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Republic of China
Treaties. The present legal position of American commercial interests in China stems out of the treaty between the United States and China for the relinquishment of extraterritorial rights in China and the regulation of related matters, which treaty was signed on January 11, 1943, and became effective on May 20, 1943. By the provisions of this treaty, the jurisdiction of the United States over its own nationals in China is disavowed, and such nationals made subject to the jurisdiction of the Chinese Government in accordance with the principles of international law and practice. The treaty further provides for the indefeasibility of existing rights or titles of Americans to real property in China, for the rights of American citizens to travel, reside, and carry on trade throughout China, and for national treatment by both countries with respect to all legal proceedings, matters relating to the administration of justice, and taxation.
It is, moreover, provided in the above treaty that the two nations will enter negotiations for the conclusion of a comprehensive modern treaty of friendship, commerce, navigation, and consular rights. Finally, it is stipulated that pending the conclusion of said comprehensive treaty, if any questions affecting the rights in China of nationals (including corporations or associations) or of the Government of the United States should arise in the future and are not covered by the treaty of relinquishment or by provisions of existing treaties, conventions, or agreements between the two nations, and are not abrogated by or inconsistent with this treaty, such questions shall be discussed by representatives of the two governments and decided in accordance with generally accepted principles of international law and with modern international practice.
Upon this background, and after negotiations lasting many months, there was signed on November 4, 1946, a treaty of friendship, commerce, and navigation.
Although not yet ratified by the Senate, this treaty, representing the results of discussions of representatives of both nations, may conceivably be considered binding pro tempore within the meaning of the treaty of relinquishment, and in fact has been used as a framework of reference for representations regarding alleged discriminations against Americans. Although technically still operative in part, the treaty as to commercial relations of October 8, 1903, which was the last previous treaty on this subject between the nations, is in practice obsolete.
The unratified 1946 treaty deals with a large number of subjects: The right to travel; reside; carry on trade; acquire, hold, and dispose of real and personal property; matters of taxation; customs; import, export, and trade regulations; monopolistic practices; remittances of funds and foreign exchange; navigation rights; arbitration; and protection of industrial and intellectual property. Most-favored nation, national treatment, and reciprocal treatment are variously applied.
Chinese Government policy.-The Chinese Government's industrial and financial policies with respect to foreign investments in China were most recently stated on August 13, 1947, in a press release of the Government Information Office, and can be summed up as follows: With the exception of arsenals, mints, main railway lines, and large
scale hydroelectric power plants, which are to be State-operated, and other industries which, according to the provisions of Chinese laws (discussed specifically below), are specifically reserved for Chinese nationals or corporations, the remaining industries are open to direct investment of foreign capital. The investment of such capital is particularly invited in the manufacture of motive-power machinery, tool-making machines, automobiles, locomotives, aircraft, and large steamships.
The mining of iron, petroleum, copper, and high-quality coal suitable for metallurgical or refining purposes is reserved for the Government, but may be leased by the Government to others to be prospected and exploited, provided the lessees are citizens of the Republic of China. In addition, it is provided in the mining enterprise statute that special lots of other minerals may be determined by the Ministry of Economic Affairs to require conservation and set aside as Government-reserved lots where no prospecting or exploitation shall be allowed. Both domestic and foreign capital may be invited to participate in Government-operated mines under a corporate organization, the Government to take part in the business and personnel management of such companies in the role of stockholder, while at the same time exercising such administrative supervision as is prescribed by law.
Registration and authorized scope of commercial activity. The Chinese company law of 1946 provides for the admission of foreign companies to do business where reciprocal rights are extended to Chinese companies. Such foreign companies must secure authorization to do business in China, based on the submission of various documents including copies of articles of incorporation, statements as to capitalization, officers, directorate, and anticipated scope of business in China.
If a foreign company desires to engage in those types of business which require the special permission of the Chinese Governmentsuch as, for example, banking and insurance-such business can be undertaken only after the special permission has been received. In the case of foreign banks a license to engage in the banking business must first be secured from the Ministry of Finance, and then, additionally, the foreign banking company must register under the provisions of the revised company law.
