Legal Risks and Prevention of Overseas Investment of Chinese Enterprises under the Background of Brexit

Brexit continues to be highly concerned, sparking various discussions about the impact of Brexit on China, the United States and the European Union. However, has Britain succeeded in leaving Europe?
Knock on the Blackboard: No!

Brexit is a process (process), not an event.

1 A theoretical analysis of whether the UK is substantially Brexit.

Brexit must first follow its own constitution. The British government must first hold a referendum on whether to leave the European Union, which must be supported by a majority of voters. But the UK's vote to leave the EU is not legally binding (not binding). The referendum is only a manifestation of public opinion. The final decision on whether to leave the European Union is in the hands of the British Parliament and needs to be voted on by Parliament.

Brexit memorabilia:

-On January 23, 2013, British Prime Minister David Cameron first mentioned the EU referendum. [I]
-On January 4, 2015, British Prime Minister David Cameron said that if possible, the referendum originally planned for 2017 would be carried out ahead of schedule. [ii]
-On May 28, 2015, the British government submitted and published a bill on the "Brexit referendum" to the House of Commons and promised to hold a vote before the end of 2017. [iii]
-Referendum date: June 23, 2016. [iv]
Referendum data:
51.9 per cent agreed to leave the European Union, with a total of 15.7 million people;
Agree to stay in Europe 48.1 per cent, a total of 14.58 million people. [v]
-On January 17, 2017, British Prime Minister Theresa Mary May officially announced the British government's "Brexit" plan policy program, and stated that the United Kingdom will determine to withdraw from the European single market and will no longer be restricted and governed by the EU legal system. [vi]
-On February 1, 2017, the House of Commons of the British Parliament passed the "Brexit" bill by an absolute majority in the first round of voting. [vii]

The Brexit process:

According to the British legislative process, the "Brexit" bill will be submitted to the British House of Lords for deliberation and voting in the near future. If the vote is passed, the bill will officially become British law and can authorize the British Prime Minister to initiate the "Brexit" process. After the UK started the "Brexit" process, the UK and the EU initially negotiated Brexit matters.
In a letter to the President of the European Council, the British Prime Minister invoked Article 50 of the EU Treaty TEU [viii] to "apply" for Brexit-the only legal way for the UK to leave the EU. (Once the EU treaty TEU Art.50 is invoked, the UK cannot choose to automatically return to the EU unless its application is unanimously agreed by other countries. However, joining the EU after a successful Brexit requires the same normal application route as any new member.)
After invoking Article 50 of the EU Treaty, the other 27 EU member states will collectively discuss Brexit; the UK will then need to negotiate with the EU and submit the Brexit draft to the European Council. There are three possible outcomes:
[1] Within two years, the UK needs the support of a qualified majority of the other EU member states. According to Article 238 (2) of TFEU, a specific majority refers to: a. at least 20 member states (27*72%= 19.44); B. the total population of these member states accounts for more than 65% of the total population of the EU [ix]. On this basis, with the approval of the European Parliament, the United Kingdom will immediately leave the European Union;
[2] By the end of the two-year period, if the other 27 EU member states agree to extend the negotiations, in the next stage of negotiations, when a certain majority of member states agree to leave the EU, the UK will leave the EU immediately;
[3] By the end of the two-year period, if the two sides do not reach an agreement and the other 27 EU member states do not agree to extend the negotiations, the EU treaty will no longer apply to the United Kingdom and the United Kingdom will leave the European Union.

II. Changes in the application of the law in the existing state

At present, the United Kingdom has not successfully Brexit, it is still one of the EU member states (EU Member State), and because the negotiations are extremely complicated, this process is likely to last for a long time. Until the UK succeeds in Brexit, EU laws and regulations remain absolutely binding on the UK and the UK must abide by them, but no longer participate in any decision-making.
Specifically, for example, on April 28, 2016, the European Commission reviewed and approved the establishment of a joint venture [x] between China General Nuclear Power Group Co., Ltd. and French Power Group (EDF) in the UK, of which NNB established the Hinkley Point C nuclear power plant in the UK. In this case, the law relied on by the European Commission is the EU Competition Law and the EU Merger Regulation (European the Merger Regulation).

