WHY USE HONG KONG AS A LICENSING AND IP RIGHTS … Issue No. 3.pdf · • Hong Kong SPV licenses IP rights to licensees and receives royalties ... foreign judgments in Hong Kong by

China NewsletterApril 2011Intellectual Property

WHY USE HONG KONG AS A LICENSINGAND IP RIGHTS TRANSFER JURISDICTION?

TAXLow tax rates

• Profits tax rate 16.5%

• No capital gains tax

• No tax on dividend and other unearned income

• Profits tax chargeable only when the profits arise in or are derived from Hong Kong

• Royalty income subject to profits tax when: IP rights are used in Hong Kong or the manufacturing or sale of goods in relation to the IP rights takes place in Hong Kong, or when the payer of the royalty can claim tax deductions (Section 15(1)(ba) Inland Revenue Ordinance)

• Royalty income not subject to profits tax (unless the payer of the royalty can claim tax deductions) when:

IP rights used outside Hong Kong and the manufacturing and sale of goods in relation to the IP rights takes place outside Hong Kong

USE OF SPV• Parent company transfer all IP rights to Hong Kong SPV subsidiary

• Hong Kong SPV licenses IP rights to licensees and receives royalties

• Benefits of using Hong Kong SPV

• Payment of dividends to parent company is tax free under the current tax system

• Easy to set up SPV and bank accounts

• Low maintenance costs of SPV (filing annual return and tax return, preparing audited accounts for tax return filing)

• Hong Kong does not practise foreign currency control

• The CEPA arrangement between Hong Kong and PRC allows for possible benefits in entry into the PRC market

G R E A T E R C H I N A L A W Y E R S

ENFORCEMENT

Certainty of legal system

• Rule of law

• Clean government

Enforcement of foreign judgments

• Established common law rules to recognise and enforce foreign judgments

• Foreign Judgments (Reciprocal Enforcement) Ordinance and other arrangements for

reciprocal enforcement of judgments with some countries provide a mechanism for enforcing

foreign judgments in Hong Kong by means of a registration procedure

SPV STRUCTURE

Note: There may be transfer pricing issues when transferring the IP rights to SPV. For instance,

if PRC IP rights are transferred from a China entity to SPV.

- Article 41 Enterprise Income Tax Law of the PRC (EIT)

- If the transaction between the parent company and the SPV does not comply with the arm's

length principle, thus reducing the taxable income or revenue of the enterprise or the

associated party, the tax authorities shall be empowered to make adjustments reasonable

methods.

Dividends (no tax)

Royalty

Transfer IP rights

(Transfer pricing issue

(PRC only))

Parent company(non-Hong Kong

company)

Hong Kong SPV subsidiary

Licensee Licensee

ENFORCEMENT

Certainty of legal system• Rule of law

• Clean government

Enforcement of foreign judgments• Established common law rules to recognise and enforce foreign judgments

• Foreign Judgments (Reciprocal Enforcement) Ordinance and other arrangements for reciprocal enforcement of judgments with some countries provide a mechanism for enforcing foreign judgments in Hong Kong by means of a registration procedure


WHY USE HONG KONG AS A LICENSINGAND IP RIGHTS TRANSFER JURISDICTION?

TAXLow tax rates

• Profits tax rate 16.5%

• No capital gains tax

• No tax on dividend and other unearned income

• Profits tax chargeable only when the profits arise in or are derived from Hong Kong

• Royalty income subject to profits tax when: IP rights are used in Hong Kong or the manufacturing or sale of goods in relation to the IP rights takes place in Hong Kong, or when the payer of the royalty can claim tax deductions (Section 15(1)(ba) Inland Revenue Ordinance)

• Royalty income not subject to profits tax (unless the payer of the royalty can claim tax deductions) when:

IP rights used outside Hong Kong and the manufacturing and sale of goods in relation to the IP rights takes place outside Hong Kong

USE OF SPV• Parent company transfer all IP rights to Hong Kong SPV subsidiary

• Hong Kong SPV licenses IP rights to licensees and receives royalties

• Benefits of using Hong Kong SPV

• Payment of dividends to parent company is tax free under the current tax system

• Easy to set up SPV and bank accounts

• Low maintenance costs of SPV (filing annual return and tax return, preparing audited accounts for tax return filing)

• Hong Kong does not practise foreign currency control

• The CEPA arrangement between Hong Kong and PRC allows for possible benefits in entry into the PRC market

