REGULATORY OVERVIEW. PRC Laws and Regulations Relating to the Product Liability

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1 Although our Company was incorporated in the Cayman Islands, a substantial part of our Group s operations are conducted in the PRC and are governed by PRC Laws and Regulations. This section sets out summaries of certain aspects of PRC laws and regulations, which are relevant to our Group s operations and business. PRC Laws and Regulations Relating to the Establishment, Operation and Management of our Wholly Foreign-Owned Enterprises in the PRC The establishment, operation and management of corporate entities in China are governed by the Company Law of the PRC ( ) (the Company Law ) which was adopted by the Standing Committee of the National People s Congress ( ) on29 December 1993 and with effect from 1 July It was last amended on 28 December 2013 and with effect from 1 March Under the Company Law, companies are generally classified into two categories, limited liability companies and companies limited by shares. The Company Law also applies to foreign-invested limited liability companies. According to the Company Law, where laws on foreign investment have other stipulations, such stipulations shall prevail. The establishment procedures, approval procedures, registered capital requirements, foreign exchange, accounting practices, taxation and labour matters of our wholly foreign-owned enterprises are regulated by the Wholly Foreign-owned Enterprise Law of the PRC ( ) which was promulgated on 12 April 1986 and amended on 31 October 2000, and the Implementation Rules to the Wholly Foreign-owned Enterprise Law of the PRC ( ) which was promulgated on 12 December 1990 and amended on 1 March The Catalogue for the Guidance of Foreign Investment Industries ( ) (the Catalogue ), which was amended and promulgated by MOFCOM and the NDRC on 10 March 2015 and with effect from 10 April 2015, lists the industries in the categories of foreign investment encouraged industries, foreign investment restricted industries and foreign investment prohibited industries. Industries not listed in the Catalogue are generally open to foreign investment unless specifically prohibited or restricted by other PRC laws and regulations. PRC Laws and Regulations Relating to the Product Liability Pursuant to the Law of the PRC on Product Quality which was promulgated on 22 February 1993 and was last amended on 27 August 2009 with effect from the same date, sellers shall adopt measures to maintain the quality of products for sale. Sellers be responsible for repair, replacement or return and compensate for the damages done to end-users or consumers if one of the following cases occurs:1. Products do not have the property for use it should have and there is no advance explanations; 2. The quality of products does not conform to the standards or to the standards specified in the packages; 3. The quality of products does not tally with the quality specified in the instruction for use or with the quality of samples provided. 65

2 Pursuant to the Measures for the Control of Pollution from Electronic Information Products which was promulgated on 26 February 2006 and with effect from 1 March 2007, seller of electronic information products shall rigidly limit the purchasing channels, and shall not sell any electronic information product not meeting the national or industrial standards for control of toxic or noxious substances or elements of electronic information products. PRC Laws and Regulations Relating to Taxation Enterprise Income Tax Pursuant to the Enterprises Income Tax Law of the PRC ( ) (the EIT Law ) which was promulgated on 16 March 2007 and with effect from 1 January 2008, and the Regulation on the Implementation of the Enterprise Income Tax Law of the PRC ( ) which was promulgated on December 6, 2007 and with effect from 1 January 2008, the income tax for both domestic and foreign-invested enterprises is at the same rate of 25%. Furthermore, resident enterprises, which refer to enterprises that are set up in accordance with the PRC law, or that are set up in accordance with the law of the foreign country (region) but with its actual administration institution in the PRC, shall pay enterprise income tax originating both within and outside the PRC. While non-resident enterprises that have set up institutions or premises in the PRC shall pay enterprise income tax in relation to the income originating from the PRC and obtained by their institutions or establishments, and the income incurred outside the PRC but there is an actual relationship with the institutions or establishments set up by such enterprises. Where non-resident enterprises that have not set up institutions or establishments in the PRC, or where institutions or establishments are set up but there is no actual relationship with the income obtained by the institutions or establishments set up by such enterprises, they shall pay enterprise income tax in relation to the income originating from the PRC. Value-added Tax Pursuant to the Provisional Regulations on Value-added Tax of the PRC ( ) last amended and promulgated on 10 November 2008 and with effect from January 1, 2009 and its implementation rules, all entities or individuals in the PRC engaging in the sale of goods, the provision of processing services, repairs and replacement services, and the importation of goods are required to pay value-added tax. For taxpayers selling or importing goods, other than otherwise specified, the tax rate shall be 17%. Pursuant to the Notice of the Ministry of Finance and the State Administration of Taxation on Including the Railway Transportation and Postal Industries in the Pilot Program of Replacing Business Tax with Value-Added Tax ( ) promulgated on 12 December 2013 and last amended on 9 May 2015 and its appendixes, entities and individuals providing services in the transportation, postal, and certain modern service industries ( Taxable services ) within the territory of the People s Republic of China are payers of value-added tax. Taxpayers shall pay VAT instead of business tax for the taxable services provided by them. Taxable services includes land transportation, water transportation, air transportation, and pipeline transportation services, universal postal, special postal, and other postal services, research and development and technical services, information technology 66

