or equity interests. There are different applicable rates of stamp duty. The transfer of shares in a Chinese company is subject to stamp duty of 0.05% of the contract value, payable by both the buyer and seller, respectively. The stamp duty rate for contracts for sales of goods is 0.03%.

Customs Duties

Customs duties are levied on the import and export of goods. The rates of customs duties vary.

If goods are imported into free trade zones or designated export processing zones within China, customs duties and import VAT are exempted, provided that certain regulatory requirements are met. Machinery or equipment imported for self-use by foreign invested company into China may also enjoy exemptions from customs duties and import VAT.

In addition to the aforementioned taxes, a company doing business in China may also be subject to other taxes, such as deed tax, land appreciation tax, urban maintenance and construction tax, vehicle purchase tax, consumption tax, etc.

Before the implementation of the Enterprise Income Tax Law of the People’s Republic of China (the EIT Law) in 2008, a foreign invested enterprise established in China generally enjoyed a “two-year exemption and three-year reduction by half” preferential enterprise income tax treatment.

Under the EIT Law, tax incentives are now mainly technology- and industry-oriented, regardless of the nationality of the shareholders. For qualified hi-tech enterprises, the enterprise income tax rate could be reduced to 15%.

There are also other tax incentives – eg, qualifying Chinese taxpayers are generally exempt from VAT on exported goods.

Foreign tax credits are recognised and available for both enterprises and individuals in China. For example, individuals who have paid foreign income tax in respect of foreign income that is taxable in China can be granted foreign tax credit. However, the credit cannot exceed the amount of income tax otherwise payable on such foreign income in China.

Group consolidation for enterprise income tax purposes is not permitted in China.

The thin capitalisation rule is provided under the EIT Law and its implementation regulations. Additional rules and regulations have been issued by the Chinese authorities to provide guidance on the implementation of the thin capitalisation rule. If a company is excessively financed with debt from a related party, the deductibility of interest paid to related entities will be effectively restricted. The related party debt-to-equity ratio is set at 2:1 for non-financial enterprises and 5:1 for financial institutions.

Transfer pricing rules are provided in the EIT Law. A number of additional rules and regulations have also been issued, including the Circular of the State Taxation Administration on Printing and Distributing the Implementing Measures for Special Tax Adjustments (for Trial Implementation) (Guo Shui Fa [2009] No. 2) and the Announcement of the State Administration of Taxation on Matters relating to Improvement of the Filing of Related-Party Transactions and the Management of Contemporaneous Documentation (Bulletin [2016] No. 42).

There are general anti-evasion rules under Chinese tax law. Generally, the Chinese tax authorities take a “substance-over-form” approach when deciding whether to make special tax adjustments. One example is the indirect disposal of an equity interest in an enterprise registered in China by non-Chinese investors.

Under Chinese law, a transaction that qualifies as a “concentration” and meets the turnover threshold is required to be notified to China’s National Anti-monopoly Bureau (AMB) of the State Administration for Market Regulation (SAMR).

Concentration

“Concentration” is defined under Chinese law to cover not just mergers and acquisitions, but also other transactions – eg, joint venture deals are usually considered a type of concentration.

Specifically, a “concentration” of business operators is defined as:

• a merger among business operators;
• the acquisition of control over one business operator by another business operator by way of acquiring shares or assets; and
• the acquisition of control over one business operator by another business operator or otherwise acquiring the ability to exercise decisive influence over the former business operator by way of contract or other means.

Turnover Threshold

A concentration must be notified to AMB if either of the following two thresholds is met:

• the aggregate global turnover of all the business operators participating in the proposed concentration exceeds RMB10 billion (approximately USD1.4 billion) and each of at least two business operators has turnover of more than RMB400 million (approximately USD56 million) within mainland China in the preceding accounting year; or
• the aggregate turnover in mainland China of all the business operators participating in the proposed concentration exceeds RMB2 billion (approximately USD282 million) and each of at least two business operators has turnover of more than RMB400 million (approximately USD56 million) within mainland China in the preceding accounting year.