A foreign company is not entitled to a certificate of authority to do business in China if the purpose or business is repugnant to the law, to public order, or the "decent customs" of the Republic of China; if "the place of the branch office" is not open to residence by aliens or its business "is not open to aliens"; if it misrepresents any particular in its application for admission; or "if its purpose is to escape the law of the country it belongs in, or to make use of the laws of a third country in order to obtain juristic personality and admission into China with the view of enjoying the rights and privileges of a citizen of a third country."
A foreign company may purchase and hold such land as is necessary for the transaction of its business if it has secured the prior approval of the central competent authority, and if "its own country" grants the same rights and privileges to Chinese companies. It would appear in the case of the United States that the expression "its own country" means the laws of the particular State under which the company is incorporated.
A foreign company is not allowed to be a shareholder of unlimited liability in another company, nor a partner in a partnership business. It may become a shareholder of limited liability in other companies, but in such cases the total amount of such investments cannot exceed one-half the amount of its own paid-in capital. But it is not so limited if its "exclusive" business is to invest in other companies, nor does the limitation apply to investments in "productive" enterprises.
The degree of participation allowed foreign investors in Chinese companies created under the company law varies according to the type of company created. Thus noncorporate foreign investors may participate in Chinese unlimited companies, which consist of two or more members of unlimited liability. They may also participate in unlimited companies with limited-liability shareholders. In both the above cases half the total number of shareholders must be domiciled in China.
Chinese limited companies consist of 2 to 10 shareholders, half of whom must be domiciled in China, and whose liability is limited to the amount of subscription. However, the chairman of the board of directors must be a Chinese citizen and resident, while the remaining managing directors must be residents.
In a company limited by shares, which consists of five or more shareholders, whose liability is limited to the amount of subscription (somewhat simliar to an American corporation), more than half the stockholders, half the directors, all the managing directors, and the chairman of the board of directors must be residents, and the chairman of the board must also be a Chinese citizen. The same restrictions are applied to a company limited by shares with stockholders of unlimited liability.
The Chinese banking law was made effective on September 1, 1947, and permits foreign banks the same scope of operations as native banks, except that the former are prohibited from conducting business as savings banks or trust companies. However, since none of the foreign banks in the past engaged in the trust business, and inasmuch as they are not interested in savings accounts because of the vast reserves required to be maintained, these prohibitions are deemed to have little import.
This statute further provides that the Government may, in accordance with the requirements of international trade and productive enterprise, designate regions in which foreign banks may establish branches.
Although it is too early to report the actual operation of this law, it is understood that foreign banks are satisfied that the law itself is reasonable and workable, and that the provisions governing the operation of foreign banks are fair and nondiscriminatory.
Laws affecting operations and administration thereof. Following the relinquishment of extraterritorial rights in 1943, foreign commercial interests in China at the close of the Far Eastern war in 1945 were for the first time exposed to the direct operation of Chinese laws, particularly in the field of taxation, banking, foreign exchange, shipping, mining, and trade controls.
In the field of taxation, the Chinese Government has sought greatly to increase its revenues by the enactment of a series of statutes designed to tap every possible source, and applicable, theoretically at least, with equal effect to both Chinese and foreigners. Included are
a business tax, stamp tax, land tax, commodity tax, income tax, and excess-profits tax.
Much of the burden of these taxes has been passed off to the ultimate consumer in the form of higher prices, and there have been no complaints of discrimination against foreigners save in the interpretation and application of the income-tax law. Arbitrarily, companies whose head offices are outside China (all foreign corporations) are placed into a different category from companies whose head offices are in China (practically all Chinese companies). By this categorization the rate of tax on Chinese companies is determined by the ratio of income to capital, while the rate of tax on foreign companies is based solely on the amount of income. The net result is that Chinese companies are permitted to readjust their capitalization in accordance with changing economic conditions, thus falling into lower tax brackets, while foreign corporations can do nothing, in the face of the same. changing economic conditions, including the very rapid depreciation of the Chinese dollar, to avoid being taxed in the hitherto inflexible higher brackets.