Beijing Office

Suite 508,

Changan Tower,

10 East Changan Street,

Beijing 100006, China

T : (8610) 6522 7069, 6522 7072

F : (8610) 6522 6967

E : [email protected]

Hong Kong Office

38/F, Cosco Tower,

183 Queen’s Road Central,

Hong Kong

T : (852) 2522 9183

F : (852) 2845 9205


Shanghai Office

Suite 1002, 10/F,

The Headquarters Building,

168 Central Tibet Road,

Shanghai 200001, China

T : (8621) 6387 9222

F : (8621) 6387 9111


Hong Kong as a Trojan horse• Many Chinese companies choose Hong Kong as trading hub due to lower tax rates and relative ease with foreign exchange controls

• Such trading companies are sometimes used as a vehicle for infringement

• When infringement actions happen in Hong Kong, legal actions can be brought against infringers.

Effective and efficient customs protection of IP rights• There is the Intelligence and Investigation Branch for IP Protection in the Hong Kong Customs

• Cases can be reported by 24-hour hotline, fax or mail

• Customs and Excise Service Ordinance

• Broad powers of search and seizure

• May search without warrant any ship, aircraft, train or vehicle (other than ships of war and military aircrafts)

• Anywhere in Hong Kong, not just harbour or borders

Protection of unregistered rights• Unregistered trademark protected by common law passing off

• Copyrights protected through international treaties like the Berne Convention

Please note that the information and opinions contained in this memo are intended to provide a general overview only, and should not be treated as a substitute for proper legal advice concerning an individual situation. We disclaim all l iability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the contents of this newsletter. Readers should make their own enquiries and seek appropriate legal advice on the particular facts and circumstances at issue.

Should you have other enquiries, please feel free to contact us.

© Vivien Chan & Co., April 2011

www.vcclawservices.com

SPV STRUCTURE

Note: There may be transfer pricing issues when transferring the IP rights to SPV. For instance, if PRC IP rights are transferred from a China entity to SPV.

- Article 41 Enterprise Income Tax Law of the PRC (EIT)

- If the transaction between the parent company and the SPV does not comply with the arm's length principle, thus reducing the taxable income or revenue of the enterprise or the associated party, the tax authorities shall be empowered to make adjustments reasonable methods.

Dividends (no tax)

Royalty

Transfer IP rights

(Transfer pricing issue (PRC only))

Parent company(non-Hong Kong

company)

Hong Kong SPV subsidiary

Licensee Licensee

China NewsletterApril 2011

NEW NATIONAL SECURITY REVIEW REGIME FOR FOREIGN M&A IN CHINA; WHAT DOES IT MEAN FOR YOUR NEXT M&A DEAL?

New national security review provisions (i.e. the

“Notice”) were introduced by the Chinese

government for foreign acquisition of domestic

enterprises of specific industries. The Notice and

its interim Measures (“Measures”) took effect on 5

March 2011.

Foreign investors will have to evaluate carefully if

a proposed acquisition will be caught under the

Notice. However, at this stage, the scope of a

number of the provisions under the Notice is still

unclear. For example, it is not clear as to the types

of products that are considered to be “key”

products under the Notice. There is also a lack of

inter-relationship with other elements of China’s

foreign investment regime and the anti-trust

approval process. The introduction of a third

party’s initiation of the review procedure without

any definite time constraint also creates a concern

of a completed deal being unwound. It is expected

that the final implementation rules to be issued will

address such uncertainties.

SCOPE OF THE NATIONAL SECURITY REVIEW

National security review covers those industries

specified under the Notice, being

(i) the military sector and those relating to

national defence security; and

(ii) key agricultural, energy, infrastructure,

transport, technology and equipment sectors.

The Notice does not apply to acquisition of

financial institutions and separate rules for

security review will be promulgated.

Acquisition of domestic enterprises under the

Notice covers both equity and asset acquisition.

For the non-military sectors under (ii) above,

foreign investors have to obtain “actual control”

over the domestic enterprise, e.g. the foreign

investor becomes the controlling shareholder or

has obtained de facto control in terms of voting

rights.

1.Notice of the General Office of the State Council on the Establishment of a Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors 2. Interim Measures on Implementation of the National Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Measures”). The Measures took effect simultaneously with the Notice on 5 March 2011 but will expire on 31 August 2011, with an initial public consultation period till 10 April 2011.

