Shenzhen NEWS

Vol. 4 , No. 4 - April 4, 2003

TOPICS THIS ISSUE:

• Consider This: Successful Chinese Business
• Grant of Probate in Hong Kong
• Reviewing Service Providers
• Philippines, A Hidden Treasure for Foreign Investment
• Tax Break in Singapore
• Feature Firm: Tress Cocks & Maddox Expands Commercial Capabilities

Consider This: Successful Chinese Business

In many ways setting up a business in China requires grappling with many of the same difficulties and considerations that occur when establishing a business in for example Europe or in America. Similar to other jurisdictions the market environment must be analyzed and it is commonly known that in China this adds yet another cause of uncertainty; the market is growing fast that it is hard to determine the future shape of many industries.

A key issue is the need to do your homework and to ask the right questions. In this regard the importance of undertaking comprehensive due diligence before committing to a relationship and to expenditure in China must not be underrated. Not performing a good due diligence has in practice proven to be a significant factor in the failure of many companies with international involvement in China. In relation to both setting up a new business and with regards to M&A transactions, matters to pay specific attention to are:

1. Assessment of business associates and partners

2. Valuation of tangible and intangible assets: equipment, land, know-how, IP, client and industry network

3. History & current performance of the target company

4. Size & status of the company

5. Market and clients

6. Careful assessment of external factors and future strategies that can affect the performance of either the target company or the newly founded company.

It is not only a matter of knowing the market and the target or partner company well but in China also administrative issues tend to surface perhaps to larger extent than in many other jurisdictions. When dealing with clients to set up Joint Ventures (JVs) in China, we have found that foreign investors usually find it very hard to deal with the numerous types and levels of Chinese authorities. From this regulatory and administrative point of view, it should be pointed out that uncertainty in government policy and regulation are inherent in any commercial environment but particularly so in China. The Chinese Foreign Investment environment is positive and improving through the EU and other cooperation projects regarding legal and administrative issues. In order to conform to WTO requirements in law and related industries, many adjustments continue to be made

Lastly, the relationships made in China are very important and can prove beneficial if conducted properly. Always be patient and understand the situation and the people you are working with. Having an understanding of where authority is vested - central, provincial and municipal - can also help to facilitate with the obtainment of relevant approvals and official seals to set up a company. Following these simple guidelines will bring the business owner one step closer to a successful business in China.

Lehman, Lee & Xu (rwageman@lehmanlaw.com)

Grant of Probate in Hong Kong

The grant of probate in Hong Kong can be broken down into two stages, namely obtaining Estate Duty clearance and submitting an application to the Probate Registry.

Generally, Hong Kong estate duty is payable on assets located in Hong Kong with some exemptions on matrimonial home, charitable gift, etc. For tangible assets, this should be fairly easy and there are detailed common law rules on the location of intangible assets.

Special rules apply where a deceased has made a transfer of property to a company (the company could be incorporated anywhere), which has Hong Kong assets at the date of death of the deceased, and the deceased has received benefits from such company in the three calendar years prior to death. In this case the company could be liable to estate duty. These rules are highly complex and its application potential very wide. The Inland Revenue has stated in a practise note that that they would only seek compliance from companies that make a special request.

Beneficiaries are normally liable to pay the relevant duty if a Gift of Hong Kong assets made by the deceased within three years of one's death in excess of HK$200,000 per recipient. Currently, no estate duty is payable where the principal value of the estate in Hong Kong does not exceed HK$7,500,000. If the value of the estate exceeds HK$7,500,000 but does not exceed HK$9,000,000, the whole estate (not just the excess) will be taxed at 5%. If the value of the estate exceeds HK$9,000,000 but does not exceed HK$10,500,000, the whole estate (not just the excess) will be taxed at 10% and if the value of the estate exceeds HK$10,500,000 the whole estate is taxed at 15%. There is a provision for marginal relief where a very small increase in the estate would increase in a large additional liability.

If the value of the estate in Hong Kong is more than HK$400,000, the applicant has to apply for the estate duty clearance by way of an Estate Duty Affidavit for the Commissioner (Form EDC 1). If the value of the estate is below HK$400,000, then a simple statement in lieu of affidavit can be filed instead. The statement in lieu of affidavit or the EDC 1 must be filed with the Estate Duty Office ("EDO") within 6 months from the date of death and if there is a delay of more than 12 months without reasonable excuse, double rate of duty are chargeable.

Obtaining the Grant of Probate

Once Estate Duty clearances are obtained, either in the form of a certificate of exemption or a receipt of payment, application can then be made to the Probate Registry for a grant of Probate. Unless a grant of Probate has already been obtained in Singapore, certain states in Australia, the United Kingdom or Sri Lanka, in which case such grant can be resealed in Hong Kong, a new application has to be taken out.