3 services, cultural and creative services, logistics support services, tangible movable property rental services, attestation and consulting services, and radio, film, and television services. For the provision of services in the modern service industries (excluding tangible movable property rental services), the tax rate is 6%. Tax on Dividend Pursuant to the Arrangement between the Mainland of China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ( ) promulgated on 21 August 2006 and last amended by the Announcement about the Entry into Force and Implementation of Protocol III to Arrangement Between the Mainland and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ( < > ) on 6 January 2011, dividends paid by a company which is a resident of one side to a resident of the other side, may be taxed in the side of which the company paying the dividends is a resident, and according to the laws of that side, but if the beneficial owner of the dividends is a resident of the other side, the tax so charged shall not exceed: (1) where the beneficial owner is a company directly owning at least 25% of the capital of the company which pays the dividends, 5% of the gross amount of the dividends; (2) in any other case, 10% of the gross amount of the dividends. Transfer Pricing Adjustments in Hong Kong and the PRC HKEX Q4(iii) Hong Kong Pursuant to Section 20(2) of the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (the IRO ), a non-resident person shall be liable to Hong Kong profits tax where it carries on business with a closely connected resident person and such business is so arranged that it produces to the resident person either no profits which arise in or derive from Hong Kong or less than the ordinary profits which might be expected to arise in or derive from Hong Kong. Section 61A of the IRO stipulates that where it would be concluded that person(s) entered into or carried out transactions for the sole or dominant purpose to obtain a tax benefit (which means the avoidance or postponement of the liability to pay tax or the reduction in the amount thereof), liability to tax of the relevant person(s) will be assessed (a) as if the transaction or any part thereof had not been entered into or carried out; or (b) in such other manner as the supervising authority considers appropriate to counteract the tax benefit which would otherwise be obtained. HKEX Q4(iii) The Departmental Interpretation and Practice Notes No. 45-Relief from Double Taxation due to Transfer Pricing or Profit Reallocation Adjustments issued by the Inland Revenue Department in April 2009 makes it available that where double taxation arises as a result of transfer pricing adjustments made by the tax authorities of another country, a Hong Kong taxpayer may potentially claim relief under the tax treaty between Hong Kong and that country (countries entered into tax arrangements with Hong Kong includes the PRC). 67

4 The PRC Pursuant to the EIT Law, the EIT Rules and the Implementation Regulations for Special Tax Adjustments (Trial) ( ( ) ) (the STA Rules ), transactions in respect of the purchase, sale and transfer of products between, amongst others, enterprises under direct or indirect control by the same third party are regarded as related party transactions. According to the EIT Law, EIT Rules and STA Rules, related party transactions should comply with the arm s length principle ( ) and if the related party transactions fail to comply with arm s length principle results in the reduction of the enterprise s taxable income, the tax authority has the power to make an adjustment following certain procedures. Pursuant to such laws and regulations, any company entering into related party transactions with another company shall submit an annual related party transactions reporting form ( ) to the supervising tax authority, but enterprises which meet one of the following standards are exempt from preparing further contemporaneous documents report ( ): (1) the annual amount of related party purchase/sales is lower than RMB200 million and the annual amount of other related party transactions is lower than RMB40 million; (2) related party transactions are involved in the performance of arrangements for advance pricing; or (3) foreign shareholding percentage is lower than 50% and the related party transactions only incur among domestic associated parties. However, according to the Notice of the State Administration of Taxation on Strengthening the Monitoring and Investigation of Transnational Affiliated Transactions ( ) (Letter No. 363 [2009] of the SAT), if a PRC enterprise, which is established by a foreign entity and undertakes the mere function of production (processing with supplied or imported materials), distribution, contractual research and development or any other limited function and bears the risks relating thereto, encounters a loss, then no matter such PRC enterprise meets related party transaction thresholds mentioned above or not, it would need to prepare the relevant information and file the same with the relevant tax authority before 20 June of the subsequent year. Except as otherwise stipulated by the STA Rules, enterprises should complete the preparation of contemporaneous documents for the current year before 31 May of the following year and submit the documents within 20 days upon request from tax authorities. PRC Laws and Regulations Relating to Foreign Currency Exchange The principal regulations governing foreign currency exchange in the PRC are the Foreign Exchange Administrative Regulations ( ) (the SAFE Regulations ) which was promulgated by the State Council and last amended on 5 August Under the SAFE Regulations, the RMB is generally freely convertible for current account items, including the distribution of dividends, trade and service related foreign exchange transactions, but not for capital account items, such as direct investment, loan, repatriation of investment and investment in securities outside the PRC, unless the prior approval of SAFE is obtained. Foreign investment enterprises are permitted to remit their profits or dividends in foreign currencies out of their foreign exchange accounts or exchange RMB for foreign currencies through banks authorised to conduct foreign exchange business. Pursuant to the Circular on Relevant Issues concerning Foreign Exchange Administration of Overseas Investment and Financing and Return Investments Conducted by Domestic Residents through Overseas Special Purpose Vehicles ( ) (the SAFE Circular No. 37 ), promulgated by SAFE and which became 68

