The Eyes on China Monthly

October 2009

Editor´s Note

Welcome to the third issue of the Eyes on China Monthly. This month, in addition to detailing the issues surrounding intellectual property right protection in China, we will focus mainly on the changes in Chinese bureaucracy regarding foreigners working and establishing business in China.

Recent policy changes affect the taxation of non-resident workers, the transfer of stock, and the process of becoming incorporated in Beijing. Modifications to Chinese business law have been continuously made since the adoption of a market economy, and the effects of these gradual changes can be seen this month in the recent adjustments.

                                                                                                                      Marco van der Putten, Managing Director, COO

1. China Tightens Double Tax Treaty Reporting
2. China Changes Rules Regarding Stock Transfer
3. New Administration Procedure for Business Establishment in Beijing
4. Trademark Law in China — Who’s in Charge of your IP?
5. Upcoming Events

1. China Tightens Double Tax Treaty Reporting

China has long been working toward instigating policies to regulate the receipt of double tax treaty benefits for foreigners in China, and the State Administration of Tax, or SAT’s, recent issuance of Circular 124 is the result of much work and many previous changes. Effective October 1, Circular 124 increases regulation over the taxing processes in China for non-residents. In addition, Circular 124 makes random investigation legal and limits the accessibility and ease of obtaining tax treaty status.

Circular 124 instigates many changes including requiring pre-approval for many filings, including many sources of dividends, interest, and royalties. The circular also requires the registration of many treaty benefits. Advice concerning the new Double Taxation Treaty (DTT) will now be offered in Eyes on China’s administrative services.

2. China Changes Rules Regarding Stock Transfer

The State Administration of Taxation has published the “Notice on Administration of Individual Income Tax Collection Regarding Stock Transfer” released on May 28th 2009. In this notice, the State Administration emphasizes that all stock transfers are subject to income taxation levied on the individual shareholder.

The revised rules stipulate that after the completion of the stock transfer, the seller or the buyer acting as tax withholding agent is obliged to contact the tax authorities and confirm the applicable income tax and collect a receipt. Once this reporting procedure is finished, the parties involved in the shareholder transaction can apply to change shareholders at the Ministry of Commerce.

Hence, a major change is that the parties involved in the transfer cannot seek permission from the government to change shareholders for the stock until the income tax has been paid. In addition, the tax authorities reserve the right to amend the amount of tax paid. This applies in particular to cases where the transaction price is relatively low. When this occurs, the tax authorities can base the income tax levied on the net asset value per share or on the collective amount of shares owned by the shareholder.
Currently, the income tax rate for a stock transfer of an unlisted company is fixed at 20%.

3.New Administration Procedure for Business Establishment in Beijing

The task of dealing with business establishment applications for business licenses has recently been transferred from a city level to a district level. This means that all applications will now be processed by district bureaus in Beijing. What is more, the time needed to process applications has been significantly extended to two weeks. These measures were put in place to relieve the city bureaus of increased demand especially from foreign companies seeking to settle in Beijing. Other major Chinese cities are expected to follow suit.

4. Trademark Law in China — Who’s in Charge of your IP?

It is widely known that trademarks have to be registered domestically in China. Contrary to widespread belief, they are not covered by international laws or laws pertaining to trademarks in the “home” country. It is therefore important to take a step back and look at why this is the case. Most news centers only on the many cases of intellectual property (IP) theft but not on the underlying reasons why trademarks violations happen so frequently in China. First and foremost, intellectual property must be registered in China. This is the most important point to stress here and this point will be resumed in the next section. Secondly, there are distinctions among various types of IP protection and differences in eligibility for protection.

Generally, Chinese law does not protect IP that is not registered in China. Owing to a relatively high number of cases involving apparent IP theft in China, there is growing notion of denouncing Chinese IP protection. Yet this largely depends on what kind of protection within IP is talked about. Admittedly, copyright protection is quite simply appalling in China but trademark law is (surprisingly) transparent and accessible as long as everything is done properly. In bigger commercial cities, trademark law is increasingly enforced. This is most likely owing to the fact that Chinese companies are emerging who themselves are in need of at least some degree of IP protection. That way local courts tend to pay more attention to it.

How to prevent trouble with trademarks in China?
How will your company shield itself from trademark theft in China? The only thing that must be done properly in order to receive protection under Chinese law is to correctly follow the trademark registration procedure and most importantly: register before coming to China. Even if only your production of goods is located in China, you must register your trademark otherwise somebody who registers it will be able to prevent your goods from being sold as well as stop your goods at the border so they cannot leave China.

