China Law Insight

Should Banks Be Held Responsible for Losses which their Clients have Suffered as a Result of Purchasing Wealth Management Products?

King & Wood — Fri, 12 Mar 2010 17:37:51 +0800

By Wang Fengli and Wang Jiangang, King & Wood's Dispute Resolution Group

For many people, their main wealth management strategy involves purchasing financial products promoted by banks. Since the first impact of the global financial crisis was felt in 2008, the performance of different bank-issued financial products has varied greatly. Some Chinese investors have lost money as a result of buying financial products promoted by foreign-funded banks, and some have even sued those banks for compensation. Since financial products are generally quite complex, hurt investors often make their claim against a bank on the grounds that the bank failed to give clear notice about the risks inherent in the financial product which it was promoting and that the bank induced the investor into purchasing a product while concealing important facts.

Although claims of this kind are generally for small amounts, their impact on the banks concerned should not be underestimated. The dispute between the bank and the investor is often quite intense. For these reasons, Chinese financial regulators are very concerned about the potential impact of such cases on the larger financial order. Another issue is that cases involving small claims are usually tried in local courts which do not have expert knowledge of complex financial products. This means that the relevant courts take a cautious approach to the conduct of such trials and the resulting court decisions reflect this cautious attitude.

Case Background
On February 18, 2008, at the recommendation of a wealth manager at the Oriental Plaza sub-branch of ABN AMRO (China) Co., Ltd (“ABN AMRO”) a Chinese investor decided to invest in a structured deposit (Phase III) product linked to the ABN AMRO/AIG “Chinese Agricultural Products Gross Return Index” (the “structured-deposit-based financial product”) . The principal invested in this particular product was guaranteed if the investor maintained its investment until maturity. On February 19, 2008 the investor deposited AUD 50,000 into an account which he had opened with ABN AMRO. Then, on February 21, 2008, the investor went to ABN AMRO to complete the formalities for purchasing the structured-deposit-based financial product. The product did not perform well during the developing global financial crisis. Therefore, on September 24, 2008 the investor filed an application for redemption of his investment and accordingly, ABN AMRO commenced the procedures for redemption. On October 16, 2008 ABN AMRO converted and settled the investor's redeemed funds in Chinese yuan renminbi at the investor's request.

By then the investor had lost RMB 142,621 which included a loss of RMB 40,565.64 due to his early redemption decision and RMB102,040 due to the conversion of Australian dollars into Renminbi.
On November 10, 2008, the disappointed investor filed a lawsuit with the Dongcheng District Peoples' Court in Beijing, claiming compensation from ABN AMRO for the loss which he had suffered on the basis of alleged fraud, concealment of important facts and breach of contract by ABN AMRO. In 2009, the Dongcheng District People's Court dismissed the investor's claim emphasizing that there are risks associated with wealth management products and setting out the duties and obligations that banks should observe when performing contracts for fiduciary wealth management. This case has served as an important reference for similar cases which have subsequently arisen.

Case Analysis

Was ABN AMRO’s structured-deposit-based financial product valid under PRC law?

Article 46 of the Interim Procedures for Administration of Personal Wealth Management Business of Commercial Banks (the “Procedures”) promulgated by the China Banking Regulatory Commission in September 2005 states that:

“commercial banks shall receive approval from the China Banking Regulatory Commission before they carry out the following wealth management services for individuals: 1) earning-guaranteed financial products; 2) new investment products designed on an earning-guaranteed basis for personal wealth management business; and 3) other personal wealth management services subject to approval from China Banking Regulatory Commission”.

Article 51 of the Procedures states that “commercial banks do not need to obtain approval for other personal wealth management services but they must report the same to the China Banking Regulatory Commission or its local agency in a timely manner pursuant to the applicable regulations”.

In the case mentioned above, ABN AMRO's structured-deposit-based financial product did not fall within the meaning of “investment products designed on an earning-guaranteed basis” as defined in the Procedures. However, in his complaint, the investor challenged the legality of ABN even issuing the product in China on the basis of an allegation that ABN AMRO had only filed the product with the banking regulatory agencies in Shanghai and Beijing and had not received approval for the product. He further alleged that the banking regulatory agencies did not provide any acknowledgement or receipt after they had received the product filing from ABN AMRO.

In answer, ABN AMRO submitted a bound volume to the court, which contained all of the recorded documents filed with the two banking regulatory agencies in Shanghai and Beijing, with the date of filing and the signatures of the handling clerks at the two banking regulatory agencies evident on the face of the documents. The court admitted this evidence after verifying it with the two agencies concerned and, as a consequence, accepted that the structured-deposit-based financial product issued by ABN AMRO was valid and legal, observing that the procedures for reporting to the China Banking Regulatory Commission's local agencies had been timely completed.

Did the bank give clear notice about the possible risks associated with the structured-deposit-based financial product when promoting it to the investor?

Because of the complex structure of wealth management products, most courts in China suspect that banks’ wealth managers overstate the potential earnings capacity and conceal the risks associated with their products while misleading clients into purchasing high-risk products. As a result, courts tend to sympathize with individual investors and this approach reflects the most common approach taken in legislative and judicial practice in China generally. For instance, when interpreting the insurer’s obligation under the PRC Insurance Law to “make clear explanation” of the “disclaimer” in an insurance policy, the Supreme People’s Court has decided that the disclaimer may not be deemed valid unless the insurer has clearly and expressly explained to the policy holder or its agent, either orally or in writing, the definitions, content and legal consequences of or relating to the disclaimer in addition to including notices to the same effect in the insurance policy.

With this approach in mind, banks responding to similar lawsuits in China need to be able to adduce evidence sufficient to prove that they have given express notice about the specific risks associated with the particular wealth management products which they have promoted to each client on each occasion. In the case above, ABN AMRO had in fact elaborated on the clauses contained in the contract for the structured-deposit-based financial product and had also expressly drawn the investor’s attention to notices in related documents which illustrated the risks associated with that particular product in language understandable to persons who are not financial professionals (in this case in particular, concerning risks to the principal investment and foreign exchange rate risks in the context of an early redemption by the investor). At the same time, ABN AMRO had also presented evidence to the court that the investor had delivered responses to an “Evaluation Questionnaire for Investments by the Client” and a “Suitability Questionnaire” provided by the bank. In this way ABN AMRO was able to prove that it did give detailed notice about the risks associated with the particular structured-deposit-based financial product in question when promoting the product to the investor in that particular case. As a result, the Dongcheng District People’s Court concluded in its final judgment that the investor had purchased the product voluntarily on the basis of a full understanding of the risks associated with the product.

Did the bank induce the investor into early redemption?

In performing its fiduciary wealth management service, ABN AMRO had sent the investor monthly statements and reports through express courier delivery service and had properly maintained records of each statement and report. These documents showed that even though the product was not performing well, ABN AMRO had, on a monthly basis, truthfully informed the investor about the performance and net value of the product as well the risks associated with an early redemption .

By contrast, the investor had alleged in his complaint that he chose early redemption as a result of demands and inducements received from ABN AMRO's staff. In answer to these allegations, ABN AMRO presented a notarized record of telephone calls between the investor and ABN AMRO's wealth manager, which showed that the investor had chosen early redemption on the basis of his own judgment of the condition of the international financial market at the time, despite knowing that his principal investment was not guaranteed unless he held the product until maturity. In addition, notarized evidence showing the variations in the Australian dollar's exchange rate and in the product's value after the investor redeemed his investment proved that it was the early redemption decision by the investor which had caused the investor's loss. As a result, the court ultimately dismissed the investor's claim.

Given that the financial derivative market in China is not yet mature, banks should give careful thought about how wealth management products that are promoted in China can be designed and advertised well, and how their fiduciary obligations to customers in China can be performed well. Banks may be exposed to legal risks and held liable for the risks inherent in the products which they promote if they have not paid careful attention to these matters and have not strictly adhered to applicable regulations in some aspects of their services. After all, customers entrust their assets to banks because they look at banks as trustworthy financial experts. It is true that investments do come hand in hand with risks, but banks always have an obligation to keep risks within a reasonable limit.

【Wang Fengli is a partner and Wang Jian’gang is a lawyer from the litigation and arbitration team in the head office of King & Wood PRC Lawyers in Beijing.】

Just Do It!? Protecting Advertising Slogans in China Part II

King & Wood — Tue, 02 Mar 2010 18:22:09 +0800

By Jiang Ling, Partner, King & Wood's Trademark Department

The term "works" used and protected under the Copyright Law refers to original intellectual creations in the literary, artistic and the scientific domain, in so far as they are capable of being reproduced in a certain tangible form. As for literal works, this refers to the works manifested in text form, no matter how long it is or what type or format of literature it uses. As long as it is original, it should be within the scope of protection by the PRC Copyright Law (as well as Trademarks as previously discussed). Therefore, it can be concluded that an advertising slogan is in principle not excluded from copyright protection on the condition that it is original. However, the Copyright Law does not define what "original" is. Judging by judicial practice, the expression of original works may not necessarily be unprecedented, and re-creation based on previous intellectual works of others is not forbidden either. In general, works possess originality as long as it is created by the author independently rather than plagiarizing others' works which bears some personalized characteristics. Thus, it is possible for slogans to be copyrighted.

In practice, there are some instances in which advertising slogans are granted copyright protection. For example, in the case of Cheng Du Huangchenglaoma restaurant vs. Beijing Huangronglaoma hotpot restaurant, the court held that the slogans used by the plaintiff possessed the originality to qualify as a literal work and thus should be protected under the copyright law. Accordingly, the defendant infringed on the copyrights of the plaintiff in using the same slogans during its daily business. As to how to judge the originality of advertising slogans, the court specifically made the following analysis and statement on the verdict, " 'original' mentioned in the copyright law means that the works are created by the author independently without plagiarism or imitation, which is mainly manifested in the selection, design and composition of certain material. Although the vocabulary which comprises the slogans was not original, through the plaintiff's selection, combination and arrangement, they have reflected certain personalized characters.