REVIEW AUTHORITY

A Joint Committee (“Committee”), led by National

Development and Reform Commission and the

Ministry of Commerce (“MOC”) will be responsible

for carrying out the national security review.

REVIEW PROCESS AND TIMING

A foreign investor acquiring a domestic enterprise

within the meaning and scope of the Notice shall

file an application with the MOC. The MOC will

submit the application to the Committee within 5

working days if it determines that the proposed

acquisition is subject to security review.

The Measures provide that the local MOC is to

conduct a preliminary assessment to ascertain if

national security review under the Notice is

applicable, in relation to its routine review of

foreign direct investment (“FDI”) applications. If it

takes the view that the foreign acquisition is

subject to national security review, it will notify the

applicant to make the relevant application under

the Notice and will not commence the FDI review

until the national security review clearance is

obtained.

A brief summary of the procedures and timing is

provided as follows:-

(1) Voluntary filing of application by foreign

investor to MOC, or initiations by third parties to

MOC for review, e.g. relevant departments of the

State Council, national trade associations,

companies in the same industry or upstream or

downstream companies of the target company;

(2) MOC to submit application to the Committee

within 5 working days;

(3) General review by the Committee (consultation

of relevant authorities) – takes up to 30

working days;

(4) Special review by the Committee where

national security concern is triggered – takes up to

60 working days;

(5) Final decision by State Council if matter

cannot be resolved during special review – no

time limit.


THE FIRST PRC DECISION ON 3-DIMENSIONAL MARKNESTLE’S INFRINGEMENT LAWSUIT ENFORCING ITS MAGGI 3-DIMENSIONAL MARK FAILED

THE BATTLE BETWEEN MAGGI AND MASTERThe Supreme People’s Court of Guangdong Province recently ruled against Nestle in its trademark infringement case involving a 3 dimensional trademark, which was launched against Master Seasoning (“Master”) a joint venture between a Chinese and a Singapore corporation based in Guangdong, China that has been manufacturing MSG and seasonings for decades. It is a battle between Nestle, the registered trademark owner of the 3-dimensional packaging of its Maggi soya sauce (through an International Registration designating China), that is, the famous cubical dark brown glass bottle with a tiny tip-shape yellow lid (“the Maggi bottle”) in respect of the goods of food seasoning in Class 30 in the PRC, against Master, who has been using a similar cubical dark brown glass bottle but with a white flat-shape lid (“the Master bottle”) as the container of its own soya sauce.

THE PROCEEDINGSNestle claimed that by reason of the similarities between the Maggi bottle and the Master bottle,the use of Master bottle in respect of soya sauce by Master has caused confusion on the eyes of the relevant public and hence infringed upon Nestle’s

trademarks right over the Maggi bottle. After failure to demand Master cease using the Master bottle, Nestle launched a lawsuit against Master before the Intermediate People’s Court of Jiangmen City, Guangdong Province without avail. Unconvinced by the judgment, Nestle thereby appealed to the Supreme People’s Court of Guangdong Province.

THE DECISIONA VICTORY FOR MASTER The final decision of the Supreme People’s Court of Guangdong Province was a blow to Nestle. In gist, the decision was boiled down to 2 issues. First, whether the Maggi bottle as a registered trademark is distinctive in respect of the applied-for goods and second, whether the use of the Master bottle alongside with the Maggi bottle in respect of food seasonings would deceive or cause confusion on the part of the public as to the source and undertaking selling the goods concerned.

(i) Maggi bottle with weak distinctiveness

Handing down the decision in 17 November 2010,

the Supreme People’s Court of Guangdong

Province ruled that the Maggi bottle was distinctive

in respect of food seasonings by reason of Nestle’s

use of the mark on its soya sauce as the packaging

thereof in the PRC for years. However, as many

Chinese companies have been using similar

packaging in their soya sauce in the PRC before

Nestle successfully registered the Maggi bottle as

a trademark with the Chinese Trade Mark Office

(“CTMO”), the distinctiveness of the Maggi bottle

on its own was weak.

(ii) Maggi bottle has been used as the packaging but not as trademark

The Supreme People’s Court also considered that

Master had not used the Master bottle as a

trademark, and skilfully ruled that Master used the

bottle as the packaging of its soya sauce, and

concluded that there were other trade mark

features being used on the Master bottle.

