China Law Bulletin -- November 2006
Feature Articles
Recent Developments
Ear to the Ground
New Law Ushers in Sweeping Changes to Bankruptcy Regime in China
China adopted a new Enterprise Bankruptcy Law on August 27, 2006, that will take effect on June 1, 2007, governing the bankruptcy
of State-owned Enterprises (“SOEs”). The Bankruptcy Law offers for the first time a unified regime applicable to all types
of enterprises in China and also provides a more robust and detailed regime for enforcement of creditors’ claims. To read
our legal update, please follow the link below to the Morrison & Foerster website.
http://www.mofo.com/news/updates/files/update02244.html
More Regulatory Hurdles for Listings of Offshore SPVs
In the August 2006 issue of the China Law Bulletin, we reported that the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises require approval by the China Securities Regulatory Commission (“CSRC”) in order for an offshore SPV that holds assets in
China to undertake a listing outside China (an “SPV Listing”). On September 21, 2006, the CSRC published a notification on
its official website with provisions setting out the legislative basis for this requirement and the conditions, procedures,
and timeline for obtaining CSRC approval of an SPV Listing. To read our legal update, please follow the link below to the
Morrison & Foerster website.
http://www.mofo.com/news/updates/files/update02249.html
Judicial Interpretation of Arbitration Law
The Supreme People’s Court of China (“SPC”), the highest judicial authority in China, has issued a comprehensive interpretation,
Interpretation of Issues Relating to the Application of the PRC Arbitration Law Fa Shi [2006] No. 7, on the application of the PRC Arbitration Law (“Interpretation No. 7”), effective September 8, 2006.
Background
In the context of a cross-border commercial transaction, China does not recognize and enforce a foreign court judgment in
China unless China and the relevant foreign jurisdiction are both parties to a bilateral or multilateral judicial treaty.
So far only a handful of countries have such treaties with China. However, China does recognize and enforce foreign arbitral
awards rendered in countries that are members of the United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (New York, 10 June 1958) (“New York Convention”). Therefore, in practice, arbitration has almost become a
default choice for dispute resolution in cross-border commercial transactions with China.
Following a style of legislation drafting that is common in China, the Arbitration Law is drafted in general terms. At the
same time, case law does not have the binding status under Chinese law that it does under common law systems. As such, a formal
interpretation such as Interpretation No. 7 is very significant.
Highlights
Interpretation No. 7 is applicable to both domestic and foreign-related arbitrations unless the specific provisions provide
otherwise. Compared with SPC’s prior interpretations concerning arbitration, Interpretation No. 7 is comprehensive in scope,
addressing many issues arising in connection with arbitration agreements, court review of arbitral awards, and enforcement
of arbitral awards, and will override prior interpretations in case of conflict. We highlight some points as follows.
- According to Interpretation No. 7, an arbitration agreement may take any written form such as electronic data including telegraph, telefax, facsimile, electronic data exchange, and email.
- When the parties to a contract generally agree to submit contractual disputes to arbitration, the matters subject to arbitration
may include all disputes concerning the execution, validity, amendment, assignment, performance, liability, interpretation,
and termination of the contract.
- Interpretation No. 7 clarifies the validity of an arbitration agreement in various situations, for example,
- If the arbitration agreement itself has a defect:
-
- PRC law generally requires the designation of an arbitration commission to administer arbitrations. Ad hoc arbitrations in
China are not recognized. Under Interpretation No. 7, if the arbitration agreement designates an inaccurate name for the arbitration
institution, the name of the institution will be ascertained from the context so that the validity of the clause is preserved.
Similarly, if the arbitration agreement provides only the arbitration rules without stipulating the institution, and the intended
institution can be ascertained from the agreed arbitration rules or the parties can reach supplemental agreement on the institution,
the clause will be upheld;
- If two or more arbitration institutions are designated, the parties may reach agreement to select one institution for arbitration.
But if the parties fail to reach agreement on the selection of the institution, the arbitration agreement will be invalid;
or
- If the arbitration provisions provide for resolution by either arbitration or the court at the choice of a party, the arbitration
clause will be valid unless the party not commencing arbitration objects promptly to the arbitration;
- When one of the parties undergoes a merger or corporate division or dies, the arbitration agreement should be binding on the
successor unless there is an agreement to the contrary that was reached when the parties concluded the arbitration agreement;
- When there are some changes to a contract, such as an assignment of the rights and obligations, the arbitration agreement
should be binding on the assignee unless the parties have agreed otherwise or the assignee has explicitly raised objections
or does not know there is such a separate arbitration agreement. If the contract did not come into effect or was repudiated,
the arbitration agreement nonetheless remains effective.