Note that there are special rules for the turnover thresholds for financial institutions. In addition, even if the applicable turnover thresholds are not met, AMB nevertheless has the authority to review a concentration if such concentration may have the effect of limiting or eliminating competition in China.

For notifiable transactions, it is mandatory to notify and obtain clearance from AMB or to wait until the statutory review period has expired without objection or without a request for further information before the transition in question can be implemented.

A standard procedure and a simplified procedure are available for merger notifications under Chinese law. The simplified procedure is a fast-track procedure for simple cases that meet certain statutory criteria.

Gun-jumping (ie, implementing the concentration before clearance) may subject the relevant parties to sanctions by AMB.

Standard Procedure

The standard procedure typically consists of the following phases:

• pre-notification consultation;
• Phase I review;
• Phase II review; and
• Phase III review.

The pre-notification consultation occurs before a notification has been accepted by AMB as being complete. It is not mandatory but is usually advisable to conduct pre-notification consultation.

The formal review phase only starts once AMB declares the notification complete and initiates the formal review process. Phase I review has to be completed within 30 days. Upon the expiry of such 30-day period, AMB may initiate an in-depth Phase II review for another 90 days if it considers the transaction has, or may have, the effect of eliminating or restricting competition, or it may notify the parties that it will not conduct further review so that the transaction can be implemented in writing. If AMB fails to make any decision within that 30-day period, the transaction is deemed to be cleared and can be implemented.

With the parties' consent or in limited circumstances, the Phase II review can be further extended for another 60 days – ie, Phase III. If AMB fails to make any decision within the applicable time limits, the concentration can be implemented. In most cases, however, clearance is granted during Phase II.

It is notable that a new “stop the clock” mechanism has been introduced and the review procedure can now be suspended in limited circumstances – eg, if the parties fail to submit documents and materials as required, resulting in the difficulties of review.

Simplified Procedure

The simplified procedure provides a fast-track anti-monopoly review for simple cases with one of the following characteristics:

• horizontal mergers where the combined market share of all the business operators participating in the proposed concentration is less than 15%;
• vertical mergers where the market share of each of the business operators participating in the proposed concentration is less than 25%;
• other mergers (which are neither horizontal nor vertical) where the market share of each of the business operators participating in the proposed concentration in their respective markets is less than 25%;
• the formation of a joint venture outside of China that does not engage in any economic activities within China;
• the acquisition of shares or assets of a non-Chinese target that does not conduct any economic activities within China; or
• a concentration where the number of controlling business operators in a joint venture is reduced, resulting in the joint venture being controlled by one or more remaining business operators.

Upon the receipt of notification of a proposed concentration as a simple case, AMB will review and determine whether the proposed concentration meets the criteria applicable to simple cases.

Since 1 August 2022, five local counterparts of SAMR at a provincial level (Beijing, Shanghai, Chongqing, Shaanxi and Guangdong) have been authorised to review certain simple cases. This pilot programme will end on 31 July 2025.

Under the Anti-monopoly Law of the People’s Republic of China (AML), a monopoly agreement is defined as an agreement, decision or other concerted action to exclude or limit competition. The AML provides a list of monopoly agreements between competitors that are prohibited, including:

• those fixing or changing the prices of a product;
• those limiting the production or sales volume of a product;
• those dividing a sales market or the market from which raw materials are purchased;
• those restricting the purchase of new technology or equipment, or preventing the development thereof;
• those establishing a refusal to deal; and
• other monopoly agreements as determined by the State Council's anti-monopoly enforcement authority.

However, monopoly agreements falling within the list above are capable of exemption if the parties involved can demonstrate that the allegedly restrictive agreement pursues any one or more of the following objectives:

• improvements to technological development or research and/or the development of a new product;
• improvements to product quality, reductions in cost, improved efficiency, the harmonisation of product specifications and standards or the implementation of specialisation arrangements;
• improvements to the operational efficiency and enhanced competitiveness of small and middle enterprises;
• social public interest benefits such as energy conservation, environmental protection and disaster relief;
• mitigating the impact of severe decreases in sales or production surplus/excess capacity during a period of economic recession;
• the protection of legitimate interests in foreign trade and economic co-operation; and
• other objectives as might be prescribed by law or by the State Council.