According to the Chinese Government's August 13, 1947, statement on industrial and financial policies with respect to foreign investments in China, foreign businessmen operating within Chinese territory shall pay the same taxes under Chinese tax laws or ordinances as Chinese nationals. The results of recent representations by the United States and other foreign governments with respect to the discriminatory nature of this law are presently being awaited.
Foreign-exchange controls. Because of the highly inflationary nature of the Chinese economy and a rapidly deteriorating balance-ofpayments position, the Chinese Government has found it necessary to impose stringent foreign-exchange and trade controls, the most recent revisions of which were announced on August 17, 1947.
Under the trade regulations, all permitted imports into China require a license issued only to registered importers and firms. Additionally, certain commodities-e. g., lumber, tobacco leaf, wheat, flour, raw cotton, pharmaceuticals, dyes, et cetera are imported under both license and quota requirements.
Importers are financed at the "official" open market rate, which is subject to daily readjustment.
Exporters, also, are now required to sell their foreign exchange to appointed banks at the open market rate.
The restriction on the export of foreign currency, gold, silver, coins, and bullion, coupled with the absence of any provision for the sale of exchange for remittances, not only makes it impossible presently for foreign firms to remit profits, but also to withdraw capital investment. In the Chinese Government's policy statement of August 13, 1947, however, assurances were given that profits of foreign investments may be remitted in principle, and that regulations are currently being drawn whereby an appropriate portion of profits realized from foreign investments in industrial enterprises may be remitted.
The administration of the exchange and trade control regulations has been the subject of considerable criticism on the part of the foreign commercial community, such criticism dealing with the alleged favored position as to licenses and quotas of state trading organizations and private Chinese concerns, the encroachment of Government monopolies into fields not previously defined as fields of Government monopo
lies, and the alleged arbitrary enforcement of newly promulgated exchange and trade regulations without affording sufficient protection for commitments already made.
Competition of Government-owned corporations.-The Chinese Government through agencies such as the National Resources Commission and the Alien Property Administration has entered into fields of industrial activity, such as cotton textiles, not formerly invaded by the Chinese Government.
Although recent policy statements indicate that the Chinese Government intends to sell certain industrial enterprises taken over from the Japanese and recently run by Government corporation, Chinese Government participation in industry has in the meantime greatly increased over prewar levels.
Right to do business.-There are, generally speaking, no legal provisions restricting the rights of foreigners to do business in Malaya. Apart from certain "Malay reservation" areas in the Malay States and certain "customary lands" in Malacca where land may be held by Malays only, there is no discriminatory legislation which would prevent the acquisition of mining rights by an American company. However, the control of mining and mining properties, as well as the conditions under which individuals and companies are granted permission to operate is such as to insure that the British Government and its citizens will not at any time be seriously handicapped by operations on the part of foreigners or foreign concerns.
Tas ation. In 1941 legislation was enacted for a war tax on incomes for that year. Late that year the law was extended for another year. Under the law all companies were to pay tax at the rate of 12 percent on their income. While no definite information has been received, it is assumed that this war tax on incomes is still in effect. No other forms of income tax, war profits and excess profit taxes were in effect prior to the war.
Labor regulations. So far as available information goes, there are no laws which restrict the employment of foreigners in British Malaya. Since more than half the total population is "foreign"-notably Chinese and Indians and immigration of foreigners is encouraged to provide both skilled and unskilled labor on plantations and in mines, it is most probable that no restrictive measures are contemplated.
Foreign exchange controls. All transactions involving use of dollar exchange are under strict control. Upon approval of applications, remittances can be made outside the sterling area for "income arising from investments in Malaya, e. g. interest, dividends, rents, and profits of nonresident-owned Malayan companies (after deduction of Malayan taxes), etc. There is nothing to indicate that American companies operating in Malaya are having difficulties remitting profits. Competition with Government-owned companies.-Except for trade in opium, there is no known Government monopoly of business in British Malaya.
Right to do business.-A foreign company, operating legally in the country where it has its principal office, is recognized as a legal person in the Netherlands Indies and may carry on its activities there.