Therefore, the relevant public would remember the

combined effect of the Master bottle together with

the word mark “Master” and other details of the

packaging label when recalling Master’s goods. As

a result, when comparing the similarity of the mark

for the purpose of infringement, the court should

compare the registered mark against the

impression of the infringing mark left on the mind

of the relevant public. It should be noted that the

test of trademark infringement lies at confusion on

the part of public but not mere similarities between

the marks concerned.

REGISTRABILITY OF 3-DIMENSIONAL MARKSince the amendment to the Trademark Laws in

2001, China started to allow the registration of

3-dimensional marks. There are 3 kinds of 3-dimensional marks including (1) a 3-dimensional 3mark irrelevant to or unconnected with the applied-for goods or services, (2) the -dimensional packaging of the applied-for goods or services, and (3) the 3-dimensional shape of the applied-for goods itself. There are only a limited number of 3-dimensional registered marks with the CTMO. Examples include the glass bottle of Coca-Cola, the triangular chocolate owned by Kraft Food Inc. and the packaging of a single piece of Ferrero Rocher Chocolate.

TRADEMARK VS DESIGN PATENTThe protection conferred by a registration of

3-dimensional marks and that conferred by a registered design patent sometimes overlap with each other. A registered design patent protects the owner’s exclusive right to use the design patent for a limited period, say for 10 years. On the other hand, by continuously renewing a trademark registration, the exclusive right to use conferred by the registration of a 3-dimensional mark is in fact perpetual. To some, this would result in monopolization of the designs and ideas for packaging and the resources for product designs, which is not conducive to the public interest of protecting freedom to ideas and enhancing creativity. And perhaps it is the policy reason behind the decision to this dispute.

CONCLUSION SCOPE OF PROTECTION CONFERRED UNDER 3-DIMENSIONAL MARKS REMAINS UNCLEARThis is the first infringement case regarding

3-dimensional mark in the PRC. Although a 3-dimensional mark is registrable in China, the extent of protection of a registered

3-dimensional mark for the purpose of trademark infringement is far from clear and more controversies are expected to arise in the future.

COMBATING INFRINGEMENT ONLINE? POSSIBLE?In this era of internet and information technology, online shopping and e-commerce are increasingly popular in Hong Kong and China. While the convenience brought by online shopping and e-commerce benefits most people, the massive trademark and copyright infringements accompanied therewith also bring headache to IP rights owners. It is not rare to locate handful of links on the online shopping or auction websites selling suspected forged products and counterfeits or claiming to be the authorized seller or distributor of well-known luxurious brands.

While the user names or address can be fake, and the internet users are usually disguised by his IP address, it may not be easy to locate him against whom a legal action can be commenced. In that case, is the online shopping or auction site operator liable for the infringements?

LOCAL PEOPLES’ COURT OF HAIDIAN DISTRICT, THE PRC SAID POSSIBLE! In a recent PRC decision, the local peoples’ court of Haidian district, Beijing held that Taobao, a famous online auction site in the PRC, was liable for copyright infringement committed by the online seller. But this case is undergoing to appeal to the First Intermediate People's Court.

POTENTIAL LIABILITY OF ONLINE SHOPPING OR AUCTION SITE OPERATOR

THE FACTS OF THE DISPUTE The Plaintiff is the producer and the copyright owner of a video training series called Zhiqiang

Club’s Stock Training Course, who has registered its copyright over the training course with the Copyright Protection Center of China. After conducting investigation on Taobao web, the Plaintiff discovered that hundreds of unauthorized sellers or distributors have been selling pirate copies of the videos of its training course. While the genuine copies are sold at above RMB10,000, some of the pirate copies are sold at RMB5 via Taobao, causing substantial loss to the Plaintiff.

One owner Wong of an online shop called “channa” even claimed that he has been sourcing the pirate copies from another online store of Taobao. For the purpose of enforcing its copyright, the Plaintiff instituted lawsuit against both Wong and Taobao for copyright infringement claiming for an injunction restraining Wong from selling pirate copies of the training course, an order demanding Taobao to remove all the links offering the infringing videos, and damages of RMB120,000 which Wong and Taobao are jointly and severally liable.

THE DECISIONINFRINGER AND TAOBAO ARE BOTH LIABLE The Court held that Wong had undoubtedly infringed the copyright of the Plaintiff as Wong personally knew that the videos he sold was pirate copies and he sold those pirate copies for the reason of gaining illegal commercial profits. As to the liability of Taobao, the Court held that there was evidence showing that Taobao had not removed the infringing links immediately upon receipt of the complaints from the Plaintiff or to verify the alleged infringement. As such, Taobao should also be liable for the damages enlarged and suffered by the Plaintiff. Wong was ordered to pay damages of RMB20,000, and Taobao was held jointly and severally liable for RMB10,000 of such damages.