Moreover, if advertising slogan has become a symbol or identifier of the company through long-term use and promotion, hence closely associated with the goodwill and the products of the company, it may also seek protection under the Anti-unfair Competition Law against other party's unauthorized use.

Conclusion

In fierce market competition, companies tend to promote their brand and products by adopting unique advertising slogans. Advertising slogans could become a symbolic sign of the company and thereby attain an intangible value just like a trademark. Under the existing legislation and in practice, advertising slogans can 1) be protected under the Trademark Law through trademark registration, as long as it is original and could function as a source indicator. 2) slogans that have built a connection with certain enterprises in the course of business should also fall within the protection scope of the Anti-Unfair Competition Law. 3) original advertising slogans may also be protected under the Copyright Law. Among the three, trademark registration is the most effective means of protection.

Hong Kong Budget Report: New Benefits for Inventors

King & Wood — Fri, 26 Feb 2010 17:32:33 +0800

By Kenneth Choy, Partner, Corporate, King & Wood–Hong Kong

Hong Kong's Financial Secretary, the Hon. John C Tsang, gave his annual budget speech Wednesday, February 24th. Buried in the 178 paragraph speech on the 2010-2011 Budget Report were two paragraphs relating to intellectual property rights. The issues mentioned by the Financial Secretary may benefit inventors and high-tech start ups.

In paragraph 106, he expanded deductibility as capital expenditure of the purchase of registered trademarks, copyrights, and registered designs. Under the current scheme, only purchase of patent rights and industrial know-how are deductible. The purpose of the expansion is to promote wider application of intellectual property and to help develop the creative industries in Hong Kong. Actual formulation for deductions will be prepared by the Inland Revenue Department. This addition brought in the most common types of intellectual property rights transferred in Hong Kong and will serve as a boon for creative entrepreneurs.

The second item concerns funding for patent applications. Currently, the Hong Kong Government provides funding assistance for Hong Kong inventors and enterprises to help them pay for the cost of filing their first patent application. The current ceiling of such grants and funds is HK$100,000. In paragraph 107, Mr. Tsang raised the ceiling to HK$150,000. Hong Kong has a recordation system for patent registration that requires the granting of a patent in another jurisdiction before a Hong Kong standard patent may be issued. To obtain a Hong Kong standard patent, an inventor must file in an approved jurisdiction where substantive review is conducted and a patent granted before a Hong Kong patent can be registered. In essence, the inventor has to pay for two patent applications to have a Hong Kong patent granted. The increase in the funding should be helpful for small inventors.

Compared to other ‘sweeteners’ offered in the speech, these two additional benefits offered for intellectual property rights are fairly minor but will have a relatively broad application. At least, the topic of IP rights is not completely left out of the speech. A full copy of the Budget report can be downloaded at www.budget.gov.hk.

30% Jump in Chinese WIPO Filings

King & Wood — Thu, 25 Feb 2010 15:28:15 +0800

By Kenneth Choy, Partner, Corporate, King & Wood–Hong Kong

The World Intellectual Property Organization, also known as WIPO, recently disclosed the number of international patent applications filed under its Patent Cooperation Treaty (“PCT”) for 2009. A copy of the release, entitled International Patent Filings Dip in 2009 Downturn (PR/2010/6), may be downloaded here. While the total number of PCT applications filed for the year was down compared to 2008, filings by applicants from East Asian countries actually grew with Japan, Korea and China ranking among the top five filing countries. Although the number of applications from the United States dropped by more than 11% to 45,700 applications, it still held its place on top of the rankings. Japan (2), Korea (4) and China (5) accounted for 45,839 PCT applications in 2009, about 30% of total filings

China filed 7,946 applications, an impressive 29.7% increase over its 2008 filings. Two Chinese filers were among the top 100. Huawei Technologies Co., Ltd. came in with 1847 applications, second only to Japan's Panasonic Corporation and ZTE Corporation jumped 15 places to finish 23rd with 502 filings. Together, these two companies accounted for 30% of China's 7,946 filings. For the year, Huawei filed 110 more applications than in 2008, an increase of 6.3% while ZTE increased by 52.6%, submitting 173 more applications into the PCT system than in the previous year.

The prolific activities of these two equipment makers in the telecommunications industry indicate the importance of protecting intellectual property rights in multiple jurisdictions as Chinese companies expand beyond China's shores to become players in the global market. The WIPO statistics indicates that Chinese companies are taking advantage of using PCT applications for international protection.

The PCT procedure gives an applicant the convenience of filing initially only one patent application with one set of papers in one language with a receiving office designated by the PCT. At a later stage, should the applicant desires, it can then choose the jurisdictions where the patent application should be filed. Only at that stage would the applicant have to pay for necessary translations and filing fees of the national jurisdiction where the application is filed. The procedure gives the applicant much more control over the application process. Companies with proprietary knowhow or inventions interested in expanding overseas should consider this option as part of their patent application strategy.

Just Do It!? Protecting Advertising Slogans in China Part I

King & Wood — Tue, 23 Feb 2010 15:23:11 +0800

By Jiang Ling, Partner, King & Wood's Trademark Department

Concise and vivid advertising slogans quickly draw the public's attention and are integral to a company's brand. Over years of use and promotion, some slogans have become well-known to the public, such as Nike's "Just do it", Adidas' "Impossible is nothing" and DeBeers' "Diamonds are forever." In many ways, such slogans are often no less important than the company's logo and other marks. As such, companies must figure how to protect and prevent the unlicensed use of their advertising slogans. Accomplishing this in China presents a unique set of considerations.

Advertising slogans, composed of words in the form of phrases, formally possess both the characteristics of both literal works and trademarks. Therefore, in principle, they can be the protected by the PRC Copyright Law ("Copyright Law") and the PRC Trademark Law ("Trademark Law").

Trademark Protection

The Trademark Law provides that:

"Any visual signs of words, devices, letters, numerals or any combination of the above elements, which being able to distinguish the goods or service of one entity from the others, can be registered as trademarks."

Accordingly, advertising brand names consisting of words are acceptable for trademark. As to whether registration is granted, all trademarks go through an official examination to determine if they possess due distinctiveness and can function as indicators the products they represent. In terms of common word marks, the trademark law does not require a word mark to be original or coined in order to achieve distinctiveness. Generally, as long as the words used by a trademark are not the generic name of the goods or does not directly indicate the features of the products, they are considered distinctive and capable of distinguishing its origin. Hence, "Apple", "Great Wall" and other dictionary words possess just as much distinctiveness as the coined words "NEC", "TCL".

Second, the words used by a brand trademark need not be totally unrelated to the features of the products. For instance, "Safeguard" indicates the features of the products in certain a way, but as long as the indication is not a direct description, the mark does not typically lose its distinctiveness.

However, the examination on trademarks for slogans tends to be more stringent both in terms of the examination criteria employed and in its application by the trademark authorities. According to the Examination Criteria issued by the Trademark Office, a slogan that does "not indicate the characteristics of the products" is one of the most elementary requirements for the registration of a slogan trademark. In addition, slogan trademarks should be original and non-popularly used, which sets a higher threshold in the judgment of their distinctiveness and thereby greatly increases the difficulty in getting them registered in the PRC.

As to whether a trademark is original, it is not difficult to judge in the case of common word marks. Non-dictionary words can most easily be regarded or alleged as "original" words, such as "Haier", "Canon" and "Philips". It seems that applying words in a non-dictionary or non-traditional way, an applicant can relatively easily meet the "originality" component.

The originality of slogans, on the other hand, is not so easy to ascertain. As a short phrase consisting of words, the purpose of slogan is to promote the concept, culture and image of the enterprises and their products, which requires it to be expressed in a way familiar and comprehensible to the general public. Hence, slogan trademarks cannot differ far from the language used by people in daily life. There may be some uniqueness in the sentence structuring, but the slogan ultimately cannot avoid being tinted with a sense of popularity. As such, the originality of a slogan is intrinsically hard to demonstrate.

As different people can have different views and feelings on what is popularly used, this makes Trademark Office's examination subjective and uncertain. The following slogans have previously applied for registration as trademarks: "The world swings with me", "Inspiration lights life", "Your vision, Our future", "Listening creates the future", "Sense the world, foresee the future" and "Share the moment, share the life" of which the Trademark Office directly approved the registration for "The world swings with me", "Inspiration lights life" and "Your vision, Our future", while rejecting the rest for lack of distinctiveness. The Office even makes a contradictory conclusion to the same slogan applied for different goods. For example, the Eastman Kodak Company's slogan "Share the moment, Share life" was approved in for pictures, but was denied in for cameras.

However, Article 11 of the Trademark Law provides that slogans that lack distinctiveness cannot be registered as trademarks with the exception of "those that have acquired distinctiveness through use ". According to this provision, if the slogans have established sole association with certain enterprises in the public recognition through use and are capable of functioning as a distinguisher of their source, they can be granted with trademark registration. As this exceptional provision further increases the threshold of registration, meanwhile it has opened a new path for the registration of slogan trademarks. Having met the requirements of this provision by proving the acquired distinctiveness through use, the slogans mentioned above, i.e. "Listening creates the future" of KENWOOD, "Sense the world, foresee the future" of OMRON and "Share the moment, Share the life" of Kodak, which were preliminarily rejected by the Trademark Office, have eventually all been approved for registration.