The making of a new application involve the submission of an affidavit by the applicant as well as various supporting documents, including the original Will and Death certificate. If the Will or Death certificate of the deceased or any document required by the Registry for the application is in a language other than English or Chinese, translations will have to be supplied and there are quite strict rules on how and by whom the translation can be done. Some of the documents will also have to be authenticated. Where the executor is a foreign resident, the Registry will normally require surety guarantee covering the value of the estate. This basically is a guarantee by persons in Hong Kong or corporation acceptable to the Registry on the due administration of the estate by the executor. After all requirements have been satisfied and relevant fees paid, the Probate Registry will issue a grant of probate. This will need to be produced before the executor can deal with the assets.

Hampton, Winter & Glynn (alfa@hwg-law.com)

Reviewing Service Providers

An extraordinary series of unconnected events has led to an unprecedented re?examination of hitherto accepted selection criteria for service providers:

• The events of 11 September have caused US authorities to totally revamp their security agencies;
• The Enron collapse has caused regulators worldwide to question the role and effectiveness of auditors;
• In Australia, the HIH collapse has underlined the need for a review of auditors' functions; and
• More recent disclosures concerning Xerox, WorldCom and Merck have heightened sharemarket instability.

One message that these events convey is that the brand and the sheer size of the associated service provider is not a sufficient determinant of capability. No security organisation has a better brand or better resources than the FBI - but it is now suggested that it failed the USA in the lead up to 11 September!

The second message is that internal communication within the service provider is critical to its effectiveness: what appears to be emerging from reviews of each of the events is that personnel within the service providers recognised dangers or correctly interpreted warning signs but that those messages, for whatever reason, did not reach the client.

Today, those who select service providers have to consider broader criteria than may have been applied in the past, including:

• The abilities of the people who actually provide the services (not necessarily the same as those who sell them) have to incorporate an additional element of savvy - the ability to read and interpret the signs.
• Their degree of independence, not just from the client, but from other market influences such as competitors, suppliers, customers and etc.
• Perhaps above all, a demonstrated ability to maintain effective internal lines of communication:

so that essential messages are not lost.

Cornwall Stodart (j.hutchings@cornwalls.com.au)

Philippines, A Hidden Treasure for Foreign Investment

With infrastructures, utilities and abundant natural resources, and government policies and incentives that encourage active private participation in economic development, the Philippines posted a modest economic growth rate last year. Its Gross National Product jumped to 5.2% last year from 3.4% in 2001 while its Gross Domestic Product which grew to 3.2% in 2001 increased to 4.6% last year.ⁱ This economic growth was partly precipitated by government-approved investments amounting to P68,523,000,000 as of September 2002.ⁱⁱ

The Philippine Advantage

The Philippines is an archipelago composed of 7,100 islands and islets. With a total land area of 300,076 square kilometersⁱⁱⁱ , it is blessed with abundant natural resources, including extensive mineral reserves, timber, rich fishing grounds and vast arable lands. The country has extensive mineral deposits of the following: iron, gold, cooper, nickel, chromite, molybdenum, mercury, lead, zinc and manganese. Copper and nickel constitute 89% of the country's total metallic output. Among its non-metallic deposits are cement raw materials and limestone.

Its greatest asset, however, is its highly educated people who speak both English and Filipino, the national language. The Philippines' literacy rate of 95% is considered one of the highest in the world. This is due in part to the culture-based desire to be educated and skilled to attain material security. The country's 44,545 schools had a total student population of over 16 million in 1999^iv . These schools have been churning out graduates who are recognized for their management capabilities, craftsmanship and computer skills. Surveys of executives in the Asian region have consistently ranked both skilled and unskilled Filipino workers high in terms of quality of work, communication capabilities and receptiveness to technology transfer.

Regulatory Environment

After years of protectionism, the Philippines has progressed towards a true market and deregulated economy. Consistent and market-based policies and decisions that are responsive to global challenges are now integral components to the country's economic strategies.

The Government encourages private sector initiatives in almost all aspects of the economy. To this end, the country has adopted a very liberal regulatory framework for foreign investments and trade. Except in certain areas deemed of national interests, foreigners may now invest or engage in a host of activities such as telecommunications, power, infrastructure, transportation, banking, insurance, exploration, development and utilization of natural resources, and recently, retail trade. The extent of foreign participation in these activities is primarily regulated by Republic Act No. 7042, otherwise known as the Foreign Investment Act of 1991. The general policy of the law is to allow foreigners to invest up to 100% of the equity in the companies engaged in almost all business activities. However, certain activities, like land ownership, are reserved to Filipino individuals or to corporations at least 60% of the capital stock is owned by Filipinos. The flow of foreign exchange has also been liberalized.