- Interpretation No. 7 provides that an arbitral award may be partially revoked if the portion in question exceeds the scope
of arbitration provided in the arbitration agreement, unless that portion is inseparable from the other matters that were
arbitrated. Therefore, an entire award cannot be set aside if only a portion of the award exceeds the scope of arbitration,
unless that portion is inseparable.
- If a party has not objected to the validity of an arbitration agreement during the arbitration, after an arbitral award is
rendered a court should not accept that party’s application to revoke the award or objection to enforcement of the award if
the party’s application or defense is based on the argument that the arbitration agreement is invalid. Furthermore, if, as
permitted under PRC law, the issue of the validity of the arbitration agreement has been submitted to an arbitration commission
for determination, a PRC court will not overturn such a determination.
- In connection with the judicial review of the validity of a foreign-related arbitration agreement, Interpretation No. 7 specifically
provides that the applicable law should be the law agreed on by the parties. However, if the parties have not agreed on the
law applicable to the arbitration agreement, the law of the place of arbitration should be applied. If there is no agreed
applicable law and no agreed place of arbitration, the law of the place of the court will be applicable. This provision makes
it clear that parties to a cross-border transaction may opt out of the application of PRC law.
Partnership Law Revised
The Standing Committee of China’s national legislature, the National People’s Congress (“NPC”), amended the Partnership Enterprise
Law (“Revised Partnership Law”) on August 27, 2006. Originally promulgated on February 23, 1997, the amended law will come
into effect on June 1, 2007.
The Revised Partnership Law introduces two new forms of partnership in addition to general partnerships: the limited partnership
(“LP”) and the special general partnership (“SGP”). It is widely anticipated that the ability to establish LPs will provide
a boost to venture capital investment into high-tech enterprises, while SGPs will promote the development of professional
service firms in China. Another notable addition is a set of bankruptcy procedures that reflect the new Bankruptcy Law.
The following is a summary of key changes from the original Partnership Law.
Limied Partnerships.The Revised Partnership Law will permit creation of LPs with two kinds of partners: general partners and limited partners.
General partners bear unlimited joint and several liability for the debts of the LP. Limited partners’ liability is limited
to the amount of their capital contributions. General partners would have managerial power, while limited partners would typically
be financial investors and would be prohibited from taking an active managerial role in the LP. The number of partners in
a limited partnership must be less than 50. The new LP form is seen as permitting greater structuring flexibility by permitting
the combination of institutions or individuals who have management experience or R&D capabilities, and those with capital.
Special General Partnerships. The Revised Partnership Law permits “professional service providers who provide clients with paid services on the basis of
professional knowledge and special skills” to organize themselves as SGPs, which are subject to distinct rules governing the
liabilities of participating partners. If one or more partners commit an intentional or grossly wrongful act that results
in liability on the part of the SGP, those partners bear unlimited joint and several liability. In connection with other types
of liability on the part of the SGP, all partners bear joint and several liability. An SGP is required to allocate a proportion
of its revenue to a risk fund and to purchase professional liability insurance. The risk fund is to be used to repay the debts
incurred by the partners during their practice.
Tax Benefits.The Revised Partnership Law exempts partnerships from corporate-level income tax. All profits and losses “pass through” and
will be attributed to the individual partners, avoiding taxation at the business entity level. This is advantageous in a variety
of business arrangements, particularly those of venture capital–backed deals. While this tax treatment is considered an important
aspect of the revised law, actual implementation will be subject to the State Administration of Taxation (“SAT”) issuing implementing
regulations.
Identity of Partners. While the original Partnership Law only permitted natural persons to be partners, the Revised Partnership Law will allow a
partner to be an individual, legal person, or other institution. A notable exception is that wholly state-funded companies,
SOEs, publicly-listed companies, institutions for public welfare, and social organizations cannot be general partners.
Foreign Participation. Foreign entities or individuals will be allowed to establish partnerships in China under the Revised Partnership Law, subject
to further regulations to be issued by the State Council.
Recent Developments
Real Estate
Since the end of August, various departments of the central government have issued new regulations governing land administration.
While these regulations address different aspects of land administration, they all serve the general objective of strengthening
government control over the real estate sector, protecting land resources, and stabilizing real estate prices.