Angel Investing in Hong Kong: Part VI Conclusion

King & Wood — Fri, 12 Feb 2010 11:20:50 +0800

By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong is blessed with many favorable elements for business growth. The most prominent factors often cited for Hong Kong's business success include its gateway role to China, the rule of law, and a location where goods, services and finance move freely. Such a positive environment has led to many success stories, particularly in the tech sector.

Recent Example

One recent success was Iatopia.com (ICL), a young Hong Kong company founded in May 2006 by Dr. Lee Shu Tak Raymond, formerly an associate professor at the Department of Computing of Hong Kong Polytechnic University. An inventor, scholar and systems consultant, Dr. Lee possesses more than 18 years of systems consulting and R&D experiences in Web 3.0 intelligent agent technology, artificial intelligence, internet and mobile technology and E-commerce.

ICL made an impressive head start in the e-publication business, servicing and partnering with more than 50 leading magazines, including Newsweek, MIT Technology Review, ESPN magazines and Ming Pao Weekly Magazine. The business model features: (1) delivery of interactive and multi-media based reading, searching and web-channel viewing experience to registered viewers, (2) service offerings to publishers ranging from simple e-content hosting, management of content, archive and registered viewers profile to maintenance of a full-fledged virtual communities and (3) generation of advertising and precision target marketing revenue from a host of branded advertisers.

As site traffic increased (with over 2.5M cpm recorded as of August 2008), ICL saw the apparent needs for extra server equipment and manpower and additional funding from sources other than the founders. From mid-2008 to early-2009, with help with two smart angels (who are professionals and seasoned investors), Dr. Lee managed to, although slightly slowed by the financial turmoil, raise two rounds of angel funding totaling HK$10,000,000 (around US$1.28million), based on a pre-money valuation of the Company at HK$25,000,000 (around US$3.2million).

In August 2009, Media Chinese International Limited, a strategic partner of ICL, entered into an agreement to subscribe for three convertible notes in ICL for a total amount of HK$4,500,000 (around US$577,000). Upon full conversion, Media Chinese will become the second largest shareholder of ICL. Media Chinese is dually listed in Hong Kong and Malaysia, and has a media products portfolio comprising 5 newspapers with total daily circulation of more than 1 million and more than 30 magazine titles around the world.

Conclusion

As seen above, this friendly environment, combined with its proximity to and close relationship with China, recent government policies favoring innovation and technology and the emergence of VC industry, have further made Hong Kong fertile soil to start and grow emerging businesses and by extension a rich venue for angel investment opportunities.

The practice and general awareness of angel investment, however, is still only limited to a relatively small portion of the business and investment communities. Angel financing has a long way to go before it can enjoy the type of popularity it has in California.

To improve on the current state of affairs and to elevate angel financing to the next level, much more work needs to be done. Seasoned angels need to make more effort to institute more organizational format and forums to angel activities in Hong Kong by establishing more angel networks, angel clubs and angel funds. The government, through the relevant quasi-government organizations, may want to consider making more missionary efforts to raise the awareness of angel investment among the business and investment communities.

Angel Investing in Hong Kong: Part V Government Tech Policies

King & Wood — Mon, 08 Feb 2010 14:45:02 +0800

By John Lo, Partner, Corporate, King & Wood–Hong Kong

Nurturing the growth of a science and technology focused sector became a significant part of the government policies of the first post-1997 administration. Under the guidance of the late Professor Tien Chang-lin, former chancellor of University of California, Berkeley, the government issued a technology blueprint for Hong Kong shortly after the changeover, which led to a new period of innovation and growth in the tech sector.

These included the establishment of the following:

Hong Kong Science & Technology Parks
Hong Kong Applied Science and Technology Research Institute
Various funding schemes managed by the Innovation and Technology Commission

The main location of the Hong Kong Science Parks located at Pak Shek Kok - now comprising around a dozen state-of-the-art multi-story buildings under its first two phases of construction - stands as a visible testimony to Hong Kong's attempt to put itself on the yellow brick road of innovation and technology. In addition to established tech companies and R&D facilities, its current occupants include some 100 startup companies under its incubation program. Since the program's inception, more than 200 incubatees have graduated.

The Hong Kong Applied Science and Technology Research Institute (“ASTRI”), modeled after the successful Industrial Technology Research Institute (“ITRI”) of Taiwan, was established in 2000 and is engaged in mid-stream R&D in IC designs, communications technologies, enterprise & consumer electronics, and material & packaging technologies. At the end of 2008, ASTRI employed more than 340 researchers.

The Innovation and Technology Commission is an executive government body under the Communications and Technology Branch of the Commerce and Economic Development Bureau. It manages various government innovation and technology funds focused on helping local businesses in the relevant sectors. Among various funding schemes pertinent to startup financing, is the Small Entrepreneur Research Assistance Program (“SERAP”), which provides pre-VC stage financing to startups.

In addition to the above initiatives, the government has had a long-standing policy to invest substantially in higher education. Despite its relatively small size, Hong Kong has eight universities, some of which have won academic acclaim worldwide and are highly ranked in selected fields. Universities in Hong Kong have regularly achieved breakthroughs and successes in their research efforts. Many made significant efforts to commercialize their research results.

In April 2009, based on the recommendation of a government appointed economic advisory committee, Chief Executive Donald Tsang announced that Hong Kong should focus on and encourage businesses in six major industrial areas where Hong Kong is believed to have competitive advantages. These areas include innovation and technology, the cultural and creative industry and the environmental industry.

Some critics charge that much more could have been done by the government to help innovation and technology based entrepreneurial pursuits. None would dispute that the policies now in place, however, are vast improvements compared with the virtual absence of government support under the so-called “Positive Non-interventionist” policies of the pre-1997 British administrations.

Angel Investing in Hong Kong: Part IV Financial Infrastructure

King & Wood — Fri, 05 Feb 2010 15:54:58 +0800

By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong has a strong venture capital industry and a vibrant capital market, which together afford a much needed financial backdrop for financing growth businesses. This business friendly environment provides funds for start ups as well as exit strategies for more mature companies.

Venture Capital
A strong venture capital presence to provide follow-on financing for post-angel companies is important to the development and growth of angel financing. In this light, Hong Kong is blessed as a key VC hub in Asia, with 294 venture capital firms operating in the territory as of first half of 2008. It has a strong lead in raising funds, raising US$16 billion in 2007 and about US$8 billion in the first half of 2008.

Before the 1990s, Hong Kong did not have much of a venture capital industry. Financing of new businesses relied largely on one's own savings or pooling of resources from the immediate family members or close friends. In the late 1980s, the first venture capital companies began to emerge in Hong Kong. This marked the first time when newly established companies without self-funding resources were able to seek equity financing from unrelated third parties.

The Internet boom in the late 1990s and the China factor attracted even more foreign venture capital firms to Hong Kong and also spurred the growth of some home-grown VC funds. Today, Hong Kong probably remains the largest VC hub in Asia, having weathered ebbs and flows, including the blow from the dotcom bust and an increasing trend for those VCs focusing on mainland China to locate their operational bases to Beijing or Shanghai.

In terms of size and depth, Hong Kong's venture capital industry pales compared to Silicon Valley. The industry also has perhaps paid too much attention to later stage companies to the neglect of early stage companies. With more quality angel financed companies coming on scene in Hong Kong, a shift of emphasis hopefully will gradually occur to catch up to the needs of early stage companies.

Capital Markets
For years, Hong Kong has been a significant world-class investment banking center servicing IPOs of local and PRC companies both on its own stock exchange and overseas bourses including the NASDAQ. Since the mid-1990s, we have witnessed a spate of listings on the NASDAQ or the Hong Kong Stock Exchange of PRC focused Internet or technology companies, many of which were managed primarily out of Hong Kong.

The first wave from mid- to late-1990s included the listing of Sina.com, Sohu, and Netease on the NASDAQ, followed in more recent years by Baidu, C-Trip, Tencent (operator of QQ) and Alibaba, etc. on the NASDAQ or in Hong Kong. These listings provided the ultimate exit for their founders and investors and a road map and prized goal for countless other striving startups and entrepreneurs.

China Weaves a Tax Net over Offshore SPVs

King & Wood — Tue, 02 Feb 2010 14:11:42 +0800

By Tony Dong and Alice Zhang, King & Wood's Tax Department

It is common for multinational companies to deploy offshore holding structures or set up special purpose vehicles ("SPVs") in tax havens to make investments, enter into cross border transactions or to list their IPOs. There are various reasons for companies to utilize offshore SPVs, and tax optimization is clearly one of the top considerations. For example, a company may take advantage of preferential tax treaty provisions or align profits to a low-tax jurisdiction or tax haven. However, in recent years, governments around the world have been tightening their tax administration of cross-border tax avoidance arrangements with TPG's recent tax dispute in Australia is the latest example. The Chinese government has been actively involved in the game, and the State Administration of Taxation ("SAT") has issued a series of regulations in 2009 to strengthen tax scrutiny on non-residents.

On January 8, 2009, the SAT issued the Interim Implementing Rules for Special Tax Adjustments ("the Rules"), which was a major milestone in China's crackdown on tax avoidance. The Rules introduce the general anti-tax avoidance provision which empowers tax authorities to launch anti-tax avoidance investigations and make tax adjustments on transactions without reasonable business purposes, including treaty shopping, abusive use of tax havens or abusive use of tax treaty benefits. When determining whether a tax arrangement was made to avoid taxes, Chinese tax authorities tend to focus on the substance of the arrangement, no matter what form the arrangement takes. Before making such a decision, the tax authorities will perform a comprehensive examination on a number of factors, including the form and substantive impact of the transactions, the execution date and duration of implementation of the transactions, the transactional methods, the connections between each step of the transactions, and tax consequences.

