A Brief Introduction of Foreign Investment Law and the Implementation Regulations

 

At the beginning of January 2020, the “Foreign Investment Law of the People’s Republic of China” and the “Implementation Regulations for the Foreign Investment Law of the People’s Republic of China” (hereinafter referred to as the “Foreign Investment Law” and the “Implementation Regulations”) officially came into force, providing a legal guarantee for continuously optimizing the foreign investment environment and promoting a higher level of opening up.

The promulgation of the Foreign Investment Law and the Implementing Regulations is of milestone significance. Its main positive effects can be easily detected in the following aspects:

  1. The definition of “Foreign Investment”

According to the Foreign Investment Law, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations (hereinafter “foreign investors”), including the following circumstances in which:

  • a foreign investor establishes a foreign-funded enterprise within the territory of China, either alone or together with any other investor;
  • a foreign investor acquires shares, equities, property shares or any other similar rights and interests of an enterprise within the territory of China;
  • a foreign investor invests in any new project within the territory of China, either alone or together with any other investor; or
  • a foreign investor invests in any other way stipulated under laws, administrative regulations, or provisions of the State Council.

For the present Law, a foreign-funded enterprise refers to an enterprise incorporated under Chinese laws within the territory of China and with all or part of its investment from a foreign investor. Besides, the Implementation Regulations interpret “other investors” as including Chinese natural persons

  1. The Principle of Unifying Market Access Standard for Domestic and Foreign Investment

In the past, foreign investment had to go through a full set of filing system or even approval system operated by the market supervision department, commerce department and etc. before entering the Chinese market, which might be very complicated and time-consuming. What’s more, there were also some local or industrial special provisions inconsistent with the law and regulations, making the entry threshold for foreign investment more stringent than it appeared.

Since 1 January 2020, the Ministry of Commerce, the National Development and Reform Commission and the Ministry of Justice have organized all regions and departments to conduct a comprehensive clean-up of the current relevant and effective laws, regulations and normative documents, repeal or amend the provisions that are inconsistent with the Foreign Investment Law and its Implementation Regulations. Moreover, it is stipulated that:

  • domestic and foreign enterprises will be treated equally in terms of project declaration, land supply, tax relief and qualification license;
  • foreign enterprises shall participate in the formulation and revision of national, industrial and local standards on an equal footing according to the law;
  • the government and its relevant departments shall not restrict foreign-funded enterprises from entering the government procurement market or implement differential and discriminatory treatment.
  1. Management System of “Pre-establishment National Treatment and Negative List”

Article 4 of the Foreign Investment Law stipulates that the State adopts the management system of pre-establishment national treatment and Negative List for foreign investment. The term “pre-established national treatment” refers to the treatment given to foreign investors and their investments at the stage of establishment, acquisition and expansion of enterprises, which is no less than that given to domestic investors and their investments.

The so-called Negative List refers to the special administrative measures for foreign investment in specific areas stipulated by the state. The state shall grant national treatment to foreign investment that is not on the Negative List. Now, we have a full set of foreign investment guiding system, which includes Negative List plus Industry Guidelines on Encouraged Foreign Investment and a Negative List for Market Access for both foreign and domestic investment.

  1. Abolishment of the Three FIE Laws

Since the Foreign Investment Law and its Implementation Regulations came into force on 1 January 2020, the existing three laws and their implementing rules (collectively Three FIE Laws) governing the establishment of Sino-foreign equity joint ventures, Sino-foreign co-operative joint ventures and wholly foreign-owned enterprises and their operations in China have been repealed simultaneously.

However, there are still some normative documents such as departmental rules, local regulations, local rules and judicial interpretations that may not be suitable for abolishing at once, nor can they be screened one by one in a short time. For this reason, the Implementation Regulations stipulate that in case of any inconsistency between the provisions on foreign investment formulated before 1 January 2020 and the Foreign Investment Law and the Implementation Regulations, the provisions of the Foreign Investment Law and the Implementation Regulations shall prevail.