Beijing Office

Suite 508,

Changan Tower,



T : (8610) 6522 7069, 6522 7072

F : (8610) 6522 6967


Hong Kong Office

38/F, Cosco Tower,


Hong Kong

T : (852) 2522 9183

F : (852) 2845 9205


Shanghai Office

Suite 1002, 10/F,




T : (8621) 6387 9222

F : (8621) 6387 9111


Please note that the information and opinions contained in this memo are intended to provide a general overview only, and should not be treated as a substituted for proper legal advice concerning an individual situation. We disclaim all l iability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the contents of this newsletter. Readers should make their own enquiries and seek appropriate legal advice on the particular facts and circumstances at issue.




UNCONVINCED TAOBAO Taobao defended that as an internet webmaster and service provider, it has no prior and/or actual knowledge as to whether infringement has happened and it is also practically impossible for it to have such actual knowledge of the occurrence of IP infringement. Unconvinced by the judgment, Taobao has lodged an appeal to the First Intermediate People's Court.

THE DIFFICULTY OF COMBATING ONLINE IP INFRINGEMENT(a) Indentifying the infringerCombating IP infringements occurred via the Internet is not easy. The first hurdle is the identification of the infringer. A user name appeared on the websites is only the virtual identity of one person, which does not provide any clue to the actual name of the infringer at all, and not to mention his whereabouts. Without any discovery and assistance from the webmaster and internet service providers, it is very difficult to launch civil proceedings against the infringers.

(b) Going to internet service providers?As to the possible legal actions against internet service providers, the internet service providers of

some online shopping or auction site operators are domiciled outside China. In these cases, the IP infringement occasioned via the overseas internet service providers may involve complex legal issues such as applicable laws and appropriate forum of litigation. Even if the merits of the infringement claim is strong and the IP rights owners succeed in the trial, further legal costs have to be incurred for the purpose of enforcing a judgment overseas.

CONCLUSIONONLINE AUCTION SITE AS THE GATEKEEPERIn China, lodging complaints with webmaster of the online auction sites requesting removal of links displaying suspected infringing product is a plausible and practical solution to internet IP infringement. Usually, online auction sites have complaint mechanisms in place for consumers and IP rights owners for reporting suspected IP infringements. In light of the recent court decision against Taobao, it is expected that online auction sites will be more responsive and reactive to the infringement complaints lodged by IP rights owners or their legal counsels.

Beijing Office

Suite 508,

Changan Tower,



T : (8610) 6522 7069, 6522 7072

F : (8610) 6522 6967


Hong Kong Office

38/F, Cosco Tower,


Hong Kong

T : (852) 2522 9183

F : (852) 2845 9205


Shanghai Office

Suite 1002, 10/F,




T : (8621) 6387 9222

F : (8621) 6387 9111


Please note that the information and opinions contained in this memo are intended to provide a general overview only, and should not be treated as a substituted for proper legal advice concerning an individual situation. We disclaim all l iability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the contents of this newsletter. Readers should make their own enquiries and seek appropriate legal advice on the particular facts and circumstances at issue.




REVIEW DECISION

In case of a determination or likelihood of a

material impact on national security, the

Committee may direct MOC to terminate the

subject transaction or to impose measures to

mitigate such impact, e.g. order transfer of the

relevant equity interest or assets.

WHAT DOES IT MEAN FOR YOUR NEXT M&A DEAL?

Although the Notice is a step forward in China to

formalize the procedures for carrying out a

national security review, due to a number of

uncertainties, one has to wait for further

clarifications from the final implementation rules

to be issued. In case a potential acquisition is

likely to be covered under the Notice, investors

are advised to seek legal advice and to submit the

application for national security review as early as

possible.

ONLINE TRADING AND IP RIGHTS ENFORCEMENT AGAINST THE WEBMASTER IN CHINA

the Maggi bottle the Master bottle




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WHY USE HONG KONG AS A LICENSING AND IP RIGHTS … Issue No. 3.pdf · • Hong Kong SPV licenses IP rights to licensees and receives royalties ... foreign judgments in Hong Kong by