On April 22, 2009, the SAT then released the Guidance on Establishment of Tax Residence Status for Chinese-controlled Offshore Companies under Effective Management Rules, (“the Guidance”) which had a significant impact on "red-chip" companies and round-trip SPVs. Pursuant to the Guidance, if a Chinese-controlled offshore company is regarded as effectively managed in China, then it would be considered as a Chinese tax resident company and taxed on its worldwide income at the rate of 25%. Accordingly, a red-chip company incorporated in a low-tax region, such as Hong Kong, may be subject to Chinese enterprise income tax on its worldwide income. However, a dividend distribution between a Chinese controlled offshore company and other Chinese resident companies will be entitled to tax exemption treatment.

PRC tax authorities have also tightened their control of offshore companies over their ability to enjoy tax treaty preferential treatments, as witnessed by the strings of regulations issued by the SAT. These regulations cover not only substantive rules such as interpretations of various treaty provisions, but also procedural rules as to how to apply for tax treaty benefits. They impose stringent requirements on the entitlement of treaty benefits for offshore entities. For example, under the Circular on Application of Dividends Provision of Tax Treaties issued by the SAT on February 20, 2009, applicants qualifying for preferential treaty treatment on dividends are subject to certain requirements. In particular, if a recipient of dividends intends to apply the dividend provisions of tax treaties which require a threshold of equity holding (generally 25% or 10%), then such recipient must be a company and must meet the aforesaid threshold both in shares and in voting rights at any time during the 12 months preceding the receipt of dividends. In addition, the SAT's Circular on Interpretation and Determination of Beneficial Owner under Tax Treaties ("Circular No. 601") directs local tax authorities to investigate whether an applicant satisfies the requirements to qualify as a beneficial owner, which is a pre-requisite to enjoying the benefit of reduced withholding tax on dividends, interest, royalties or capital gains under a tax treaty. According to Circular No. 601, a beneficial owner refers to an individual or any organization that has ownership and control over the income or the assets or rights generating the income. An agent or a conduit company is not regarded as a beneficial owner. A conduit company is a company established in a tax-exempt or low tax rate jurisdiction for the purpose of avoidance or reduction of taxes or the transfer or accumulation of profits, and where the company does not engage in substantive business activities like manufacturing, distribution or management.

The competent local tax authority examines whether a person or an organization is a beneficial owner case by case by reviewing the information provided by the taxpayer or through exchange of information protocols, if necessary. The Circular further lists seven types of unfavorable factors. Where any of these factors exist, an individual or an organization may not be recognized as a beneficial owner. Pursuant to these factors, many single-level offshore SPVs will be unlikely to satisfy the requirements for beneficial owners due to lack of substantive operating activities or unjustifiable business purposes.

In terms of procedural rules on applications for treaty benefits, the SAT issued the Administrative Rules for the Provision of Treaty Benefits to Non-residents (Trial) on August 24, 2009. The Rules introduce two different procedures - filing procedures and approval procedures, depending on the types of applications. Approval procedures apply to applications for treaty benefits of dividends, interest, royalties and capital gains. In other words, nonresidents shall make substantial disclosures, submit adequate supporting documents, and obtain the approvals of tax authorities in order to enjoy treaty benefits. Applications for other treaty treatment, such as business profits of permanent establishments or individual service provider, should be subject to filing procedures, under which the applicant or the party subject to withholding tax is required to submit documentation (including tax residency certificate). For the said reasons, it is critical for the applicants to proactively prepare such application documents to properly and sufficiently address the offshore company's economic substance and business purposes.

In practice, Chinese tax authorities published their decisions on two real cases – a Xinjiang case and a Chongqing case. These decisions are clear signals for the tightened scrutiny on offshore SPVs and offshore transactions. In the Xinjiang case, a Barbados SPV acquired shares in a Xinjiang joint venture and subsequently sold the shares for a gain, and tried to avoid withholding tax on capital gains by applying China-Barbados tax treaty provisions. However, the Xinjiang state tax authority rejected the Barbados SPV's eligibility to enjoy the treaty benefits on the ground that the Barbados SPV was not viewed as a tax resident of Barbados and the transaction through the Barbados SPV was for tax avoidance purpose. In the Chongqing case, a Singaporean investor contemplated disposal of its shares in a Chinese subsidiary and thus established an intermediate Singaporean company to hold the equity shares, and later sold the equity shares of the intermediate Singaporean company to a Chinese buyer to avoid paying capital gain tax in China. Chinese tax authorities disregarded the existence of the intermediate holding company in Singapore and imposed withholding taxes over the capital gains realized from the transfer of equity shares or the Singapore holding company.

Companies are advised to watch closely the changes in tax regulatory climate, review their holding structures and offshore transactions, particularly the positioning of offshore SPVs, to mitigate adverse PRC tax exposures and ensure the soundness of both tax compliance and tax efficiency.

Angel Investing in Hong Kong: Part III Angel Profiles & Networks

King & Wood — Thu, 28 Jan 2010 11:26:30 +0800

By John Lo, Partner, Corporate, King & Wood–Hong Kong

To a large extent, angel investment in Hong Kong has so far revolved around individual investors rather than institutions. It is useful to examine local angel financing activities by looking at the angel profiles.To date, no systematic research has been conducted regarding the number or makeup of business angels in Hong Kong. General observations indicate that the following groups, not in any order, have been spearheading the efforts: (a) former VC practitioners; (b) individuals who have made money from entrepreneurial activities or as angels; (c) second generation of the leading business families; (d) professionals such as lawyers, doctors and accountants; (e) tech executives and professionals; (f) well-to-do manufacturers who made their initial fortunes with investments in China; and (g) returnees or overseas Chinese with exposure to angel investment elsewhere.

Angel Profiles

A recent article on Hong Kong’s VC industry has an interesting analysis of angel investors in Hong Kong. It put them into five categories :

Sophisticated – the “true” and knowledgeable angel investment practitioners;
Businessmen – knowledgeable but less intense investors in start-ups doing deals as an alternative investment form;
Corporate – manufacturers seeking tech startups to extend their product lines or services;
Incidental – highly wealthy individuals investing to prove themselves or kill time; and
Traditional entrepreneurs – traditionally minded bosses who will invest only if they are in control, not the founders who came up with the original ideas.

Outside certain portions of the above circles, the concept of angel financing is only beginning to be understood or practiced widely.

Angel Networks

Angels acting in concert or in organized groups is a more effective way to invest. Accordingly, organized angel networks have begun to emerge in recent years. We cite a few better known examples below.

British Chamber of Commerce Business Angel Programme (http://www.britcham.com/baker-tilly-business-angel-programme) was initiated by the British Chamber’s IT and SME committees and sponsored by a local audit and business service advisory firm. This program has been running two or three meetings a year, where a number of shortlisted investee companies are given the opportunity to make presentations.
China Business Angel Network (CBAN) (http://chinabusinessangelnetwork.angelgroups.net/) Hong Kong Chapter is the local chapter of CBAN, an established network of more than 140 angels with chapters in Shenzhen, Shanghai and Beijing. CBAN members enjoy reciprocal membership with Business Angel Network South East Asia (BANSEA) in Singapore.
Hong Kong Angel Capital Network (www.facebook.com/group.php?gid=4505959039) is created as a joint venture among its members and Dr. Samson Tam, founder of Group Sense Limited and currently a legislator in Hong Kong. Member admission is by invitation or referral only, requiring declaration of not less than HK$20,000,000 of investable fund and investment in at least one project of the Network in a 12-month period.
Tolo Habour Business Angel Support Group (www.baf.cuhk.edu.hk/research/gem/_new/EN/education/thbasg/index_thbasg.html) is an initiative of the Chinese University of Hong Kong Centre for Entrepreneurship to match companies with good potential with prospective angel investors through the University’s alumni network.

Angel clubs, Angel funds or investment groups

Going beyond networks, angels might band together to invest collectively as angel clubs, angel funds or investment groups. So far, such efforts in Hong Kong seem far and few in between. A few of the budding ones may include:

Black Horse (www.darkhorseinvest.com), a small angel investment group that typically invests US$50,000 to US$1,000,000 in each company and looks to co-invests with other venture funds in Asian companies with capital requirement of US$1,000,000 to US$5,000,000 and a valuation of US$2,000,000 to US$10,000,000. Its industry focus is IT, telecom, education and environmental protection.
Catalyst Group (www.catalistgroup.com)
Hong Kong Angel Investment Network (www.investmentnetwork.hk) is a London-based investment company. It provides a web-based matching service for angel investors seeking investment opportunities and entrepreneurs seeking capital. Entrepreneurs are charged upfront referral fees for the service

Amounts and Structure of Financing

Based on general observations, the deal size of angel investment in Hong Kong seem to largely fall under the norms elsewhere. Individual investors generally takes one or more units of roughly US$50,000 each, resulting in rounds of financing aggregating roughly between US$0.5 million to US$1.0 million per round.

The funding vehicle and the corporate structure in Hong Kong are often more complex and less uniform than those elsewhere, such as Silicon Valley. This is a reflection of the need to adapt to the varying requirements to operate multi-jurisdictionally. For instance, companies of Hong Kong based founders that operate in the mainland will need to set up a corporate structure not only in Hong Kong but also on the mainland. Typically, ordinary shares are used for the initial rounds. However, following the financing practice of the US, some investments are taking on more sophisticated structures, including the use of preferred shares and convertible notes.

Angel Investing in Hong Kong: Part II Startup Scene

King & Wood — Tue, 26 Jan 2010 16:18:44 +0800

By John Lo, Partner, Corporate, King & Wood–Hong Kong

Hong Kong has perhaps one of the most heterogeneous and interesting mix of startups in the world in terms of founder makeup, location of operational base and target markets. Founders of a Hong Kong startup, for example, could be made up of individuals from a wide variety of personal backgrounds, including locals, returnees mostly from North America, foreign expats, and PRC residents and returnees, especially those hailing from the Pearl River Delta. While a “Hong Kong startup” may be taken to mean the use of a Hong Kong incorporated operating or holding company, depending on the background or special strength of its founders, its actual seat of management or key operational base could be in Hong Kong, in China, or sometimes even the U.S. The initial targeted market of startups could also vary widely from the local market, to China, Southeast Asian region or other overseas markets.