Also, for established foreign-invested enterprises, Article 42 of the Foreign Investment Law stipulates a five-year transitional period during which established foreign-invested enterprises may continue to maintain their original organizational forms, etc. In another word, during this 5-year transitional period, foreign-invested enterprises can choose either staying the same organizational form or going through a change procedure according to Company Law or Partnership Enterprise Law. If an enterprise has not changed its form after the transitional period, it shall be regarded as a violation of the law and the market supervision department will not handle the change or filing procedures of any registered items of the enterprise.

  1. Investment Management: Foreign Investment Information Reporting

Foreign investors or foreign investment enterprises shall submit investment information through the enterprise registration system as well as the enterprise creditworthiness information announcement system to the commerce administrative authority.

The contents, scope, frequency and detailed workflow for foreign investment information reporting shall be determined and announced by the commerce administrative authority of the State Council jointly with the market regulatory authority of the State Council and other relevant authorities. The commerce administrative authority and other relevant authorities shall strengthen information sharing and shall not require foreign investors or foreign investment enterprises to submit such investment information which can be obtained through inter-departmental information sharing.

In short, the approval and filing system has already been replaced by the information reporting system. For most foreign-invested enterprises, commerce filing is no longer required because such information will be shared by the governmental departments.

Written by Edwin Yin, China Consultancy Team, CW CPA

Shanghai Pilot Free Trade Zone (FTZ) was officially established on 29 September 2013, covering an area of 28.78 square kilometers, originally including four special customs supervision areas, namely, Shanghai Waigaoqiao Free Trade Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port Area, and Shanghai Pudong Airport Comprehensive Free Trade Zone.

 

The Shanghai FTZ became a new experimental field for China’s economy, for it has implemented a number of reform measures such as the transformation of government functions, financial system, trade services, foreign investment, and tax policies, and will vigorously promote the development of Shanghai’s entrepot and offshore businesses.

 

In the past years, the Shanghai FTZ successfully intrigued a huge number of investors from all over the world. These achievements can never separate from its preferential governmental policies and foreign-friendly investment environment, which can be categorized as follows:

 

  1. Negative List Management

Foreign investments in those industries outside the Negative List are treated equally as domestic investments. That is to say, the establishment and amendment of foreign-invested enterprises are subject to a filing system same as that for domestic companies. At present, the Negative List management model has been fully popularized and replicated throughout the country, but the Negative List in the FTZ is less restrictive than that outside the zone.

 

  1. Encouraging Services, Manufacturing and Some Other Hign-End Industries

Since the FTZ was established, two batches of 54 opening measures have been successively introduced in the service sector and some manufacturing sectors. Some of these opening measures have been replicated outside the zone, while some of them are still being piloted in the zone.

 

  1. Simplification of Government Procedures

In the past, establishing a foreign-invested enterprise required the approval of the National Development and Reform Commission, the Commerce Commission, Administration of Foreign Exchange, and other relevant government departments, which normally took 3-6 months. Now, projects valued under 300 million US dollars only need to make a filing in the free trade zone, which can be completed within 3 working days.  

 

  1. Customs Supervision Policies

Inside the special customs supervision area in the FTZ, there is a series of new institutional arrangements in terms of trade facilitation, such as navigation and customs clearance, inspection and quarantine, and selective taxation. The FTZ has also promoted the rapid development of a series of new customs service businesses, including a “one-stop” government service window for international trade, supervision of goods status, etc.

 

  1. Encouraging Policies for Financing

Financial opening and innovation are the key points of FTZ reform. At present, the split-account accounting based on free trade accounts and overseas local and foreign currency financing is still only being piloted in the FTZ. The cross-border RMB two-way capital pool and the centralized operation and management of foreign exchange funds at the headquarters of multinational companies, which are well received by enterprises, have been replicated nationwide, but they are still more convenient in the FTZ region than outside the region.