3 Risks of legal changes due to Brexit and countermeasures

1. The establishment of overseas companies and overseas mergers and acquisitions or to EU countries, subject to EU law

In the event of a successful Brexit, the EU's treaties would no longer be binding on the UK. Internally, Britain will have greater initiative and autonomy in legislation; externally, Britain needs to renegotiate a new trade agreement with the European Union, one of the world's largest economies. As Brexit is a negative event for the EU, the EU may bring some restrictions or set up trade barriers to the UK through new agreements, which will not only affect the UK's domestic trade imports and exports to EU member countries, but also affect the investment of Chinese enterprises to a certain extent. Previously, the United Kingdom was one of the EU member states with the highest degree of trade and investment liberalization. Chinese companies and investors used the United Kingdom as an important gateway to enter the EU's unified market, and strengthened cooperation with the EU through the United Kingdom, so they were willing to invest in the United Kingdom. From this perspective, the ties of cooperation between China and the European Union have been broken after Brexit. Chinese companies no longer have obvious advantages in choosing to invest in the UK, which may affect their choices, some investors may wish to consider cities and regions with free market facilities in the EU, such as Brussels and Dublin, which need to follow EU law and member states' legal requirements on the establishment and operation of companies. For example, the establishment of a company in Brussels, the center of the European Union, or a neighboring city (within Belgium) requires compliance with the relevant Belgian laws under EU law. According to Belgian law, the branch does not have the status of an independent legal person, and the parent company should bear legal responsibility for it in accordance with the law, while the subsidiary and the parent company are relatively completely independent, the parent company does not need to bear legal responsibility for the subsidiary, when the subsidiary makes financial statements at the end of the year, the tax bureau's financial requirements for the parent company are extremely relaxed. As a result, subsidiaries are the preferred choice for investors over subsidiaries. Subsidiaries are divided into limited liability companies (SPRL/BABA) and limited liability companies (SA/NV). The former needs to have a registered capital of 18,550 euros (about 136,700 RMB), at least one founder and one manager (which can be held by the same person), while the latter needs to have a registered capital of 61,500 euros (about 453,000 RMB), at least two founders and three directors. In addition, the company registration process and the employment of employees (working hours, salary, benefits and social security, etc.) need to be strictly in accordance with local legal requirements, otherwise it will suffer double damage to reputation and interests.
If Britain is willing to actively conduct trade negotiations with China and give more preferential conditions and policies than the EU, it will also be a good move to promote trade between the two sides. For example, the EU imposed tariffs on Chinese steel in 2016, hindering the export of Chinese steel to the UK, while the London government fiercely opposed such tariffs [xi]; therefore, if the UK gives preferential policies to Chinese companies, it will actively promote the supply and demand of steel on both sides. At present, investors tend to set up companies in the UK in the form of limited liability companies, including private limited companies and listed companies, which are divided into fully controlled subsidiaries and joint venture subsidiaries.

EU tax harmonization will no longer apply to the UK

After Brexit, the EU tax coordination policy will no longer apply to the UK; the tariff burden from scratch, and exports with the EU will need to resume customs clearance procedures, which will inevitably increase the tax costs of multinational companies.
In 1990, the EU passed three pieces of legislation on corporate tax: the 90/434 Directive (Capital Gains Tax Directive) applies to the merger, division, transfer of assets and transfer of shares of companies between member states; the 90/435 Directive (Parent-Subsidiary Tax Directive) regulates the tax policies of parent-subsidiary companies in member states; and the 90/434 Convention is an arbitration convention to avoid double taxation on adjusted profits of affiliated enterprises. [xii] These legal provisions give multinational corporations tax benefits, such as deferred payment of capital gains tax on the transfer of assets; in the EU system, if the subsidiary has paid the tax payable on the dividends received by the parent company, the parent company may be exempted from taxation on its profits paid to the parent company. However, after Brexit, multinational companies in the UK that have parent-subsidiary relationships with EU member states will no longer enjoy these preferential policies. In fact, although the UK has signed double taxation agreements with 27 other EU member states, it rarely involves full exemption from withholding tax. After Brexit, dividends paid by multinational companies headquartered in the UK and subsidiaries in the EU may be subject to a 10% withholding tax, which will significantly increase the cost of the company. Therefore, for multinational companies with mergers, divisions and other businesses, it is the best policy to seize the opportunity to enjoy these concessions before the success of Brexit.