SAFE Circular Implementing Opinion 171
On the heels of promulgation of the Opinion on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market (“Opinion 171”) (Jian Zhu Fang [2006] No. 171), the State Administration of Foreign Exchange (“SAFE”) and the Ministry of
Construction jointly issued the Circular Concerning Certain Issues Regarding Regulation of Foreign Exchange Management in the Real Estate Market (“Foreign Exchange Circular”) (Hui Fa [2006] No. 47) on September 1, 2006.
The Foreign Exchange Circular sets out specific measures guiding SAFE branches in their administration of Opinion 171 through
their role of monitoring and supervising foreign exchange transactions. The key points of the Foreign Exchange Circular include
the following:
- Foreign exchange remitted into China for the purchase of commodity premises by a foreign company’s branch or representative
office must be converted into Renminbi and directly wired to the real estate developer’s Renminbi account.
- If the purchase is not completed for any reason, foreign currency may be purchased with the Renminbi purchase funds and refunded
to the payor by outbound remittance.
- If a foreign company’s branch or representative office or a foreign individual sells commodity premises, the Renminbi sales
proceeds may be used to purchase foreign currency, which can be remitted out of China.
- Reflecting principles of Opinion 171, the Foreign Exchange Circular states that the relevant SAFE branch will not register
the foreign debt of a foreign-invested real estate enterprise (“FIREE”) or confirm settlement of foreign exchange loan proceeds
if (a) the enterprise’s registered capital has not been fully paid up, (b) it has not yet obtained a “land use certificate”
for the land, or (c) the paid-in capital of the development project is less than 35% of the total investment of the project.
- If a foreign company or individual acquires a domestic real estate enterprise or a Chinese party’s interest in an FIREE but
fails to pay the purchase price in a lump sum, the relevant SAFE branch should not process related foreign exchange registrations.
Where the documentation related to an FIREE provides for any form of fixed return for any party, likewise the relevant SAFE
branch must not process any foreign exchange registration or amendment thereof for the FIREE.
State Council Circular Strengthens Control Over Land Transactions
On August 31, 2006, the PRC State Council issued the Circular Concerning Certain Issues Regarding Strengthening Land Adjustment and Control (“State Council Circular”) (Guo Fa [2006] No. 31). This circular follows the State Council’s Decision Concerning Intensifying Reform and Strengthening Land Administration (Guo Fa [2004] No. 28). It reflects the central government’s expressed policy of protecting farmland and peasants, reforming
the land requisition approval system, strengthening regulation of land requisition and land grants by local land administrations,
controlling the use of land grant fees, and penalizing land-related violations.
The more significant provisions of the State Council Circular include:
- The State Council will no longer approve on a “batch-by-batch” basis conversion of farmland into construction land or land
requisitions. Instead, these matters will be subject to approval on an annual basis based on annual reports and applications
submitted each year by the relevant provincial government.
- The grant of a land use right for industrial purposes will be made subject to bidding, auction, or quotation procedures. The
grant price must not be lower than a publicly published standard.
- Farmland requisitions are subject to completion of all required procedures. Leasing of farmland for non-agricultural use without
completion of the necessary requisition procedures is prohibited.
The State Council Circular is a high-level legal document that states general principles relevant to land administration.
It is likely additional measures will be issued by the Ministry of Land and Resources (“MOLAR”) to clarify and implement these
principles.
MOLAR Circular on Land Administration
In May 2006, MOLAR issued the Urgent Circular on the Immediate Strengthening of Land Administration, which among other things sets out specific information that provincial governments must provide in applications for land
for construction projects that are subject to State Council approval. On September 18, 2006, MOLAR issued the Circular Concerning Work Related to Examination and Approval of Land Use for Construction Purposes Required to Be Approved
by the State Council, which provides additional detail on the scope of information to be provided. These two circulars are part of MOLAR’s effort
to better control use of farmland and other land resources as required by the State Council Circular.
Tax
New Tax Arrangement with Hong Kong
Responding to the ever increasing business flows between China and Hong Kong, as well as fulfilling a policy commitment to
maintain Hong Kong as a financial center and commercial gateway to China, on August 21, 2006, China signed a new arrangement
with Hong Kong for the avoidance of double taxation (“New HK Arrangement”), which revises and replaces its 1998 version.
Since Hong Kong is a Special Administrative Region of China with an autonomous legal and tax system, the New HK Arrangement
is the equivalent of a tax treaty between China and Hong Kong. Compared to other Chinese tax treaties, the New HK Arrangement
is particularly noteworthy in the following two respects:
Preferential Rate for Passive Income. The New HK Arrangement provides for withholding income tax (“WHT”) rates on passive income including dividends, interest,
and royalties that are among the lowest among all of China’s tax treaties.