 

  1. Leading the Establishment of the Rule of Law

To give full play to the exemplary role of the Shanghai FTZ, the Shanghai government established rules and guidance systems for urban planning and construction, land management, economic development, social management, public services, etc. Besides, a judicial system with international credibility and a new mechanism for administrative law enforcement was established. To meet the needs of FTZ finance and high-tech industries, specialized platforms such as FTZ financial arbitration, high-tech and intellectual property arbitration was built to integrate professional resources and improve service levels.

 

Over the past 6 years, through the effort of a regional linkage mechanism, the FTZ has given full play to its demonstration effect and provided sufficient impetus for development. The FTZ area was enlarged to more than 120 square kilometers, and there are now 7 free trade areas. What’s more, recently on 12 September 2019, the Shanghai government released Several Opinions of Shanghai Municipal People’s Government on Further Promoting Foreign Investments, which explicitly depicts the future development layout of the FTZ.  

 

All in all, the practical experience of the Shanghai FTZ is a precious wealth to China. As its financial reform keeps pushing forward, the FTZ can surely make more contributions to the accelerating process of the internationalization of RMB and greatly increase China’s influence on the world’s economy.

 

Written by China Consultancy Team, CW CPA

Macao advantages as a bridge between China and Lusophone countries

The Macao Special Administrative Region may only have gained worldwide prominence with the advent of the liberalization of the gaming industry (casino) less than two decades ago, but it is important not to devalue what was and still represents Macao: a trading post. Macao’s history as a colony dates back to the 18th century. XVI when it was voluntarily ceded by China to the Portuguese to facilitate trade. Since then, this peaceful coexistence between East and West has defined Macao, making it an attractive business hub given the region’s stability and uniqueness, which is currently celebrating its twentieth anniversary of its return to the Chinese administration.

That said, the connection with Portugal, or with Lusophony, has never been lost, which is noticeable in the fact that the Portuguese language remains one of the official ones (together with Chinese). As such, official documents are almost all bilingual, and Portuguese is still heard in various public and private services (although in this latter context English is also often an option).

Another noteworthy aspect has been China’s investment in Portuguese-speaking countries (PALOPs), which has been carried out directly or through Macao. Forum Macao, as it is known, is a China-funded organization that aims to facilitate trade cooperation with the PALOPs. Moreover, at the advent of the Macao International Fair (MIF), it is worth noting this and other events held in Macao to promote products from around the world and in, which various buyers participate.

For any business owner, the difference in tax burden is currently an important aspect of decision making. In Macao, given the considerable government revenue from gambling tax, corporate income tax is limited to only 12%. The same applies to the amount of profits after deduction of the exemption, which varies each year from MOP600,000 for the 2018 financial year, currently equivalent to about USD74,273. Also, there is no dividend tax, which means that net income is the amount the end-day investor takes home. Business taxation is divided into two groups of taxpayers, one of which is based on presumed income. To do so, the annual statement provided by the Finances must include the total amount of income and expenses – overall, Macao has a much easier bureaucracy. Likewise, the personal income tax is progressive up to a maximum of 12%. Since the employer is only required to withhold and pay social security contribution (which is not high). Besides, there is no value-added tax and Macao is considered a free port, there are no customs duties on imported products. Also, the Macao Government has entered into various double taxation agreements.

Another interesting aspect is the Mainland and Macao Closer Economic Partnership Arrangement (CEPA), which gives Macao companies privileged access to the interior of China, including the export of certain goods. types of products exempt from customs duties. Company formation in Macao is a relatively simple procedure open to any investor and can be done remotely. The subsequent opening of a bank account currently requires (depending on the requirements of KYC), in addition to the usual documents, proof of the existence of a (legitimate) business, final beneficiary and, in most banks, a personal journey in front of the counter.

It is therefore advisable to set up the company first, which may take up to 1 month (two weeks minimum for registration with the Conservatory), with a subsequent director traveling to Macao to handle the opening procedures of bank account. In this context (as anywhere), professional assistance can be a valuable help in saving time in making any investment in the region.

This text is only a basic guide and should not be taken as a reference for making investment decisions in Macao as the specifics of the case may translate into the application of different rules.