In addition, for the first five exemption situations listed above, the parties shall also prove that the agreement so concluded does not gravely limit competition in the relevant market and can benefit consumers.

A dominant market position is defined under the AML as a market position that enables one party to control the price, volume or other transaction terms of a product in a relevant market, or to hinder or affect the entry of other parties into a relevant market.

According to the AML, a party will be assumed to have a dominant market position when certain market share thresholds are met – eg, if a party accounts for half of the total market share in a relevant market.

A party holding a dominant market position is prohibited from engaging in any of the following conducts by abusing its dominant market position:

• selling a product at an unfairly high price or buying a product at an unfairly low price;
• selling a product at a price below cost without a good reason;
• refusing to transact with a counterparty without a good reason;
• restricting a counterparty to dealings only with it or with any business operator designated by it without a good reason;
• engaging in tying without a good reason, or imposing other unreasonable transaction terms on a transaction;
• applying different treatment in terms of transaction price or other transaction terms to counterparties with equal standing without a good reason; and
• any other conduct as identified by the State Council's anti-monopoly enforcement authority to be an abuse of dominant market position.

A party having a dominant market position must not exploit any data or algorithms, technology or platform rules, nor otherwise to engage in the abuse of a dominant market position described above.

There are three types of patent under the Patent Law of the People’s Republic of China:

• invention patent;
• utility model patent; and
• design patent.

An invention is any new technical solution pertaining to a product or process, or an improvement to a product or process. A utility model refers to any new technical solution relating to the shape or structure – or combination thereof – of a product that is fit for practical use. A design is a new design of a product's overall or local shape, pattern or combination thereof, or combination of colour and shape or pattern, which is fit for industrial application while having an aesthetic effect. Generally, novelty is critical for the successful prosecution of patents in China. Inventions or utility models must also possess non-obviousness and practical applicability in order to be patentable under Chinese law.

China adopts a “first-to-file” system for patent prosecution, instead of “first-to-invent”. In addition, a patent applicant may claim priority in China for an application first filed in another jurisdiction within 12 months for inventions or utility models, and within six months for designs, pursuant to the relevant conventions or treaties.

For all patent applications submitted to it, the China National Intellectual Property Administration (CNIPA) will first conduct a preliminary examination.

For an application for a utility model patent or design patent, if it is found there is no cause to reject the application upon the preliminary examination, CNIPA shall decide to grant the patent right.

For an application for an invention patent, if CNIPA, upon preliminary examination, finds the application conforms to the legal requirements, it shall publish the application promptly within 18 months from the filing date. Then, the applicant shall request CNIPA to further conduct substantive examinations within three years from the filing date. If the applicant fails to do so, the application for an invention patent shall be deemed to have been withdrawn. Upon the examination into the substance of an application for an invention patent, if there is no cause to reject the application, CNIPA shall decide to grant the patent right for the invention, issue the relevant certificate of patent for invention, and register and announce the same. The patent right for the invention shall become effective as of the date of announcement.

The length of protection is 20 years for inventions, ten years for utility models and 15 years for designs, all commencing from the date of filing. For innovative drug patents, the patent owner is legally permitted to have the patent term extended to remedy delays due to the drug approval process, provided that the maximum extension does not exceed five years and that the total period of protection after drug approval does not exceed 14 years.

A significant recent development is the adoption of a patent linkage system for drug patents, which provides a framework for both innovative drug developers and generic drug manufacturers in terms of patent protection and timely marketing authorisation approval.

Under the Trademark Law of the People’s Republic of China, any sign that distinguishes the goods of a natural person, legal person or other organisations from those of others, including any word, device, letter, number, three-dimensional sign, colour combination, sound and combination thereof, may be registered as a trade mark.

China adopts a “first-to-file” system for obtaining trade mark rights, but a few exceptions exist, including bad faith filings or prior use of a well-known mark.

An application for trade mark registration must be submitted to the Trademark Office of CNIPA, which has nine months from the filing date to conduct a preliminary examination of the application. If it is determined that the application complies with legal requirements, the Trademark Office will preliminarily grant the trade mark application and have it published in the Trademark Gazette. If no opposition has been filed within the statutory three-month period, the Trademark Office will make an announcement in the Trademark Gazette and issue a registration certificate to the applicant.