Startups tend to concentrate in business areas offering the greatest potential for business growth, from those relating to TMT (technologies, media and telecom) on the one hand to those targeting the huge China market, in particular the consumer market, on the other or areas where the two overlaps. Specific industry areas of the startups are extremely wide ranging, from retail business to language instruction, cartoon production, fast food, semiconductor, E-commerce, outdoor media, health supplements, and on and on.

Accordingly, business angels in Hong Kong have an abundance of choices in investment targets.

Developmental History

The quintessential angel financing model probably did not emerge in Hong Kong until the 1990s. Before that time, entrepreneurs seeking early-stage funding were largely left to chance or the luck of knowing the “right” people or groups to approach. Knowledge of angel investing practices was largely lacking. Occasionally, founders of a startup might obtain loan or equity money from an unrelated party or a distant relative. However, the lack of a standardized or well-conceived practice for structuring the loan or investment often resulted in poorly fitted documentation leaving room for later disputes or unfairly skewed arrangements leaving sour taste among the parties.

As the Silicon Valley tech success rippled across the Pacific in the 1980s, its effects, including the tech based startup and angel financing approaches to building new businesses, began to be felt in Hong Kong. I recall handling a case as a lawyer in Hong Kong in the mid-90s where an Internet startup in Hong Kong received angel funding in the range of several million US dollars. The financing was syndicated by a well known investment banker to seven or eight local individuals where each invested in several investment units of US$100,000 per unit. The documentation for the investment followed the preferred share model prevalent in California. In most respects, that transaction was not much different from similar deals structured in the US at the time.

Since the 1990s, the concept of angel investment has gradually taken root and started to proliferate in the business circles, especially among the startup and tech sectors, expatriates and returnees, VC and capital markets practitioners, and a younger generation of business executives and professionals.

Family Feud in Hong Kong: Chow Sang Sang Trademark Dispute

King & Wood — Fri, 22 Jan 2010 17:08:36 +0800

By Kenneth Choy, Partner, Corporate, King & Wood – Hong Kong

“Chow Sang Sang” (周生生) is a successful and well recognized name in the jewelry business. The name in Chinese has an auspicious meaning of “continuous growth” or “endless vitality of the Chow family”.

Chow Fang Pu (周芳谱) had six sons, three from his wife and three from his concubine. In the 1930’s, his sons from his wife started a jewelry business in Guangzhou with money he provided. The business traded under the Chow Sang Sang name. In the early 1940's, shortly before his death, Mr. Chow split his assets among his six sons. He instructed both branches of his family to run their businesses “side-by-side in a peaceful manner” and provided that his “descendants may use the name Chow Sang Sang but they shall not allow outsiders to join in their businesses” or sell the name to outsiders.

Over the decades, both branches of the family prospered and expanded their jewelry businesses using some form of the Chinese and English versions of “Chow Sang Sang” as an integral and distinctive part of their business names. The “original brothers” formed a partnership but ultimately operated separate jewelry stores. By 1989, the last of their separate interests was bought by one of the original brothers. These businesses were consolidated and now operate under the name of “C.S.S. Jewellery Company Limited”.

The “half-brothers” branch of the family operated their business under a corporation now known as “Chow Sang Sang Jewellery Company Limited”. Its parent company, Chow Sang Sang Holdings International Limited, is listed on the Hong Kong Stock Exchange.

In recent years, relations between the two branches have become tense.

In the 1990’s, the half brothers, through their company, registered the trademark “A CORPORATE GIFT IDEA BY CHOW SANG SANG”. Then in 2003, the remaining original brother tried to register “CHOW SANG SANG” as a trademark. The application was rejected by the Registrar of Trade Marks during the preliminary stage on the grounds that the mark is too close to the earlier mark and that its registration is likely to cause confusion on the part of the public. The company then appealed the decision to the High Court of Hong Kong and recently, the court rendered its decision.

The court noted that for decades, there had already been honest and concurrent use of the Chinese and English versions of CHOW SANG SANG by both branches of the family. This is not a situation where allowing the registration of the mark may lead to public confusion that did not exist before. Whatever public confusion there may be had existed from the time the two branches of the family started using the mark and its Chinese equivalent decades ago. The court observed that the real issue is not whether confusion will be created by registration, but the increase of public confusion that may result if the mark is registered.

Noting that the honest concurrent use of the mark arose from the historical link and that the original brothers had used the Chinese and English marks for more than half a century, the judge felt that it “would be a surprising result if only one branch of the extended Chow family could have “Chow Sang Sang” registered as a trade mark, even though both branches have been using “Chow Sang Sang” (as a transliteration of “周生生”) in one form or another, continuously for decades”. Since the half-brothers branch of the family had already registered a trademark incorporating “CHOW SANG SANG”, allowing the current application to proceed will allow both branches to continue their respective use of “CHOW SANG SANG” as a trademark. On the other hand, rejecting the application at this stage may expose one branch to an infringement claim by the other branch.

After considering the background, the court decided that the risk of increase in public confusion was not substantial. The judge also observed that in recent years, the appellant, C.S.S. Jewellery Company Limited, had been deliberately using the mark in a slightly different manner and in addition had been using it with other logos and marks in attempt to distinguish its goods and services from those of the other branch of the family. To refuse registration because of this shift “would have the practical effect of ‘penalizing’ the appellant for its effort to lessen the potential confusion to the public". Allowing the application will not prevent the other branch from using CHOW SANG SANG because of its earlier registration. On the other hand, in view of the growing animosity between the two branches, rejecting the application may effectively prevent the applicant from using the mark in the future because of a real threat of a claim of infringement of the earlier mark.

On the issue of public confusion, the court confirmed that there is a distinction between creation of public confusion and an increase of public confusion in allowing registration of a similar mark for the same or similar goods or services. Where other factors, such as honest and concurrent use or special circumstances exist, the existence of public confusion is not necessarily enough to reject registration.

After weighing the relevant factors, the court concluded that the “application should not have been thrown out the window” by the Registrar of Trade Marks. While the other branch may still oppose its counterpart’s application on other grounds as the application continues to publication and public notice, the Registrar of Trade Marks was wrong in its reasoning for rejecting the application at this stage.

One point of interest is the court stopping short of saying “the public has got use to the confusion or possible confusion”. Given the proliferation of franchising and product licensing, the shifting nature of trademarks from being badges of origin to endorsement of providers of goods and services by trademark owners may be factors in countering rejection due to the likelihood of public confusion.

In other words, it may be possible in the right situation to argue that the public understands that trademarks are used by unrelated businesses and that such usage does not necessarily indicate the goods and services originated from the trademark owners. Instead, common usage may reflect the trademark owner's endorsement of the goods and services bearing the mark.
When a consumer visits a fast food restaurant operating under the same trademark as numerous other similar restaurants, the consumer may not assume automatically that all such restaurants are operated by the same entity. While the consumer may have some expectation of uniformity in menu and service, he or she may understand that each is a separate business entity operating with the permission of the trademark owner. In such a situation, public confusion may be minimal.

Angel Investing in Hong Kong: Part I Introduction

King & Wood — Thu, 21 Jan 2010 16:26:40 +0800

By John Lo, Partner, Corporate, King & Wood – Hong Kong

Angel investment in Hong Kong may be on the verge of an exciting transition from being an occasional engagement of a wealthy few to a more widespread, organized form of startup financing involving many more people with the wherewithal to invest.

In a broad sense, angel investment might have been a part of local economic life for decades. Most such activities, however, tend to be of an informal and spotty nature; well to do individuals would fund an occasional new venture of a favorite nephew or a close friend that has the potential to become a business success.

Better organized angel investment activities of the type prevalent in the West however, have been slow and hard to blossom. The causes are probably manifold. One factor may be the profusion of investment alternatives available in this business boomtown which distracts the attention of would-be angel investors. Another factor may be the traditional Chinese mindset to want majority control in any business one finances. The tendency to grow business within family circles also dampens efforts to support any outside business.

The tide may be changing though. During the last decade or two, thanks partly to the Internet led startup movement, angel investment are becoming familiar to Hong Kong. This coincides with two other significant trends that encourage entrepreneurial pursuits: the tremendous business opportunities unleashed by rapid economic development in mainland China and a change of attitude by the government on its policy toward technology and innovation.

These trends point to stepped-up entrepreneurial activities and an increased demand among the local startup community for more organized angel funding. We may now be reaching an inflection point, with angel financing poised to elevate to a much more active and visible level in the coming years.

Business Environment

Ranked as the world's freest economy by the Wall Street Journal and Heritage Foundation's Index of Economic Freedom for 15 consecutive years, Hong Kong has long been a favorable setting for entrepreneurialism and business formation. Many small companies grew into sizable operations and a considerable number became listed conglomerates. The most celebrated example is perhaps Cheung Kong (Holdings) Limited, empire of Hong Kong business legend Li Ka-shing, which started as a modest assembling operation of plastic products.

In face of the recent global economic turmoil, Hong Kong has been among the first few economies to show signs of recovery. Business formation continued to be on a rising trend. In 2008, a total of 97,985 private companies were incorporated, which shows a slight drop from 100,041 in 2007 but still exceeds 81,432 recorded in 2006.

Hong Kong's inherent business strength has received a further boost in recent decades by its close relationship with an opening mainland China. Hong Kong is an enclave with a population of merely seven million. Before mainland China opened up, most Hong Kong businesses had limited access to the mainland market and were only able to target the international markets. China's reform and open-door policies that began in the late 1970's and intensified throughout the ensuing years opened up an enormous new market to Hong Kong.