Written by Jose Alvares, Partner, CA Lawyers – Macao

The 2019 Edition of Negative Lists and Catalogue of Encouraged Industries for Foreign Investment

Foreign investors are subject to special administrative measures for access to the Chinese market. Currently, China adopts the management system of negative list for granting foreign investors and their investments into China. The negative list sets out industries where foreign investment is prohibited or restricted. To push forward the development of an open economy, the National Development and Reform Commission and the Ministry of Commerce jointly published two updated negative lists and the encouraged industry catalogue for foreign investment on 30 June 2019, which came into force on 30 July 2019, namely:

  • Special Administrative Measures for Admission of Foreign Investment (2019 National Negative List)
  • Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (2019 PFTZ Negative List)
  • Industry Guidelines on Encouraged Foreign Investment (2019 Encouraged Catalogue)

The structure of the updated edition remains the same as the old one (2018 Edition), while some items have been removed or modified. The number of entries in the national Negative List was reduced from 48 to 40, and the number of entries in the PFTZ Negative List was reduced from 45 to 37.

2019 National Negative List

Opening of service industries

  • In the field of transportation, the restriction that domestic shipping agencies must be controlled by Chinese majority shareholders has been lifted.
  • In the area of infrastructure, the restriction that Chinese majority shareholders must control the gas, heating pipelines and water supply in cities with a population of more than 500,000 has been lifted and only the restriction of water supply remains effective afterwards.
  • In the cultural field, the restriction that cinemas must be controlled by Chinese majority shareholders has been removed. The restriction that performance agencies must be controlled by Chinese majority shareholders, which was removed in 2018 Pilot Free Trade Zone Negative List, is now removed nationwide.
  • In the field of value-added telecommunications, restrictions on foreign investment imposed by domestic multi-party communications, store-and-forward and call center services have been lifted.

Opening of agriculture, mining and manufacturing industries

  • For agriculture, the prohibition for foreign investment in wildlife resources development has been lifted.
  • In the field of mining, the limitation of exploration and development of petroleum and natural gas to joint ventures and cooperation has been lifted, and the prohibition on foreign investment in exploration and development of molybdenum, tin, antimony and fluorite has been removed.
  • In the manufacturing sector, the ban on foreign investment in Chinese art paper and production in ink stick has been lifted.

2019 PFTZ Negative List

 

The purpose of setting up Pilot Free Trade Zones is to explore the application of national treatment and the use of negative list in the foreign investment approval process, to boost opening up and innovation in the financial sector, and to provide an invest-friendly regulation environment. In 2018, opening measures regarding performance agencies and oil and gas exploration were proved successful in these Pilot Free Trade Zones and then were spreaded to the whole country. And for this time in 2019, opening measures on industries like fishing of aquatic products and printing of publications are carried out nationwide.

In addition, on 26 August 2019, the State Council announced the Promulgation of Overall Plan for the fifth batch of PFTZs, which will be set up in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang, in total 6 provinces.

2019 Encouraged Catalogue

Besides the Negative List, China also issued the Industry Guidelines on Encouraged Foreign Investment, which combined the “Industry Guidelines on Encouraged Foreign Investment” in the 2017 Catalogue on Industry Guidelines for Foreign Investment and the 2017 Catalogue of Priority Industries for Foreign Investment in Central and Western Region. This catalogue mainly stresses upon encouraging foreign investment to participate in high quality development of manufacturing industry. More than 80% of the new or revised items in the national catalog belong to the manufacturing sector, supporting foreign investment to pay more attention to high-end, intelligent and eco-friendly manufacturing.