The period of validity of a trade mark is ten years from the date of approval of the registration, which can be renewed for an additional ten years upon an application for renewal.

In China, an industrial design can be protected by having it registered as a design patent under the Patent Law. It can also be protected as a trade mark or copyright.

Under the Copyright Law of the People’s Republic of China, works that are subject to copyright protection are defined as intellectual creations with originality in the realm of literature, art or science that can be represented in a certain form. The Copyright Law provides a non-exhaustive list of such works, including written works, oral works, musical works, dramatic works, Chinese folk art works, choreographic works and acrobatic works, works of fine arts and works of architecture, photographic works, audiovisual works, engineering design plans, product design drawings, maps, schematic drawings and other graphic works and their model works, and computer software.

For copyrights under Chinese law, there are both moral rights (including the right to determine whether to publish the work, to get acknowledgement as the creator of the work, to control amendment of the work, and to preserve its completeness) and economic rights (ie, the right to remuneration).

Generally, the period of copyright protection is for the life of the author plus 50 years.

Copyrights come into existence upon the creation of the works under Chinese law. Therefore, registration is not a precondition to copyright enforcement, but rather prima facie evidence of ownership. It is not mandatory under Chinese law to have the copyright registered with the competent authorities.

Software

Software is protected as the subject of copyright under Chinese law. In addition to the Copyright Law, the Chinese government has promulgated specific rules on software protection, according to which software can be registered with the National Copyright Administration to provide prima facie evidence of ownership.

It is notable that a licence or transfer of software copyright by a Chinese citizen, Chinese enterprise or other Chinese organisation to a non-Chinese citizen or enterprise is required to comply with the Regulations of the People's Republic of China on Administration of Technology Import and Export.

Trade Secrets

The protection of trade secrets is primarily provided under the Anti-unfair Competition Law of the People’s Republic of China, which defines trade secrets as any technical information, operational information or commercial information that is not known to the public and has commercial value, and for which the party that has rights in such secrets has adopted measures to ensure its confidentiality. In practice, it is critical that the owner of the trade secrets has taken reasonable precautionary measures to protect the trade secrets. Otherwise, it will be very difficult for the owner to prevail in its enforcement activities.

Under Chinese law, data includes personal information and general data. Before 2021, China mainly regulated data protection through the Cyber Security Law (CSL), which mainly focused on the protection of network operation security and network information security, and regulated the protection of personal information within the scope of cyberspace.

With the increasing emphasis on data protection, China implemented the Data Security Law (DSL) and the Personal Information Protection Law (PILP) in 2021. The DSL was implemented first and regulates the processing of all data, including personal information and general data, focusing more on the regulation of “Critical Data” (ie, data that is closely related to national security, economic development and social public interests).

The PIPL only stipulates the rules for the protection of personal information. It provides a comprehensive and systematic legal basis for the rights and interests of personal information subjects, the obligations of information processors, and the authority of competent authorities. It is the most basic and important law on personal information protection in China.

In general, China currently regulates data security through these three main laws, which are intersecting and complementary to each other, and each has its own focus. There are also a large number of administrative regulations, departmental regulations, local regulations, and national and industry standards that refine and supplement the three laws, and together construct the legal framework of data protection in China.

The CSL, DSL and PIPL are applied differently in the international context.

According to the relevant provisions of the CSL, both local and foreign companies should comply with the CSL as long as they build, operate, maintain and use networks in China.

The DSL adopts the principle of “territorial jurisdiction + protection jurisdiction” in its application. “Territorial jurisdiction” refers to the fact that all data processing activities, whether by Chinese enterprises, foreign enterprises or multinational enterprises, are subject to the jurisdiction of the DSL as long as they are carried out in China. “Protection jurisdiction” means that, although the data processing activities are carried out outside of China, the DSL is also applicable if the lawful rights and interests of the Chinese state, citizens or organisations are harmed.