China’s general statutory WHT rate is 20% with respect to PRC-sourced passive income, with the WHT rate having been reduced
pursuant to a State Council circular since January 1, 2000, to 10% for passive income other than dividends. Ten percent is
also the WHT rate under most China tax treaties. According to the New HK Arrangement, the WHT rate applicable to passive income
other than dividends is generally no higher than 7%. See Table A for a summary of the WHT rates.
Limited Scope of Exchange of Information. While it appears China has started pushing for inclusion of a broader exchange of information clause similar to the one adopted
in the 2005 OECD model treaty (see discussion below for the first case involving Mauritius), the New HK Arrangement contains
a narrower exchange of information clause. In addition, the protocol to the New HK Arrangement explicitly states that information
obtained through the exchange of information may not be disclosed to any other jurisdiction for any purpose without the consent
of the side originally furnishing the information.
The lower WHT rates ought to attract foreign investors to use HK as a base for investment or licensing activities into China.
At the same time, the limited scope of exchange of information provisions of the New HK Arrangement should help promote confidence
among foreign investors, lenders, and licensors concerning confidentiality.
TABLE A
|
WHT Rate
|
Dividends
|
Interest
|
Royalties
|
|
PRC Domestic Law
|
Exempt or 20%
[Exemption is applicable to dividends arising from a foreign invested enterprise (FIE), defined as an enterprise registered
in China in which foreign investors hold at least a 25% equity interest.]
|
10%
|
10%
|
|
New HK Arrangement
|
5% or 10%
[5% is applicable to dividends arising from an FIE invested by Hong Kong investors, and 10% is applicable to all other cases. The 5% New HK Arrangement rate will not exclude the applicability of the exempt treatment provided under PRC domestic law
so long as that treatment remains available.]
|
Exempt or 7%
[Exemption is applicable to interest payable to governments or certain institutions recognized by the competent authorities.]
|
7%
|
China-Mauritius Tax Treaty Amended
On September 5, 2006, China entered into a protocol amending its 1994 tax treaty with Mauritius. The protocol adopted two
key amendments:
- A new paragraph has been added to the capital gains clause so that a country may tax capital gains arising from a transfer
of 25% or more of the shares of a company residing in the country. Accordingly, China will have the authority to tax a Mauritius
company that holds a 25% or greater interest in a Chinese company upon its sale of those shares. The capital gains exemption
available under the Mauritius-China treaty was one of the attractions for foreign companies to use a Mauritius holding company
for investment into China. This narrowing of the exemption will reduce the attraction of Mauritius for some foreign companies.
- A full version of the exchange of information clause under the latest 2005 OECD model treaty has been adopted. According to
the OECD commentary to the 2005 version of the OECD model treaty, information may be exchanged to the widest possible extent
under the model treaty. The information may include particulars about non-residents and may relate to the administration or
enforcement of taxes other than income tax as covered in the treaty. A treaty partner has the obligation to obtain the requested information even though the requesting treaty partner may not
need such information for its own tax purposes. Such widened access to information will enhance China’s ability to attack
tax avoidance.
An article by Peng Tao of our Beijing office on these two developments appeared in the September 25, 2006 issue of Tax Notes
International. To read the full text of that article, please follow the link below to the Morrison & Foerster website.
http://www.mofo.com/docs/PDF/TaxNotesInternational.pdf
Export VAT Refund and Processing Trade Policy Adjusted
On September 14, 2006, the Ministry of Finance (“MOF”), joining with the National Development and Reform Commission (“NDRC”),
the Ministry of Commerce (“MOFCOM”), the General Administration of Customs (“GAC”), and the SAT, issued circular Cai Shui
[2006] No. 139 to adjust policies in regard to export value-added tax (“VAT”) refunds and processing trade. This circular
took effect on September 15, 2006.
The circular has abolished export VAT refunds in respect of certain mineral products, coal, and natural gas. The export VAT
refund rates for some other products such as steel, cement, and textiles have been further reduced to between 5% and 13%,
depending on the particular products. However, some other products such as major technical equipment, IT products, bio-medical
products, and encouraged hi-tech products will be eligible for an increased, full export VAT refund rate of 17%.
In addition, all the products in relation to which the export VAT refund has been abolished will be classified as products
prohibited for processing trade. The importation of those prohibited products will be subject to import duty and import-stage
VAT.