  • In the electronic information industry, the Catalogue further includes the development and manufacturing of 5G core components, integrated circuit etching machine, chip packaging equipment, cloud computing equipment etc.
  • In the equipment manufacturing, items related to industrial robot, new energy vehicles, key components for smart vehicles are added or amended.
  • For the medical and pharmaceutical industry, the Catalogue adds the development and production of new key raw materials for the production of vaccines, cell therapy drugs, and large-scale cell culture products.
  • To encourage the new material industry, the Catalogue further updated the section about the development and production of new materials for aerospace, monocrystalline silicon, large silicon wafer etc.
  • In the commercial services sector, the Catalogue updated the sections about project consultancy services, tax consultancy services, inspection and testing certification services etc.
  • For business services and trade, cryogenic distribution, e-commerce, construction and operation of railway arterial network and railway special line are updated.
  • Under the technology service sector, artificial intelligence, clean production, the development of Carbon Capture and the development and application of energy saving, and circular economy technologies are included.
  • In Yunnan, Inner Mongolia, Hunan and other regions with certain distinguished agricultural resources and labor advantages, the Catalogue modifies items regarding the industries of agricultural product processing, textile clothing and furniture manufacturing.
  • In Anhui, Sichuan, Shaanxi and regions where the development of electronic industry clusters is accelerating, the Catalogue adds the development and manufacturing of integrated circuit, tablet computer and communication terminal etc.
  • In Henan, Hunan and regions with dense transportation and logistics network, the construction of new logistics storage facilities and auto refueling stations has been added.

The incentive policies supporting the old catalogues of encouraged industries will apply to the 2019 Encouraged Catalogue, including:

  1. For encouraged foreign investment projects, the import of self-use equipment within the total amount of investment shall be exempted from the customs duty and import value-added tax;
  2. Enterprise income tax will be collected at a reduced rate of 15% for qualified foreign invested enterprises in Western Regions which fall into the category of encouraged industries;
  3. Relevant land use policies are applicable to foreign-invested and domestic enterprises equally. China will continue to provide land in priority to the “encouraged-type” of foreign investment industrial projects on intensive land use; After the reserve price for land use is determined, no less than 70% of the national minimum standard for land for industrial use corresponding to the same rank of land may be implemented. 

At present, China is striving to accelerate the development of emerging industries and create a strong domestic market opened to global investors, which provides not only market opportunities but a more strengthened legislative framework for supervising the foreign investments in China. Coupled with China’s new Foreign Investment Law, which will come into effect on 1 January 2020, foreign companies that are already established in China may consider the following actions:

  1. Revise the current market situation and explore beneficial restructuring options considering the new Negative Lists and the 2019 Encouraged Catalogue;
  2. Pay close attention to any changes of the local rules set forth by local competent authorities in response to the new Foreign Investment Law to be implemented soon.

As for investors who are still yet to put forward the China project:

  1. The Negative Lists and the 2019 Encouraged Catalogue shall be first reviewed in order to confirm whether a Wholly Foreign-Owned Enterprise can be set up or a Joint Venture is needed.
  2. In the latter case where a Joint Venture is considered, be aware of the upcoming changes that the Law on Sino-foreign Equity Joint Ventures, and the Law on Sino-foreign Cooperative Joint Ventures shall be repealed after the new Foreign Investment Law comes into effect on 1 January 2020. Therefore, it is strongly advisable to consult with a China legal counsel for solutions to cope with the legislative changes.

Should you wish to know more about China’s recent changes in foreign direct investment laws, please feel free to reach out to our China Consultancy Team.

Contact:

Delilah Li

Senior Manager, Greater China

delilah.li@cwhkcpa.com

Phenix Zheng

FDI Legal Counsel, Greater China

phenix.zheng@cwhkcpa.com

Written by Edwin Yin, China Consultancy Team, CW CPA

Recruiting in China – online recruitment platforms that work

In China, there were nearly 200 million people who searched for jobs online in 2018. To broaden their search, job seekers often tap on multiple recruitment platforms. In recent years, many online recruitment platforms have emerged as the market leaders by offering not only online recruitment, but also other human-resource related services. Some focus on particular industry verticals, such as technology and finance, or job seeker segments, like the younger generations and re-joiners in the labor force.

If you are an HR tasked with recruiting local staff in China or a start-up business owner looking for Chinese talents, you need to know the most effective and popular platforms that could offer the very specific niche that suits your business needs. Our Human Resources Process Outsourcing (HRPO) team has complied the following list to help you navigate through the all the various choices in the market.