5 effective on 14 July 2014, (a) a PRC resident ( PRC Resident ) shall register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle ( Overseas SPV ), that is directly established or controlled by the PRC Resident for the purpose of conducting investment or financing; and (b) following the initial registration, the PRC Resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change of the Overseas SPV s PRC Resident shareholder(s), name of the Overseas SPV, term of operation, or any increase or reduction of the Overseas SPV s registered capital, share transfer or swap, and merger or division. Pursuant to SAFE Circular No. 37, failure to comply with these registration procedures may result in penalties. Pursuant to the Circular of the State Administration of Foreign Exchange on Further Simplifying and Improving the Direct Investment-related Foreign Exchange Administration Policies ( ) (the Circular 13 ), which was promulgated on 13 February 2015 and with effect from 1 June 2015, the foreign exchange registration under domestic direct investment and the foreign exchange registration under overseas direct investment will be directly reviewed and handled by banks in accordance with the Circular 13, and the SAFE and its branches shall perform indirect regulation over the foreign exchange registration via banks. PRC Laws and Regulations Relating to Labour Protection Regulations Pursuant to the Labor Law of the PRC ( ) and the Labor Contract Law of the PRC ( ) which were separately with effect from 1 January 1995 (amended in 2009) and 1 January 2008 amended in 2012, respectively, labor contracts shall be concluded if labor relationships are to be established between the employer and the employees. Pursuant to the Social Insurance Law of the PRC ( ) which was promulgated on 28 October 2010 and with effect from 1 July 2011, employees shall participate in basic pension insurance, basic medical insurance schemes and unemployment insurance. Basic pension, medical and unemployment insurance contributions shall be paid by both employers and employees. Employees shall also participate in work-related injury insurance and maternity insurance schemes. Work-related injury insurance and maternity insurance contributions shall be paid by employers rather than employees. An employer shall make registration with the local social insurance agency in accordance with the provisions of the Social Insurance Law of PRC. Moreover, an employer shall declare and make social insurance contributions in full and on time. Pursuant to the Regulations on Management of Housing Provident Fund ( ) which was effective from 3 April 1999 and amended in 2002, employers shall undertake registration at the competent administrative center of housing provident fund and then, upon the examination by such administrative center of housing provident fund, undergo the procedures of opening the account of housing provident fund for their employees at the relevant bank. Enterprises are also obliged to timely pay and deposit housing provident fund for their employees in full amount. 69

6 PRC Laws and Regulations Relating to Intellectual Property Rights Computer Software Copyright Pursuant to the Copyright Law of the PRC ( ) which was promulgated on 7 September 1990 and was last amended on 26 February 2010 and the Regulations on Computers Software Protection which was promulgated on 20 December 2001 and was last amended on 30 January 2013, software developed by PRC citizens, legal persons or other organizations is automatically protected immediately after its development, without an application or approval. Software copyright may be registered with the designated agency and if registered, the certificate of registration issued by the software registration agency will be the preliminary evidence of the ownership of the copyright and other registered matters. PRC Domestic Investment Regulations Pursuant to the Interim Provisions on the Domestic Investment of Foreign-funded Enterprises ( ) which was promulgated by the MOFCOM and the State Administration for Industry and Commerce on 25 July 2000, and subsequently amended by the State Administration for Industry and Commerce on 26 May 2006, to set up a company in a field in the encouraged or permitted category, a foreign-funded enterprise shall file an application with the company registration authority without further permission of the Provincial Department of Commerce. 70