China joined the World Trade Organization (WTO) in 2001 and became an official member state in 2006. This made it possible for foreign, including Hong Kong, companies to crack open numerous market sectors in China. What is more, as a special favor to Hong Kong, the Chinese government and the Hong Kong government signed the Closer Economic Partnership Arrangement (CEPA) in 2003. As of this writing, Supplement VI of CEPA has already been signed, providing Hong Kong businesses with even more preferential treatments and policies in terms of duty free trade in goods, trade in services and sector access for investment in China.

The Arrangement for the Avoidance of Double Taxation on Income and Prevention of Fiscal Evasion (DTA) between China and Hong Kong, which came into effect on April 1, 2007, allows Hong Kong companies and individuals to enjoy reduced tax rates on such passive income as interest payments, dividends, royalties and capital gains. The reduction in tax rates under this Arrangement is favorable compared with other countries with double tax treaties with China. It has also further strengthened Hong Kong's position as the gateway for foreign investments into Mainland China.

Hong Kong and China also signed “The Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region Pursuant to Choice of Court Agreements between Parties Concerned” in July, 2006. The Arrangement became effective for Hong Kong on August 1, 2008. This made it possible for Hong Kong and Chinese parties to economic contractual disputes to have their disputes resolved by Hong Kong courts.

These developments have thrown open to the Hong Kong business community a huge market of 1.3 billion people. As the Chinese saying goes: “pavilions that are near the water first get the moon” (meaning the mere proximity to a source of wealth or influence gives a decided advantage), thanks to its proximity to China, Hong Kong is indeed running into a golden opportunity of a lifetime.

Challenges in IPR Arbitration in China

King & Wood — Mon, 18 Jan 2010 18:51:34 +0800

King & Wood's IP Legal Group in Beijing

The Domain Name Dispute Settlement Center of CIETAC was established in December, 2000, and began operation on July, 2005, as the Internet Disputes Settlement Center. This Center accepts cases including cybersquatting of domain names (disputes on Chinese domain names, e.g. ".cn", and top-level general domain name, e.g.".com"), cybersquatting of general websites, wireless websites, text message websites, etc.

In addition, many regional Arbitration Commissions have also started paying more attention to the importance of IPR arbitration and some have set up their own Intellectual Property Arbitration Centers in an attempt to provide an effective means for IPR disputes resolution, in addition to judicial and administrative remedies. For example:

On February 15, 2006, the first intellectual property arbitration center was set up by the Xiamen Arbitration Commission.
On April 15, 2007, the Intellectual Property Court of Arbitration was officially set up by Wuhan Arbitration Commission.
On April 25, 2008, the Intellectual Property Arbitration Center of Guangzhou Arbitration Commission was officially set up.
On October 29, 2008, the Shanghai Intellectual Property Court of Arbitration was officially set up.
Nevertheless, IPR arbitration in China is just at its infant stage and still facing the following problems:

a. Unbalanced Development among Regions in China

There are over 170 regional arbitration commissions at various levels in China. However, in addition to the Domain Name Dispute Settlement Center set up by the CIETAC, only four regional commissions, including Xiamen, Wuhan, Guangzhou and Shanghai, as mentioned above, have set up arbitration organs specializing in IP disputes. It is clear that the development of IPR arbitration is not balanced among different regions.

b. Lack of International Regard

Since the first PRC Arbitration Commission was set up in 1956, Chinese arbitral practitioners have strived to be professional, fair and efficient. In the past decade especially, the amount of arbitration cases involving foreign parties has increased every year, an indication that foreign parties have more confidence in Chinese arbitration institutions. On the other hand, IP cases accepted by the arbitration institutions are actually still quite rare from what one would expect given the number of IPR disputes. Chinese arbitration institutions must lift their arbitration standards in IP arbitrations, promote China's IP protection system to the rest of the world, and establish a series of IP arbitration centers that are internationally recognized.

c. Lack of Supplementary IP Arbitration Rules

Since intellectual property is knowledge-based, IPR arbitration is special and different from general commercial arbitration. Therefore, the procedural rules for general arbitration cannot be entirely applied to IPR arbitrations. In this aspect, the WIPO Expedited Arbitration Rules has provided a good reference point but unfortunately, to date none of the Chinese arbitration institutions has issued its own arbitration rules specific to IPR disputes.

Conclusion

Under the background of globalization, utilization of intellectual property has also become more internationalized and commercialized as can be seen through a variety of cross-border cooperation arrangements, such as through licensing, technology transfer and co-operative research and exploitation arrangements. This has raised the demands of the rights holders for dealing with IPR disputes at an international level. When seeking mechanisms for dispute settlement, more and more parties take their commercial interests as the primary concern, i.e. they require the dispute procedure to be personal, highly flexible and efficient so that the cross-border disputes can be solved without ruining the commercial relationships. As an alternative means for dispute resolution, arbitration can avoid parallel litigations and has its inherent advantages in dealing with commercial disputes in respect of flexibility, confidentiality, finality.

China has taken steps to promote and encourage IPR arbitration. In June, 2008, the State Council issued the Outline of the National Intellectual Property Strategy, which indicates that intellectual property is becoming a strategic resource in national development and a core element in international competitiveness, and therefore the development of an IP protection and arbitration system should be an important focus of the national development plan.

Offshore Equity Transfers - Next Target for PRC Tax Anti-avoidance Attack

King & Wood — Fri, 15 Jan 2010 14:48:25 +0800

By Stephen Nelson, Partner and Head of King & Wood's Taxation Practice

It is not uncommon for foreign investors to sell the shares of intermediate holding companies that hold the equity in Chinese companies as a way to exit their investments in China, in order to get around government approval procedures, as well as to avoid PRC tax on their capital gains. It certainly appears that these offshore transfers may be examined by the China tax authorities going forward, and may no longer escape the Chinese tax net. Recently, the State Administration of Taxation (the “SAT”) issued the circular Guoshuihan [2009] No. 698, “Strengthening the Tax Administration of Equity Transfers by Non-resident Enterprises” ("Circular 698”), which, for the first time, explicitly requires disclosure to the tax authorities of offshore indirect transfers of equity in PRC companies. The tax authorities may then examine the transferred offshore holding company in order to ascertain whether the structure has a reasonable commercial purpose – if not, the offshore gain could be held subject to Chinese tax.

1. Scope and effective date

Circular 698 stipulates the tax position and administrative treatment on capital gains of non-resident enterprises generated from their disposals of equities in resident enterprises. However, the tax issues for gains from transfers of H-shares, Chinese tax resident listed red chip companies and B-shares are not addressed by the circular. The circular was promulgated by the SAT on 10 December 2009, with retroactive effect starting from 1 January 2008.

2. Calculation of gains of equity transfer

Under Circular 698, the income of an equity transfer is equal to the amount of equity transfer proceeds minus the original investment/acquisition cost, which would be normally subject to withholding tax at 10%, unless the relevant tax treaty provision stipulates a lower rate. Particularly, retained earnings and after-tax reserves (if applicable) attributed to the transferor’s equity may not be deducted from the transfer price for the purpose of calculating capital gains. This is the first time that the SAT officially clarified the treatment of reserves and retained earnings. In addition, where the original shareholder acquires the equity through multiple investments or purchases, the equity transfer cost should be determined on a weighted average basis.

3. Indirect transfer

“Indirect transfers” refers to the situation where foreign investors indirectly transfer the equity in resident enterprises by disposing of the shares of offshore holding companies. According to Circular 698, if foreign investors (de facto controlling parties) indirectly transfer their equity in a resident enterprise, and the transferred offshore holding company is located in a country (or territory) with effective tax rate less than 12.5% or no income taxation on residents’ foreign sourced income, then they should, within 30 days upon the conclusion of equity transfer contract, submit relevant materials to the in-charge tax bureau where Chinese resident enterprise is located. These documents include the equity transfer contract; a report addressing any reasonable business purpose for establishing the offshore holding company, information on the operating activities, personnel, finance and properties of the offshore holding company, and its relationships with resident enterprises, etc. In case the indirect transfer transaction is viewed by the tax authorities as having no reasonable business purpose or abusive use of treaties or forms of investment vehicles, the local tax bureau may report the case up to the SAT for further assessment. If confirmed, the tax authorities may re-characterize the equity transfer based on economic substance or even deny the existence of offshore holding company in the transaction.

4. Group transfer of equity in multiple companies

Circular 698 also addresses the scenario where foreign investors (de facto controlling parties) transfer equities of several onshore and/or offshore companies in one transaction. In this case, the resident target enterprise shall submit to the competent tax bureau the master transfer contract and sub-contract concerning the resident target enterprise. If no sub-contract is available, then the resident target enterprise shall furnish detailed materials/methodology for the purpose of accurate allocation of transfer proceeds among companies involved. Otherwise, the tax authority may deem the respective transaction consideration by reasonable means.

5. Election of tax treatment for special reorganization

Where an equity transfer covered by Circular 698 qualifies for a tax-deferred special reorganization, as stipulated by the circular No. 59 “Notice on Enterprise Income Tax Issues for Corporate Restructuring” and the company elects to enjoy special tax treatment, it shall obtain approval from tax authorities at the provincial level.

K&W Observations:

Circular 698 remains silent on the issue as to whether capital gains on H-shares and B-shares (as well as tax-resident red chip companies listed on a stock exchange), are subject to tax. Some have expressed the view that Circular 698 deliberately sets aside the issue of transferring publically listed shares and it is more likely than not that the gains for trading public shares will not be taxed in China. However, it may be premature to reach that conclusion as it is expected that the SAT may issue a separate ruling to clarify the issue.