Though China has adjusted export VAT refund rates for different products from time to time, the adjustments made under this
most recent circular are significant because of the broad scope of products involved. The goal of the adjustments is believed
to be to discourage the export of certain resource products and products the manufacture of which consumes significant energy,
as well as to decrease the current record high trade surplus.
China Clarifies Constructive Dividend Treatment for Transfer Pricing Adjustments
On September 28, 2006, the SAT issued notice Guo Shui Han [2006] No. 901, confirming that the PRC tax authority may still
apply the constructive dividend treatment concerning a taxpayer’s taxable income adjusted in a transfer pricing audit. An
article by Peng Tao of our Beijing office on this issue appeared in the October 30, 2006 issue of Tax Notes International.
To read the full text of that article, please follow the link below to the Morrison & Foerster website.
http://www.mofo.com/docs/pdf/0610TaxNotesChinaClarifies.pdf
Notice Clarifies Tax Treatment of Stock Options
The SAT issued notice Guo Shui Han [2006] No. 902 clarifying some technical points regarding the tax treatment of stock options,
as provided under tax circular Cai Shui [2005] No. 35. Notice 902 confirms that Cai Shui [2005] No. 35 governs the tax treatment
of an employee who receives stock options from an employer (whether a listed or nonlisted company) as long as the stock corresponding
to the stock options is stock of a company listed in China or overseas. An article by Peng Tao of our Beijing office on this
issue appeared in the October 30, 2006 issue of Tax Notes International. To read the full text of that article, please follow
the link below to the Morrison & Foerster website.
http://www.mofo.com/docs/pdf/0610TaxNotesStockOptions.pdf
Direct Sales
Measures on Administration of Direct Sales Service Networks Issued
On September 20, 2006, MOFCOM promulgated the Measures on the Administration of the Establishment of Direct Sales Service Networks (the “Measures”), which increase the administrative burden on direct sales enterprises and lengthen the time enterprises
have to wait before they may start direct sales activities. The Measures regulate establishment of direct sales enterprise
service networks, elaborating on requirements stipulated in the Management Regulations on Direct Sales and those promulgated in the Notice on Questions Related to Strengthening Administration of Direct Sales Activities by Direct Sales Enterprises issued by MOFCOM on August 8, 2006.
The Measures provide that enterprises applying for a direct sales license must submit a service network plan to the approval
authorities as part of their application package. Under the Measures, a service network must meet the following requirements:
Purpose and Function: A service network and service points should be able to easily satisfy customers’ and direct sellers’ need for understanding
product functions, prices, and procedures for returning or exchanging goods.
Location: An enterprise must establish a service point in each and every district of a city where it is licensed to conduct direct
sales activities. Service points may not be located in residential homes, schools, hospitals, or government offices.
Timing: Direct sales enterprises must set up their service networks within six months of issuance of their direct sales licenses.
However, an enterprise would not be permitted to commence direct sales activities until MOFCOM publishes on its Direct Sales
Industrial Management website the geographic areas where the enterprise is licensed to conduct direct sales activities and
its service points, which information would be based on reports of the provincial and county or district level commerce authorities
after their verification of the established service network and service points.
Other Requirements: A service network must conform to relevant requirements of county and higher levels of government on direct sales service
networks. Any alteration to a direct sales enterprise’s service network plan or reduction of service points must be approved
by its original approving authority. Local commerce authorities can request a direct sales enterprise to establish additional
service points to satisfy demands of consumers or direct sellers.
Clarification Published on Administration of Direct Sales Enterprises’ Activities
MOFCOM issued the Notice on Questions Related to Strengthening Administration of Direct Sales Activities by Direct Sales Enterprises (the “Notice”) on August 8, 2006, effective from the same date. The Notice provides requirements for service networks which
are further elaborated in the draft Measures on the Administration of the Establishment of Direct Sales Service Networks. The Notice also imposes new requirements for enterprises that seek to engage in direct sales in China. Any violation of
these requirements by a direct sales enterprise would lead to suspension or revocation of its direct sales license.
Significant provisions in the Notice include:
- Direct sales enterprises must file the names of their direct sales trainers with MOFCOM.
- Enterprises cannot recruit or train direct sellers before MOFCOM publishes the trainers’ names on its direct sales industrial
management information system.
- Direct sales trainers must conduct direct sales training activities strictly in accordance with the Management Regulations
on Direct Sales and other relevant rules.
- Direct sales enterprises may not use their deposits without approval and must adjust the amount of their deposits in accordance
with relevant rules.