The Government grants various fiscal and non-fiscal incentives to investment in priority projects or if the investment is located in economic zones. Among these incentives are income tax holidays, tax-and-duty-free importation of machineries, equipment, raw materials and supplies, exemption from wharfage dues and local taxes, exemption from export taxes, permanent resident status for foreign investors and their immediate families, employment of foreign nationals, and remittance of earnings abroad.

Aside from the Foreign Investment Act, other laws that will concern a prospective foreign investor in the Philippines include the Omnibus Investment Code of 1987 (Executive Order No. 226), Special Economic Zone Act of 1995 (Republic Act No. 7916), Export Development Act of 1994 (Republic Act No. 7844) and the Investor's Lease Act of 1993 (Republic Act No. 7652).

Through clear policies, rules and regulations, these laws are implemented through the following administrative agencies: Securities and Exchange Commission, Department of Trade and Industry, Bangko Sentral ng Pilipinas, Philippine Economic Zone Authority and the National Economic Development Authority. An efficient work system among these agencies has been developed to promptly assist all requirements of foreign investors.

Ponce Enrile Reyes & Manalastas Law Offices (pecabar@pecabar.ph)

ⁱ Data from the National Economic Development Authority.

ⁱⁱ Data from the Board of Investments.

ⁱⁱⁱ 1999 Philippines Yearbook at p. 398.

^iv Id.

Tax Break in Singapore

Businessmen have praised the Budget's announcement to exempt taxation on foreign income remitted back to Singapore. It is believed that such a move will not only make it easier for local companies to expand globally but the move will also attract and encourage more companies to do business in Singapore.

The announcement comes as good news for companies, particularly multinational companies and those seeking to list on the Singapore Exchange. As announced in the Budget, earnings from abroad, such as dividends from overseas subsidiaries and branch profits, will automatically become tax-free as of June 1, 2003. This is as long as they are sent back from places with tax rates of at least 15%.

The Budget's announcement is expected to benefit large, locally listed firms like SingTel and Venture Corp, which have substantial interests abroad. In the past, these firms had to grapple with a troublesome system of tax credit but all of these issues should now be handled with greater ease.

Analysts expect that this new and improved system will greatly attract multinational firms to set-up holding companies in Singapore to consolidate their finances. In fact, some believe the change could even influence more businesses to create listing vehicles in Singapore instead of tax havens like the Bermuda islands.

A tax partner at Deloitte & Touche, Ajit Prabhu commented: "It is extremely significant, particularly in the context of listing vehicles which companies, particularly foreign companies, might choose when they seek a listing on the Singapore Exchange. It becomes a lot more attractive to use either a Singapore listing vehicle or a listing vehicle in Hong Kong, or perhaps Mauritius, which have headline tax rates of at least 15%. The reason being dividends paid by such listing vehicles to Singapore shareholders would not be subject to Singapore tax, whereas using a Bermuda listing vehicle now would be subject to Singapore tax."

It is estimated that approximately 90 million dollars of remitted income will be exempted from taxation. Many are still questioning how the actual plans expect to be implemented. The Inland Revenue Authority of Singapore plans to present more details by May 2003 .

Feature Firm:

Tress Cocks & Maddox Expands Commercial Capabilities

Tress Cocks & Maddox, the ALFA representative firm in Sydney, Australia has recently expanded its commercial capabilities.

Late last year, Philip Mitchell joined the firm as a partner and Silke Koernicke joined as a senior associate. Philip (who speaks Japanese) has a broad commercial practice with a focus on foreign based corporations doing business in Australia. Silke (who speaks several European languages) has a similar practice and works closely with Philip. Both are capable of advising overseas-based corporations about setting up and doing business in Australia and regularly deal with their overseas-based clients in their native languages.

Starting shortly with the firm is Steven James, who has also been appointed as a partner. Steven specialises in information technology and does work for a number of government departments as well as a range of local and overseas clients who need expert advice on complex contracts dealing with their intellectual property rights in information technology - no matter whether they purchasers or vendors.

The addition of these lawyers accords with Tress Cocks & Maddox's determination to expand its commercial capabilities and to provide a full range of services to overseas-based companies wishing to do business in Sydney.

Tress Cocks & Maddox (awl@tcm.com.au)

Lehman Lee & Xu

China Lawyers, Notaries, Patent, Copyright and Trademark Agents

http://www.lehmanlaw.com

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