Circular 698 now formally clarifies the method for calculating the taxable income from an equity transfer. Even though undistributed profits and after-tax reserves may no longer be deducted from equity transfer consideration, for tax planning purposes, some structures are still viable to decrease the tax cost including the distribution of existing dividends, and allowing the transferor to retain the right to current-year dividends.

The most significant development is that indirect transfers are now officially under the scrutiny of the PRC tax authorities, which will significantly impact offshore holding company structures. Circular 698 sets forth substantial disclosure and compliance obligations, and offshore equity transfer arrangements without a sufficient business purpose may be taxed in China. China tax authorities have sent strong signals to attack tax avoidance arrangements in the form of overseas transactions or holding structures. It will be interesting to see how the tax authorities will in reality enforce the circulars.

Finally, it remains unclear whether the reporting requirements of Circular 698 will apply to indirect equity transfers that have already been consummated prior to the issuance of the notice.

We will closely monitor further developments with respect to Circular 698’s implementation and local enforcement, as well as any further clarification on listed company shares and follow up with future blogs as soon as information is available.

中国反避税行动瞄向境外股权转让

King & Wood — Fri, 15 Jan 2010 14:10:18 +0800

林燊，金杜律师事务所税务主管合伙人

过去实践中，为了绕过中国商务局、税务局等部门的审核监管，境外投资方通常会考虑采用转让设在境外（例如BVI, 香港）的控股公司的股权而达到转让国内企业股权的目的。时过境迁，这种做法现在很有可能会受到中国税务机关的挑战。近日，国家税务总局下发《关于加强非居民企业股权转让所得企业所得税管理的通知》（国税函[2009]698号，简称“698号文”），该文件第一次将间接转让（即前述的转让境外控股公司）以明文规定的形式纳入中国税务审查的范畴。税务机关将审查境外股权结构是否具有合理商业目的，如果没有，那么转让境外股权取得的资本利得仍有可能需要在中国缴税。因此，这将对境外控股公司架构及境外并购重组交易产生重大影响。

1. 698号文的适用范围及生效日期

698号文适用于非居民企业转让中国居民企业的股权所取得的所得，并未提及对转让H股、B股以及转让境外红筹上市的居民企业的股权的所得是否征所得税的问题。该文件于2009年12月10日出台，但其效力追溯至2008年1月1日。

2. 股权转让应纳税所得额的计算

依据698号文，股权转让所得是指股权转让价减除股权成本价后的差额，但是与旧的外商投资企业所得税法处理不同的是，现在被转让企业的未分配利润或税后提存的各项基金中属于转让方的部分不得从股权转让价中扣除。这是自08年新企业所得税法颁布后税局第一次发文明确这问题。此外，如果原非居民股东通过多次投资取得股份，那么应以加权平均法计算其股权成本价。

3. 间接转让

间接转让是指境外股东通过转让境外控股公司的方式从而达到转让其控股的中国居民企业股权的交易实质。根据698号文，境外投资方（实际控制方）间接转让中国居民企业股权的，并且如果被转让的境外控股公司所在国（地区）实际税负低于12.5%或者对其居民境外所得不征所得税的，应自股权转让合同签订之日起30日内，向被转让股权的中国居民企业所在地主管税局提供相关资料，包括：股权转让合同，设立被转让的境外控股公司具有合理商业目的的说明，其生产经营、人员、帐务、财产等情况，其与中国居民企业的关系等内容。另外，文件规定，对滥用组织形式且不具有合理商业目的以规避纳税义务的间接转让，主管税局可在层报国家税务总局审核后按照经济实质对股权转让交易重新定性，否定被用作税收安排的境外控股公司的存在。

4. 多个公司整体转让

文件同时规定，如果境外投资方（实际控制方）同时转让境内或境外多个控股公司股权的，被转让股权的我国居民企业应将整体转让合同和涉及本企业的分布合同提供给主管税局。如果没有分部合同的，被转让股权的中国居民企业应向税局提供被整体转让的各个控股公司的详细材料，准确划分境内被转让企业的转让价格。如不能准确划分的，税局有权选择合理的方法对转让价格进行调整。

5. 特殊重组审批制

非居民企业取得股权转让所得，如符合并选择采用特殊性重组处理的（参见财税[2009]59号），应报省级税务机关核准。

金杜评论

首先，698号文仍然没有明确对转让H股、B股的所得以及转让海外红筹上市的居民企业股票所得是否征税。有一种观点认为，该规定刻意避开这个问题，很有可能这类上市公司的股票转让不需缴纳中国企业所得税，我们认为该结论言之尚早，据我们了解，国家税务总局有可能会单独发布文件对此加以明确。

其次，698号文明确了股权转让所得的应纳税所得额的计算。虽然被转让企业（目标公司）的未分配利润或税后提存的各项基金不得从股权转让价中扣除，但实践中，此类交易还是有一定筹划空间来减少税务成本，比如可以考虑由目标公司在股权转让前将现有的留存收益先分配给其股东，并且转让合同约定出售方有权获得转让当年的股息分配。

更为重要的是，税务当局第一次将间接转让纳入中国税务征管范围，这势必对设立在避税地的境外中间控股公司的股权架构模式产生重大影响，一方面，698号文件增加了股权转让交易的披露要求，另一方面，对不具有合理商业目的、规避中国纳税义务的交易安排，税务机关有权否定被转让的境外控股公司的存在，从而视为直接转让境内居民企业的股权而征缴中国税。虽然中国税务当局对间接转让交易的监管意图很明显，但在操作中如何执行值得关注。

最后，698号文对于在该文件出台前已经完成的境外间接股权转让是否仍要履行税务申报义务有待明确。

我们将继续关注该文件在实际操作中的执行情况，以及转让境外上市公司股票所得的税务动向。如有进一步的信息我们将在后续的博客中进行探讨，敬请期待。

Days of Easy Credit Dawning? Consumer Credit Companies Arrive in China

King & Wood — Thu, 14 Jan 2010 15:01:06 +0800

By Mark Schaub, Partner, Corporate, King & Wood - Shanghai

Three consumer credit companies have obtained regulatory approval for their establishment from the China Banking Regulatory commission (CBRC). The main shareholder in each of these consumer credit companies are domestic banks namely Bank of China (BOC), Bank of Beijing and Bank of Chengdu.

The move is no doubt part of a broader effort by the government to boost domestic consumption as an engine of delivering growth as outlined by the State Council in its policy “to maintain growth, adjust structure, promote reform and benefit livelihood".

The CBRC issued the Pilot Management Measures for a Consumer Finance Company (“Pilot Measures”) on July 22, 2009. The hope is that the establishment of consumer credit companies will promote domestic consumer demand and support sustainable economic development.

The PRC has (possibly luckily) missed out on the easy credit boom seen in much of the West (and also parts of Asia). The “consumer financial companies” outlined in the Pilot Measures refer to non-bank financial institutions established within the PRC and subject to CBRC approval. Crucially such companies are prohibited from taking deposits from the public. Such consumer credit companies are to provide small-amount loans according to the Article 2 of Pilot Measures. The consumer credit companies will offer personal loans for the purposes of travel, education and durables (i.e. electrical home appliances and IT products).

According to the Pilot Measures, the main shareholder in a consumer financial company must be a financial institution (can be domestic or overseas). Shareholders will also need to obtain CBRC approval and are subject to meeting certain conditions (i.e. overseas financial institutions must have had a representative office in China for more than two years or established a branch and have a sufficient analysis and research capability within China; the financial monitoring authority in their home country must have a good cooperative relationship in place with the CBRC in respect of administration and supervision). We understand that at present no foreign financial institution or foreign investor has been approved by the CBRC but the regulations do clearly allow for such possibility.

It is interesting to note that Bailian, one of China's largest retail conglomerates, is a shareholder in one of the recently established consumer credit companies.

Summary

Time will tell whether the growth of consumer credit in China will lead to a mountain of consumer debt as is the case of US and Korea or whether Chinese consumers will continue to pay off their bills on time much to the chagrin of their financiers. In any event the new developments are a further indication of China seeking to use domestic demand as an engine of growth rather than relying solely on exports. Foreign retailers and financial institutions are likely to closely monitor the opportunities that arise for them as credit becomes a more common part of consumer life.

Bilski v. Kappos, the end of the 'Machine or Transformation Test'?

King & Wood — Tue, 08 Dec 2009 11:06:21 +0800

By Kenneth Choy, Partner, Intellectual Property, King & Wood - Hong Kong

Last month, the United States Supreme Court heard oral arguments in the closely followed case of Bilski v. Kappos, 08-964. The case concerns a patent application for hedging risk in commodities trading. Both the U.S. Patent and Trademark Office and the United States Court of Appeals for the Federal Circuit rejected the claims. In reaching its decision, the Federal Circuit ruled that to be eligible for a patent, a process claim must be tied to a particular machine or it must transform an article into a different state or thing. The court said that this ‘machine or transformation’ test is the only test for determining patent eligibility of process claims.

By so ruling, the Federal Circuit effectively overruled its own “useful, concrete and tangible result” test formulated in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 143 F.3d 1368 (Fed. Cir. 1998). This test focused on practical applications of the invention to determine if it is patent worthy. That decision was said to have led to the boom of business method and software patents in the past decade. The rejection of the useful, concrete and tangible result test raises questions about the validity of many existing business method and software patents. Because of the high stakes, dozens of interested parties filed a total of 44 amicus or ‘friends of the court’ briefs to express their viewpoints and concerns.

Few observers believe Mr. Bilski’s claims can survive either the useful, concrete and tangible result or the machine or transformation test. It is also unlikely that the Bilski claims will meet the standard ultimately adopted by the Supreme Court.