51job.com gives you access to a nationwide database of job seekers of nearly 200 Chinese cities. It also provides a number of other value-added HR services including training, professional assessment, executive search, and compensation analysis. 51job.com primarily targets white-collar workers between the ages of 20 to 35 and covers many different job categories, from professional and middle management positions to entry-level, clerical and hourly jobs.

Zhaopin.com is a popular recruitment website focusing on hiring students, white-collar workers and high-end talents across different fields. Similar to 51job.com, it also offers other professional HR services throughout China. Posting a recruitment ad in Zhaopin.com is free of charge, which may be preferable to start-up companies.

Chinahr.com is a comprehensive recruitment website under the world-famous recruitment network Saongroup. However, in recent years, Chinahr has become a less preferable choice due to the fierce competition in the recruitment market. Employers can still consider posting recruitment ads in Chinahr as an additional channel complementary to 51job.com and zhaopin.com.

YJS is an online recruitment website that focuses on graduates and students in China. If you are keen on hiring fresh graduates and training them from the basics, YJS can be a useful tool as it attracts many new highly educated, first-time workers. It has a large concentrated pool of young workers looking for opportunities to kickstart their career. Besides of recruitment, YJS is also a platform for on-campus talks, corporate visits, and recruitment fairs.

Jingying targets much more experienced and highly skilled professionals. While traditional headhunting firms prefer networking in the offline community to scout for mature candidates, 51jingying addresses this segment of market by introducing an online platform where job seekers, headhunters or direct employers can access the online professional network built by Jingying, featuring mobile application with private communication channel and name card exchanging and scanning.

Lagou specializes in the fields of technology and engineering. Employers seeking software developers, computer programmers, web designers, system administrators, data analysists and project managers will appreciate its niche in technology related positions. Lagou also provides industry insights, company profiles and user discussion forums.

BOSS Zhipin is an active latecomer to China’s online recruitment market. Its selling point is that it offers job seekers direct chat engagement with recruiters by learning user behaviors. One can expect that such “fast food” experience is suitable for matching less experienced job-seekers with employers who wishes to find someone inconveniently and fast. BOSS Zhipin’s users are mostly “green-hand”, or inexperienced workers under the age of 24.

Liepin is also a job seeker-employer match making platform that prides itself in applying artificial intelligence to match job seekers and business needs, hence reducing information asymmetry and recruitment costs. Liepin focuses on mid-to-high-end talents in China.

58.com is the largest online marketplace serving local merchants and consumers in China. It is also a place where free lancers, entry level and blue-collar workers congregate. Similar websites include ganji.com, baixing.com, gongren.com, chinalao.com and 528.com.cn.

Certainly, there are abundant other recruitment platforms you can work with. For foreign companies operating in China, local hiring can be easy if there is a dedicated Chinese speaking HR manager who can undertake the whole process from writing job descriptions, posting on recruitment sites, interviewing and shortlisting to negotiating and issuing the offer letter.  However, it is often the case that SMEs do not always have the adequate resources and time to work on bringing the right people on board. This is where CW’s HRPO team can come into the picture.

CW’s HRPO team offers recruitment services that focus on entry to mid-level positions. We believe that a successful recruitment is a fine-tuned process with an understanding of both your expectation and the characteristics of the current job market.  With CW’s help, you can rest assure to achieve the following:

  • Market benchmarking, requirement analysis
  • Job analysis, marketing design, and descriptions
  • Candidate sourcing or pooling
  • Screenings and skills assessments
  • Reporting and documentation
  • Interview management and selection assistance
  • Pre-employment checks
  • Off-boarding, paper work and tax clearance

Do you need to hire someone in China? Please do not hesitate to contact us.

EMAIL : cw@cwhkcpa.com
WEBSITE : www.cwhkcpa.com

Written by Delilah Li, China Consultancy Team, CW CPA

On the Revision of “Anti-Unfair Competition Law” in April 2019

On 23 April 2019, the 10th meeting of the Standing Committee of the 13th National People’s Congress decided to amend eight laws, including the Trademark Law and the Anti-Unfair Competition Law. Among them, the revision of “Anti-Unfair Competition Law” is of great progressive significance. This amendment has made more detailed provisions on some existing concepts in the Anti-Unfair Competition Law, which expanded the scope of application of this Law while further clarifying the responsibilities and penalties for illegal acts.  