3. Intellectual Property Legal Risks

At present, under the EU trademark (European Community Trade Mark) system, applicants can obtain the protection of their trademarks in 28 EU member states through a unified application procedure, with a unified registration system, fees, languages and applicants. However, in the event of Brexit, UK applicants may apply for trademark registration in different countries.
Although applying for a patent in the European Patent Organization (European Patent Organization) will not automatically be recognized and protected by its 38 member states, the applicant only needs to pay a single lawyer's fee, language and application fee, and audit fee. After the examination and approval, the applicant will pay the designated fees to the EPO member states respectively for patent registration. Since the EPO is based on the European Patent Treaty (European Patent Convention) and is not part of the EU, this approach is likely to remain in force.
In addition, regarding the establishment of the EU's Unified Patent Court, it needs to be signed by the 28 member states of the EU to sign the "Unified Patent Court Agreement" (Unified Patent Court Agreement) and ratified by 13 member states including the United Kingdom, France, and Germany before it can take effect; however, Brexit will directly affect this process.
After Brexit, applicants in the UK can register their trademarks in the EU through the Madrid Agreement (Madrid Agreement Concerning the International Registration of Marks) and its protocol, but this method is relatively inconvenient. Before making overseas investment, Chinese multinational enterprises need to employ people with professional experience in intellectual property rights to conduct detailed investigation and research on intellectual property applications and other issues, so as to minimize the legal risks of intellectual property rights, prevent their own rights from being infringed, and avoid infringing upon the rights of others.

4. Or promote the "the belt and road initiative" strategy

Some economists believe that in the long run, Brexit may promote the European continent, especially Central and Eastern European countries, to participate more actively in China's "Belt and Road Initiative" strategy. However, these countries are relatively politically sensitive and unstable, their economic development is relatively backward, and there are complex religious problems and extremist organizations and other social contradictions. Some countries have frequent natural disasters and weak post-disaster assistance capabilities. The risk of force majeure is also an important factor affecting overseas investment., The overall investment environment is not optimistic. Therefore, it is recommended that investors choose countries that have signed bilateral investment agreements with China. As of December 12, 2016, a total of 15 European countries along the "Belt and Road" have signed this agreement with my country: Poland, Romania, the Czech Republic, Slovakia, Bulgaria, Hungary, Lithuania, Slovenia, Croatia, Estonia, Albania, Macedonia, Ukraine, Belarus, Moldova [xiii]. In the process of overseas investment, the main legal and economic risks faced by Chinese enterprises exist in the establishment, operation and liquidation of enterprises. Therefore, Chinese enterprises need to hire lawyers to have in-depth understanding of the laws and regulations of the investment target country (including the legal system of the host country, relevant laws and cases, etc.), and do full due diligence (including investment environment, government support, tax policies, etc.). For foreign exchange issues, they can also timely and accurately understand national policies (including exchange rate fluctuations, overseas remittance restrictions, etc.) to avoid foreign exchange risks, business negotiations and contract signing are rigorous and prudent, minimize legal risks (including detailed agreed terms, clarify the rights and obligations of both parties, etc.), and give priority to arbitration when resolving commercial disputes (but taking into account local protection factors, the choice of the arbitration tribunal in the host country should be avoided as far as possible).
Different countries have their own different legal systems. Therefore, the application of laws in multiple countries may be involved in cross-border investment, mergers and acquisitions and dispute resolution. Any detail may cause huge legal risks and hinder the smooth completion of projects and negotiations or the successful and effective resolution of disputes. It can be seen that cross-border projects have relatively high requirements for the project team, especially the professionalism and experience of lawyers. In cross-border investment, the role of domestic lawyers cannot be underestimated. In addition to the duties mentioned above, domestic lawyers can assist Chinese companies in negotiating and drafting relevant documents, explain relevant foreign laws and regulations to clients, contact and coordinate foreign lawyers to jointly study and solve effective and feasible solutions, and act as a bridge and link between Chinese companies and relevant foreign institutions and personnel to avoid losses caused by unnecessary misunderstandings. In addition, domestic lawyers who have been engaged in cross-border business for many years can help Chinese companies quickly find familiar foreign service firms with professional experience and strength, and help Chinese companies negotiate foreign lawyer service fees, reliable and fast, thus saving time and economic costs.
The application of laws brought about by Brexit has changed greatly, and the application of laws in competition law, tax law, intellectual property law and so on will change and adjust to varying degrees, bringing risks and obstacles to overseas investment. Doing a good pre-legal risk assessment can more effectively avoid various risks in the investment process. Professional lawyers can shelter foreign companies from the wind and rain, and they can also escort Chinese companies to "go out. It is also hoped that more Chinese companies can make full use of the power of lawyers and other professionals to achieve overseas investment goals more safely and effectively.