However, there is no consensus on whether the Supreme Court will come out with a new test or even if it will fully addressing the harder question of what the proper test for patent eligibility of business method or software claims. Indeed, the issues are complex and from the questions asked during oral argument, the high court seemed to lack confidence in dealing with the complexity of this area of patent law.

The questions of the justices reflect their concerns about broadly worded business method patents that may foreclose use of business processes by other parties. They peppered Mr. Bilski’s lawyer with hypothetical questions on the patentability. They asked about patentability of claims relating to estate plan, tax avoidance, resisting corporate takeovers, choosing juries (Ginsburg, p. 5); processes that help business succeed (Breyer, p. 6); speed dating (Sotomayor, p. 7); teaching antitrust law without students falling asleep (Breyer, p. 9); compiling actuarial tables and their application to risks (Kennedy, p. 11); horse whispering (Scalia, p. 16); and alphabet as a process of forming words (Roberts, p. 22). Transcript of the oral argument is available at www.supremecourtus.gov/oral_arguments/argument_transcripts/08-964.pdf.

Section 101 of the U.S. Patent Act provides that new and useful processes, machines, manufacture and composition of matters are patent eligible. This is very broad language. So under a Section 101 analysis, these extreme examples are patent eligible. In fact, the justices may be surprised that patents actually have been granted for the extreme examples they cited.

Although concerned about the broadness of Section 101, they were also clearly uncomfortable with the rigidity of the machine or transformation test the Federal Circuit ruled as the sole test for determining patentability of process claims. The justices recognize that technological advances mean that inventions may not necessarily have physical attributes. Thus, they seemed inclined to reverse the Federal Circuit’s ruling but at the same time, they struggled with finding and enunciating an appropriate test of patent eligibility.

Business method patents in China

Chinese patent laws do not have a specific category for business method claims so the standard applied to such claims are no different than other technical or computer related applications. Business method claims are patentable under Chinese law if they incorporate technical features to achieve a business or commercial purpose. The claim must specify the technical features required to be implemented on a commercial or business purpose. A detailed description of a business method without showing the technical features necessary for its implementation will not be patentable under Chinese law. Technical features must be an integral part of the business method. Thus, the Chinese standard is similar to the machine branch of the machine or transformation test.

Applying Chinese law, the Bilski claims will also be rejected. But a Chinese granted business method patent will also survive scrutiny under the machine or transformation test. On the other hand, business method patents granted under the useful, concrete and tangible result test may not be patentable under Chinese law unless they also incorporate sufficient technical features.

How will the Supreme Court resolve the problem?

Our speculation is that the Bilski claims will be rejected and the Supreme Court will reverse the Federal Circuit ruling that the machine or transformation test is the only test for patent eligibility. Instead, the Supreme Court may try to find a compromise standard that will allow protection of some business method and software claims but will screen out broad and abstract claims such as the Bilski claims. If we are correct, the new ruling may widen the gap between Chinese and U.S. law that the machine or transformation test had narrowed.

What was interesting about the oral arguments was the lack of mention of Section 112 of the Patent Act. This section also covers patent eligibility and requires that an invention must be specified in “full, clear, concise, and exact terms as to enable” someone to make and use it. While Section 101 uses broad language, Section 112 requires specificity in the claims. This serves to prevent abstract claims from gaining patent protection. These sections work together to prevent an inventor from precluding others from practicing a useful art merely by making general and broad claims. To be patentable, a claim must be sufficiently specific to enable someone to practice its teachings.

Since Section 101 should be read in conjunction with Section 112, one would think that Section 112 would be raised during oral arguments. Even if the Bilski claims can survive the broad language of Section 101, it would not pass muster under the specificity requirements of Section 112. Thus, the failure to bring up Section 112 has been described by a commentator as the elephant in the room that no one mentioned. The Bilski claims cannot pass Section 112 analysis. This will allow the Supreme Court to sidestep the machine or transformation test completely.

How will the Supreme Court rule? We will find out sometime in the spring 2010 when the decision is expected to be announced.

Measures for Foreign Invested Partnerships Issued: Has the Door Opened?

King & Wood — Fri, 04 Dec 2009 16:04:12 +0800

By Zhang Yi, Partner, & Alan Du, Counsel, Corporate Group, Shanghai

The Administrative Measures for Establishment of Partnership Enterprises in China by Foreign Enterprises or Individuals (the “Measures”) was issued by State Council on 2 December 2009. The Measures, effective from 1 March 2010, will allow foreign investors to directly act as partners of partnerships in China.

Without the Measures, the existing Partnership Enterprise Law itself does not allow foreign investors to directly invest in partnerships due to a provision which says such circumstances will be subject to administrative measures to be issued by State Council. Though with such restrictions, international PE/VC firms still appear to prefer using limited partnership as the form of RMB fund, and try the approach of setting up a foreign invested company acting as the general partner and raising fund from domestic investors, which proves practicable in some areas of China. Nonetheless, due to the foreign exchange control in China, a limited partnership cannot receive substantial funding from foreign investors even in such an indirect way.

The Measures generally allow a foreign investor to act as a general partner or limited partner of a limited partnership, but it is still too early for PE/VC firms to celebrate the opening of door. The Measures indicates that for foreign enterprises or individuals setting up partnerships in China with the main business of investment, special laws or regulations in this regard could apply. According to the answers of the Legal Affairs Office of State Council explaining the Measures to journalists, the authorities has not figured out a clear position on partnerships with the main business of investment, such as venture capital enterprises and private equity funds etc., and thus the relevant wording in the Measures is flexible. As a general practice in China, the implementation of the Measures will require detailed rules, which may address this issue further.

The Ministry of Commerce and its local counterparts (“MOC”) has been the main approval authority for foreign invested enterprises for decades, but the Measures take a different approach for foreign invested partnerships (“FIP”). An Application for the establishment of an FIP shall be submitted to the local administration of industry and commerce as authorized by the Sate Administration of Industry and Commerce (“AIC”). MOC will only be notified of the registration information upon the establishment of an FIP. An FIP is still subject to foreign investment industrial policies, including the Foreign Investment Industry Catalogue, and the AIC will review an explanation on compliance with foreign investment industrial policies as part of the application process. We would like to put a question mark on the consistency between AIC and MOC in applying industrial policies to FIPs and other foreign invested enterprises respectively, and speculate that this could trigger the involvement of MOC in approving FIPs.

新一轮境外控股公司反避税风暴

King & Wood — Wed, 25 Nov 2009 17:03:39 +0800

林燊，金杜律师事务所税务主管合伙人

中国政府对境外控股公司的反避税管理又向前迈进了一步。国家税务总局日前下发文件，即《关于如何理解和认定税收协定中”受益所有人”的通知》（国税函[2009]601号，简称“601号文”），指导地方税务机关调查认定申请人是否满足“受益所有人”的条件，以决定申请人能否享受税收协定中有关股息、利息、特许权使用费、财产转让收益等优惠待遇。该文件的发布引起广泛关注，跨境交易的税务筹划及利用境外控股公司享受税收协定优惠的安排将受到很大限制。

依据601号文，“受益所有人”是指对所得或所得据以产生的权利或财产具有所有权和支配权的人。“受益所有人”一般从事实质性的经营活动，可以是个人、公司或其他任何团体。代理人、导管公司等不属于“受益所有人”。导管公司是指通常以逃避或减少税收、转移或累积利润等为目的而设立的公司。这类公司仅在所在国登记注册，以满足法律所要求的组织形式，而不从事制造、经销、管理等实质性经营活动。但是，601号文并没有进一步明确什么属于管理活动，也没有指出管理活动是否必须要由本地的管理团队来执行，还是说仅由决策层执行就可以了。

受益所有人身份的认定将由各地税务机关根据每个案件的具体情况，通过查阅纳税人提供的申请资料，以及信息交换机制等方式来确定。同时，601号文罗列了以下几项不利于申请人认定受益所有人身份的因素，但没有明确这些因素所占比重：

1) 申请人有义务在规定时间（比如在收到所得的12个月）内将所得的全部或绝大部分（比如60%以上）支付或派发给第三国（地区）居民。

2)除持有所得据以产生的财产或权利外，申请人没有或几乎没有其他经营活动。

3) 在申请人是公司等实体的情况下，申请人的资产、规模和人员配置较小（或少），与所得数额难以匹配。

4) 对于所得或所得据以产生的财产或权利，申请人没有或几乎没有控制权或处置权，也不承担或很少承担风险。

5) 缔约对方国家（地区）对有关所得不征税或免税，或征税但实际税率极低。

6) 在利息据以产生和支付的贷款合同之外，存在债权人与第三人之间在数额、利率和签订时间等方面相近的其他贷款或存款合同。

7) 在特许权使用费据以产生和支付的版权、专利、技术等使用权转让合同之外，存在申请人与第三人之间在有关版权、专利、技术等的使用权或所有权方面的转让合同。

依照601号文，很明显许多单层模式的境外特殊目的公司将很有可能不满足受益所有人的条件，从而将不能享受税收协定下有关股息、利息、特许权使用费和财产转让收益的优惠税率；目前尚未清楚地是税局对持有多个夹层特殊目的公司的境外控股公司的态度，虽然该类控股公司没有自己的管理层也不从事制造经营，但他们作为从事投资性的公司是否能够满足受益所有人的条件。在实务操作中地方税务机关可能有较大的裁量权。

在此我们建议客户应当重新审视自己的公司架构，评估在新的法规环境下的税务后果。在从中国公司取得股息分配或其他收入时应谨慎行事，尽量避免使用特殊目的公司。对境外控股公司应尽可能的赋予实质性的经营职能，对公司注入一定的人员和运营资产，避免被否定为收益所有人，加重中国税务负担。同时601号文在具体实施中出现的问题和相关协定国家的反应也值得关注。