  1. Definition of infringement of trade secrets and expansion of its scope of application

  This amendment has made more detailed provisions on the infringement of trade secrets. On the one hand, electronic intrusion is added to the act of infringing trade secrets. With the advent of the electronic age, illegal acts of infringing trade secrets in the form of electronic invasion have become increasingly frequent. This form of invasion is often more covert, convenient, and technical than usual. Compared with the previous classification of electronic intrusion into the category of “other unfair competition means” in Article 9, this amendment juxtaposes it with theft, bribery, fraud, coercion in the form of enumeration, clarifying the illegal nature of electronic intrusion and facilitating relevant departments to supervise and regulate it. By explicitly including this new form of intrusion into the law as a notice provision, the Anti-Unfair Competition Law will be more adaptable to the complicated business competition situation and will be more conducive to ensuring the network security of business secrets. On the other hand, a new paragraph (4) is added to Article 9 to include the acts of instigating, luring, and helping others to obtain trade secrets into the acts of infringing trade secrets. At the same time, other natural persons, legal persons, and organizations of non-legal persons other than business operators are also defined as the subject of infringing trade secrets, further clarifying the scope and targets of this law.  

  1. Increase in compensation and punishment standards

  This amendment adds compensation and punishment standards for serious violations to Article 17 of the Anti-Unfair Competition Law. If the circumstances are serious due to the malicious acts of business secret infringement committed by the business operator, compensation shall be made according to the standard that the actual amount of losses suffered due to infringement is more than one time but less than five times. In addition, the punishment for violations of trade secrets will be increased from a maximum of RMB 3 million yuan to a maximum of RMB 5 million yuan, and the supervision and prosecution department has the right to confiscate the illegal income from violations. The increase of the punishment standard and upper limit has greatly increased the cost of illegal acts, which will help to crack down more effectively on infringement on business secrets.  

  1. Transfer of burden of proof

In normal cases, the proof rule of “the burden of proof lies with the person making the claim” is applied in civil proceedings. The party who claims provides evidence to prove his claim and bears corresponding adverse consequences if he fails to prove it. Before this amendment, this rule of proof was applicable to illegal acts that violate trade secrets. The right holder of trade secrets needs to prove the existence of infringement acts and damage results, the causal relationship between acts and results, and the infringer is at fault for the occurrence of results. However, due to the strong concealment of trade secret infringement, theft, disclosure, and illegal application of trade secrets are usually carried out in a secret way. The application of the general rule of “the burden of proof lies with the person making the claim” often places the plaintiffs of trade secret infringement cases in a very passive position, which leads to the high losing rate of the plaintiffs of trade secret infringement cases tried by our courts in recent years.   This amendment adds a new article 32, which stipulates that the rule of inversion of burden of proof will apply to cases of infringement of trade secrets. The plaintiff only bears the preliminary burden of proof; that is, it only needs to prove the existence of infringement or infringement risks and has taken reasonable confidentiality measures for trade secrets. Correspondingly, the suspected infringer needs to prove that there is no infringement or the trade secret claimed by the obligee does not belong to the trade secret stipulated in this law. This amendment has reversed the situation of showing fairness to the plaintiffs in cases of infringement of trade secrets and provided a strong guarantee for the holders of trade secrets to safeguard their legitimate rights and interests.   

Summary 

This amendment specifies some specific issues of unfair competition from the aspects of definition and scope of application, compensation, punishment, and allocation of burden of proof, etc. The identification standard of infringement has been clarified, and some forms of infringement with apparent harmful nature have explicitly been incorporated into the law to be stipulated separately so that this law can meet the challenge of illegal infringement under the new situation. It has also strengthened the punishment for infringement, increased the burden of proof for the infringer, and significantly increased the expected cost of illegal infringement.

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