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China Updates – February 2021

EU-China Comprehensive Agreement on Investment (CAI)

A draft of the EU-China Comprehensive Agreement on Investment (CAI) published on 22 January 2021, showed a promising advance in the long-standing negotiations between all the parties involved.

After 35 rounds of negotiations since 2013, CAI becomes the first comprehensive investment protection agreement concluded by China, covering investment liberalization, investment protection, fair and competitive conditions, dispute settlement, and sustainable development.

Key elements of the EU-China CAI:

  • Making the conditions of market access for EU companies clear and independent of China’s internal policies.
  • Opening new market access in China for EU companies through the elimination of quantitative restrictions, equity caps, or joint venture requirements in various sectors.
  • Improving the level playing field by seeking to discipline the behavior of state-owned enterprises to act in accordance with commercial considerations.
  • Imposing transparency obligations on subsidies in the services sectors.
  • Laying the rules against forced technology transfers.
  • Providing transparency rules for regulatory and administrative measures to enhance legal certainty and predictability, as well as for procedural fairness and the right to judicial review.
  • In labor and environmental areas, China commits not to use the standards of protection for investment attraction or protectionist purposes.
  • Commitments on environment and climate, including to effectively implement the Paris Agreement on climate.

Simplification of business name registration procedures in China

With effect from March 2021, the revised regulation on business name registration will further simplify registration procedures of starting businesses. The €˜business name pre-approval’ stage will be abolished. Hence, this change will allow applications to be lodged through the online business name application system.

Applicants now have the option to inquire, compare and screen proposed business names via the online business name declaration system or directly submit their application to the registration authority. The new regulation and digitalized system grant more flexibility and transparency to its applicants.

However, applicants must ensure their selected business name meets the requirements of these Provisions. All information and materials submitted must be authentic, accurate, and complete. The applicant shall bear legal liability for infringement of others’ legitimate rights and interests.

China to boost VAT e-invoicing and reinforce tax compliance

China has very quickly and efficiently adopted the electronic VAT system. The disruption of COVID-19 has encouraged companies to rapidly integrate their IT resources (ERP, CRM, etc.)  with those of tax authorities.

China has advanced its e-invoicing system and technological integration in its fiscal compliance and processes, introducing the feature of issuing €˜Special’ VAT e-invoices on top of its former restriction to €˜General€ VAT invoice.

This modern technology adoption promises multiple benefits for companies and tax authorities. Taxpayers of all levels €“ micro, small, medium, and big enterprises €“ will reap the benefits of reduced paper-waste and increased efficiency in terms of time and cost. Subsequently, Tax authorities are able to assess real-time information which could strengthen compliance checks.

New announcement by the Ministry of Finance and the State Taxation Administration on the Pre-tax Deduction of Marketing Expenses

The Ministry of Finance and the State Administration announced on 27 November 2020 that the pre-tax deduction is effective from January 2021 till December 2025. This will benefit businesses that incur marketing expenses (advertising and business promotion expenses).

However, the measure will only apply to companies involved in the cosmetics industry (manufacturing or selling goods) and the manufacture of beverages and drugs (excluding alcohol).

The businesses benefiting from this policy will be able to deduct up to 30% of their sales revenue in the current year, where expenses were incurred. The excess may be carried forward during the next years.

It is worth noting that tobacco marketing expenses, such as advertising and promotion, are not deductible in calculating taxable income.

The importance of details on Employment Contracts

2020 has revealed many instances in which both employers and employees neglected the importance of labor matters. When all is well, enforcing strict contractual terms seems to be unnecessary.

However, the unique environment arose in numerous conflicts between contractual parties. This revealed the gravity of remaining vigilant to employment contract details. It is imperative to remain attentive to multiple items, including national laws and local policies and rules, termination conditions, duration of the contract (fixed-term, open-ended, specific), clear and concise use of language, and oral agreements. Compulsory contract provisions such as salary, bonus, benefits, working hours, the term of service, probationary period, social insurance program, overtime rate, conflict resolution methods, and other elements also play important roles. Due to its complexity and location variations, whether the company is hiring, dismissing, or relocating employees, it is highly advised that contracts are drafted and reviewed by specialized lawyers.

A decade-long battle of intellectual property conflict

After a decade and over 80 lawsuits, Basketball legend, Michael Jordan won a trial over the Chinese company, Qiao Dan, who has been making use of his name and similar logo for around 20 years.

The Supreme People’s court, equivalent to the U.S. Supreme Court in China, has decided that the company must publicly apologize on mass media and formally announce that they have no ties to the athlete. Despite the inadequate mental damage compensation, China has shown an effort to avoid intellectual property disputes and make it a safer investment destination for foreign brands.

Any trademark dispute can be time-consuming and involve high costs for both parties. Therefore, it is highly recommended to do research on trademark and Intellectual Property Rights and protection to minimize risks.