Language is another issue. You must be or have a fluent Mandarin speaker to do it. This is absolutely essential to avoid trouble. Another related important point is that if the product or company name is translated into Chinese, it is useful to register it in a number of different dialects as well in order to eliminate any loopholes that would enable counterfeit.

Once the trademark is registered, there is a three month period in which objections can be made. If no objections are made, the Trademark Office will register the trademark. Reversely, if the Trademark Office accepts any objections, the registration will be denied. In more commercial areas in China, the local courts are not opposed to lawsuits against Chinese entities violating a foreign trademark — there is ample protection under Chinese law if the registration procedure is followed properly. What is more, in case of a violation of a properly registered trademark, the authorities will seize all fake goods, make arrests and ensure that the goods do not leave the country if destined for export by alerting Customs. In sum, trademark law is rather well established and properly enforced, as opposed to copyright law for example.

Legal Framework of International Trademark Protection
There have been a number of treaties and international agreements to protect trademark violations. Unfortunately, it has been and still is to a great extent the case that companies must register their trademark in as many countries as possible. This is absolutely essential for countries in which the company is looking to sell its products. To make matters worse, every country has a separate legal framework for trademark protection since every country is its own jurisdiction. Hence, the trademark must be registered separately each time, since there is no proper international trademark protection.
 If the trademark is not registered before market entry or if indeed the foreign company is convinced that trademark registry in a Western country is valid in China, they will be in for a rude awakening. If a Chinese entity is quick in registering the foreign company’s trademark before the company who thinks it has legal claim on it, the foreign company cannot market its product and can even be fined for doing so. Oftentimes, the Chinese entities who are engaged in such practices are not interested in marketing the product itself, but simply selling the trademark back to the foreign company for a hefty price. The former scenario occurs more often than most people think which is why there is an emerging group of “businesspeople” trying to spot rapidly growing companies in the West and registering their trademark in China before they do.
There are some means of enforcing trademarks internationally. There are three main international treaties which are relevant in this case.
Firstly, the CTM (“Community Trade Mark”) was signed in 1996. It stipulates that a trademark can be registered in all EU member states with only one application. At present, this applies to all 27 EU member countries. The costs of doing so are comparable to separate registrations in three EU countries. Hence, it is worthwhile if your company has a presence in at least three EU countries or has a prospect of doing so.
Secondly, the Madrid Protocol was passed in 2003. It enables that one application can be made to expand one’s trademark registered in the home country to as many of the 77 Madrid Protocol member countries as one wishes. However, each member country will charge its own fee. Most industrialized territories are member to the Madrid Protocol, except Hong Kong, Taiwan, Canada, Mexico, and all of Latin America.
Thirdly, most countries in the world are members to the Paris convention. This international treaty permits companies to register a trademark in one member country (other than the home country) and at the same time secures that trademark for up to six months after the initial application in all other member countries. This means that a company can register a trademark in Member Country A and then wait up to six months to register the same trademark in Member Country B (C, D, E, etc.). This endows the registering company with more freedom to choose appropriate markets without having to worry about counterfeit.
What is more, all of the above treaties can be used in combination (this applies only to the members of the relevant treaties).

It is estimated that the cost of international trademark protection has been reduced by almost half on average as a result of these treaties.
However, it is still a near impossibility to protect oneself from counterfeit goods anywhere in the world. Most SMEs simply do not have the budget to do so. Hence, in order to minimize risk, these companies must carefully plan where to focus most attention on by thinking about where their greatest foreign sales are, whether countries in their network have widespread trademark violations, where a violation would negatively impact sales the most etc.

It is vital that companies are aware of these issues. If the budget does not allow registering the trademark in all necessary countries, then the company must register the trademark gradually by adhering to a country order that minimizes the most risk. Naturally, this is not an optimal solution and there will be gaps which will leave the trademark registering company vulnerable, yet these will be short-lived.

Previous Newsletter
August 2009
September 2009
Upcoming Events
  • ASEAN Expo/ Nanning, Oct. 20-24
  • International Commodities Fair/ Yiwu, Oct. 21-25
  • International Toys and Gifts Fair/ Shenzen, Oct. 22-25
  • Trade Fair for Power Transmission and Control/ Shanghai, Oct. 26-29
  • China Electronics Fair / Shanghai Nov. 11-13 
  • China Hi-tech Fair / Shenzhen Nov. 15-19

    For information about more upcoming events across China, please see Eyes on China´s news and events page here.

Contact us

For business establishment, legal as well as accounting and tax advisory services please contact Marco van der Putten in the Beijing office of Eyes on China at or +86 (0) 10 65880899 ext. 808.