The PIPL generally applies to the processing of personal information of natural persons in China but – similar to the “Long-arm jurisdiction” of the GDPR – the PIPL has extraterritorial effect. A foreign company that processes personal information of natural persons in China outside of China should also comply with the PIPL if it is:

• for the purpose of providing products or services to natural persons in China;
• for the analysis and assessment of the behaviour of natural persons in China; or
• applicable to other circumstances as provided by law – this clause is a bottom-up clause that is not yet specified in detail, but leaves room for future legislation.

The Internet Information Department (including State Cyberspace Administration and local Cyberspace Administrations) is responsible for co-ordinating the protection of personal information and related supervision and management work. It co-ordinates relevant departments to promote the protection of personal information as follows:　　

• formulating specific rules and standards for the protection of personal information;　　
• the development of specific rules and standards for the protection of personal information for small personal information processors, the processing of sensitive personal information, etc;　
• supporting the research, development and promotion of the application of secure and convenient electronic identity authentication technology, and promoting the construction of public services for network identity authentication;　
• promoting the construction of a personal information protection socialised service system, supporting relevant institutions in carrying out personal information protection assessment and certification services; and
• improving the protection of personal information complaints and reporting work mechanism.

The Ministry of Industry and Information Technology (MIIT) is mainly responsible for the supervision and management of data processing activities and security protection in the field of industry and information technology. It supervises and guides provincial industry and information technology authorities and industry regulators such as communications authorities and radio management agencies to carry out data security supervision work.

The Internet Information Department and MIIT are the main agencies for data protection in China, and guide other relevant departments to jointly regulate data protection in China.

Proposed VAT Law

On 27 December 2022, China’s National People’s Congress (NPC) released the first draft of the VAT Law of People’s Republic of China; the second round review is expected to take place in 2023. The purpose of the new VAT Law is not to create an additional layer of tax burden on business, but rather to enhance the adoption of OECD International VAT/GST Guidelines, clarify some ambiguous concepts and reduce the tax burden to a certain extent. 

Proposed Concentration Compliance Guidance

On 19 June 2023, SAMR promulgated the Anti-monopoly Compliance Guidance for Concentration of Business Operator (Draft for Comments) (the Concentration Compliance Guidance), which will be the first concentration compliance guidance ever released by the Chinese government. The Concentration Compliance Guidance explicitly states that it is for business operators' reference, and that the requirements contained therein are not legally mandatory. However, it is generally understood that if an enterprise has adopted various compliance measures in accordance with the Concentration Compliance Guidance, it will strengthen its compliance management and significantly reduce its risks of non-compliance. It is not immediately clear when this guidance will be formally released. 

Corporate Vehicles

On 30 December 2022, a draft revision to the Company Law of the People's Republic of China was published with the following important improvements: 

• the responsibility of shareholders' capital contribution was strengthened, with detailed provisions on the responsibility of shareholders for late capital contribution and the conditions for accelerated expiration of capital contribution obligations; 
• the establishment of the organisational structure was optimised, and the division of authority between shareholders and directors was clarified; 
• the rules of compensation for company executives who damage the rights and interests of others in the performance of their duties are clarified, and it is made clear that the company can insure the directors; and 
• the governance of public companies is strengthened by expressly prohibiting the illegal holding of shares in public companies, with clarification that a subsidiary of a public company may not acquire shares in that listed company. 

It can be seen that the organisational structure of companies, the duties of executives and rules of corporate governance will be further clarified in China.  

Data Protection

In recent years, more and more data protection-related laws have been issued to strengthen the protection of data. 

In terms of personal information protection, China maintains a continuous focus on the cross-border transfer of personal information. The Measures for Standard Contract for Cross-border Transfer of Personal Information came into effect on 1 June 2023, and the second version of the Cybersecurity Standard Practice Guide-Security Certification Specification for Cross-border Processing Activities of Personal Information (exposure draft) was issued in November 2022, implementing the Security Certification for Cross-border transfer of personal information. 

In terms of cybersecurity, the Regulation on the Administration of Network Data Security (exposure draft) was published in November 2021, with the stricter regulation for cybersecurity. 

In general, China's legislation on data protection is continuing to improve, and the regulation on data protection will become stricter.