- Direct sales enterprises must comply with the Regulations on the Administration of Direct Sales and other relevant rules to
truthfully, accurately and completely disclose relevant information to the general public and file such information with MOFCOM
and the State of Administration for Industry and Commerce.
- The investors, registered capital and compensation policies of direct sellers and marketing planning reports of a direct sales
enterprise must conform with the Regulations on the Administration of Direct Sales and any change in connection with such
information must be approved by MOFCOM.
Other
China Imposes Greater Restrictions on Foreign News Agencies
China’s Xinhua News Agency (“Xinhua”) issued new regulations imposing restrictions on foreign news agencies operating in China.
The Measures for the Administration of Release of News and Information in China by Foreign News Agencies (the “Measures”), promulgated on September 10, 2006, significantly change the operating environment for all foreign news
agencies in China.
Although the censorship restrictions remain the same, foreign news agencies are now prohibited from directly distributing
any information in China; rather, they are required to use a Xinhua designated agent. This is seen as directly affecting foreign
financial news providers, which had previously been permitted to distribute financial products directly to customers in China.
Many view the Measures as distorting the market since Xinhua is both the regulator for this industry and a market player with
competing financial news products.
Key provisions in the Measures include:
- A requirement that foreign news agencies use a Xinhua-designated agent for all business activities in China, and a prohibition
on directly soliciting subscriptions for their news and information services;
- New qualification requirements for foreign news agencies;
- Qualification requirements for agents, requiring them to be separately registered with Xinhua;
- The requirement that all users enter into written contracts with the Xinhua-designated agents; and
- The requirement that foreign news agencies submit annual reports to Xinhua regarding their business, and the provision that
Xinhua has examination and inspection rights over foreign news agencies and the designated agents.
Ear to the Ground
RoHS Standards to Be Issued
The Ministry of Information Industry (“MII”) will issue three compulsory national standards this month to facilitate the enforcement
of China RoHS, which will come into force on March 1, 2007.
The three compulsory national standards will be:
- Requirements for Concentration Limits of Toxic/Hazardous Substances in Electronic Information Products (“EIPs”)
- Examination Measures for Toxic/Hazardous Substances in EIPs
- Marking for the Control of Pollution Caused by EIPs
The MII has also scheduled a full-day seminar on November 8, 2006, at which China RoHS experts will clarify key issues of
the compulsory standards.
Amendments to Draft Property Law Proposed
Over the last few years, the NPC has taken a number of steps towards enacting the country’s first law governing property rights.
To date, a proposed Property Law has gone through five rounds of drafting and revisions. The latest draft (“Fifth Draft”)
was submitted to the 23rd conference of the NPC’s Standing Committee (“NPCSC”) in August 2006.
History and Scope. Starting in the late 1990s, the Chinese government commenced drafting of a new law to protect private property. The first
draft of the Property Law was submitted to the NPCSC for review in December 2002. After the Chinese Constitution was amended
in March 2004, partly legalizing private property ownership for the first time in China, the proposed Property Law was revised
accordingly, and the second draft was submitted to the NPCSC in October 2004. The third and fourth drafts were reviewed by
the NPCSC in June and December 2005, respectively.
The proposed Property Law covers a wide range of subject matters in relation to property rights, including state-owned property,
collectively-owned property, private property, real property, personal property, easement rights, and mortgage rights.
Implications. The Fifth Draft puts state-owned property, collectively-owned property, and private property on an equal footing and affords
the same level of protection. If enacted, the Property Law will likely have a significant impact on a number of areas, including:
- Protection of Private Property. The provisions on private property include protection for private homes, income, savings, and investments.
- Protection of State Property. The law would codify existing rules on the protection of state-owned assets by stipulating that anyone causing loss to state-owned
assets due to unlawful activities would bear legal responsibility.
- Land Use Right. The term of land rights for residential use could be automatically extended after the initial term of 70 years has elapsed,
upon payment of additional land grant fees. The method for calculating the additional land grant fees would be formulated
by implementing rules.
- Easement Rights. The proposed law would create a formal structure for handling easement rights, for the first time.
Upon promulgation, the Property Law would be one of the fundamental laws in the Chinese legal system, and it would have a
far-reaching impact on China’s legal and economic development. Compared with the previous drafts, the Fifth Draft appears
to be more balanced between state interests and private property protection. It is widely believed that the Fifth Draft is
ready to be voted on by the NPCSC, and many observers expect the NPC to enact the law during its full session in early 2007.
