Shanghai,China Eskom Incorporation Brief

When answering the following questions please also refer to the Eskom brief (attached again for ease of reference).

1. Form of Business
(a) Would the countries legislation require Eskom to register a place of business in the country in these circumstances? Yes, it is compulsory. State Administration for Industry & Commerce of People's Republic of China has issued the new rule about Representative Office at 4th Jan, 2010 which speaks about penalty for if there's difference between registered address and business address.

(b) If they do require us to register a business, what types of business is available? Which form do you recommend and what are the relative advantages and disadvantages of your proposed business form? Representative Office. For foreign companies, the most common way to establish a permanent presence in China is to register as a representative office. Registration legitimizes business operations in China and allows a foreign company to establish a permanent presence in the Chinese market. Although representative office personnel cannot directly sign contracts or receive fees or income in China, they can perform market research, consulting, or liaison type work. A foreign company must first find a sponsor organization that will approve its application to establish an office. An application is then submitted to the State Administration for Industry and Commerce (SAIC) for review and registration.

(c) What are the tax implications of the recommended form of business? Foreign Company representative offices which engage solely in liaison activities within China on behalf of their head offices normally have no Chinese source income and therefore do not pay income tax, although a tax return must be filed. Offices of foreign service companies such as consultants, accountants, banks and trading companies that derive income from their services may be taxed on their income. Further, chose RO as their China business entity since it's cost efficient and it requires no capital investment

(d) If we have to register a business entity can you indicate how long this process normally takes? Also advise on the associated costs. Since January 15, 2010: According to State Administration of Industry and Commerce's file: Gong Shang Wai Qi [2010] No.4, To set up a Foreign Representative office in China: PARENT COMPANY must be established for more than 2 years. For Service of Representative Office registration in Beijing, Shanghai, Guangzhou, Suzhou, Shenzhen, Hangzhou, and other cities of China the total cost is RMB 15,000 plus official registration filing fees which are estimated to be RMB 3,000. In the case of representative offices which require prior approval, the applicant company must apply for registration within 90 days of the date on which the Approval Certificate is issued.

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(e) What should the relationship be to the parent company? According to State Administration of Industry and Commerce's file: Gong Shang Wai Qi [2010] No.4, PARENT COMPANY must be established for more than 2 years.

(f) Given the form of the relationship, what is the parent companies liability regarding activities of its branch/subsidiary? The Representative Office is a non-legal entity operating representing it's parent company overseas. A representative office is not allowed to engage itself in business activities, issue invoices on its own, remitting outward, signing sales or purchase contracts, or receiving income from services performed but may act as a liaison and promotion office for its parent company. At the beginning of setting up the Representative Office, it is advised to decide the place and building where office is going to be located first, as the address of the proposed office will have to be mentioned in the application for approval. Note: the business address must be located in commercial buildings approved by the government, in Shanghai, the Rep. office's location MUST be in a Grade A office building. A Representative Office in China may only engage in non-profit making activities, it can carry out the following functions: 1. Conduct research and survey for its parent enterprise in the local market; 2. Liaise with local and foreign contacts in China on behalf of the parent enterprise; 3. Conduct research and provide data and promotional materials to potential clients or trading partners; 4. Act as a coordinator for the parent enterprise's activities in China; 5. Make travel arrangements for parent enterprise representatives and potential Chinese clients.

2. Employment constraints

Eskom is currently envisaging that we will ob obtaining our resources from third parties (our contracted inspection panel service providers). These will be staff that work for them, but are on our projects on a full time basis. If this is the case: (a) Are there any legal obligations that we have to these externally contracted individuals? WFOE can hire Chinese employees by itself. But Rep Office can not hire China employees directly. Rep Office shall appoint HR companies to do it.Further, as per the new rule issued by State Administration for Industry & Commerce of People's Republic of China Office at 4th Jan, 2010 Total amount of representatives shall be less than 4;

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(b) If we did not supply office space to them will this change the legal situation? The registered address shall be commerce property. And the registered address of Rep Office shall be chosen among buildings appointed by Government. Yes, it is obligatory norm.

If Eskom were to employ staff directly, or second South African staff to the country: (c) Are there any constraints in terms of the nationality or work permits of the person who may be employed in the country? Local employees Representative offices are required to entrust the hiring of local personnel to a domestic foreign service unit or such other unit which has been designated by the Chinese government. A representative office must enter into a contract with such a unit for the supply of staff to the representative office. There is, therefore, no direct labour contractual relationship between the representative office and the employee. Local staff members enter into labour contracts with the unit instead of the representative office and will receive salary and social benefits from the unit. The representative office is, however, still expected to provide directly to the staff member various other benefits such as performance and year-end bonuses, transportation, meal and clothing allowances, personal accident insurance, etc. The unit will receive a fee for the provision of its services. Foreign employees A representative office is not required to obtain approval for the employment of foreign personnel in the capacity of Chief Representative or ordinary Representative, but it is subject to a limit of number of the Representatives. Pursuant to Article 11 of the Regulations and Article 3 of the Circular, a representative office shall have one Chief Representative and no more than three ordinary Representatives. Every foreign employee of a representative office should apply to the Chinese consular office of his/her country of residence for a single entry "Z" visa and, upon arrival in China, apply to the relevant labour administration department for a Foreigner Work Permit. After obtaining a Foreigner Work Permit, the foreign employee should apply for a Residence Permit, which will serve as their multiple entry visa, at the local PSB for the employee and any accompanying family members who will be residing in China. A foreigner who intends to import any personal items into China must also register with the local customs bureau.

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(d) What type of work permits so non-nationals require? To enter China, one needs only a visa. The visa can be single entry or multiple. One can only obtain a multiple entry visa valid for a year if he/her has a work permit. Without the work permit, one can only get a single entry or two-entry visa. Even in Hong Kong, it takes three days or more to get the visa and it cost about USD 20 for a single entry visa. (Single entry visa to China costs USD 50 if obtained in U.S.) With the work permit, one can get a multiple entry visa which will give the teacher a lot more freedom going in and out of China. Also, one needs a work permit to work legally in China. Residents of Taiwan, Hong Kong or Macau should obtain a Work Permit for Taiwan, Hong Kong or Macau Personnel instead of the Foreigner Work Permit. Whilst Hong Kong or Macau residents need not obtain a "Z" visa or a Residence Permit in order to work and reside in the PRC, Taiwanese residents must obtain a multiple-entry endorsement as well as a residence endorsement for such purposes.

(e) What safety and other applicable legislation do we need to adhere to?

(f) What additional Statutory/Legislative requirements apply should the staff work from their homes whilst we are establishing the offices?

(g) Are there any country-specific obligations regarding Employment conditions e.g. Pension funds, etc.?

3. Office Location
(a) Are there any material tax differences depending on the choice of city in the given country? Yes, but they are subject to local municipal laws of the council.l

(b) What are the property regime to obtain office accommodation and the costs involved, including the normal rental or lease legal rules applicable, i.e. any specific obligations a lessee must comply with as a legal requirement or business practice?

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4. Insurance
(a) What are the mandatory insurances that we require to operate in the chosen country?

5. Other
Are there any additional relevant advice or guidance you may wish to share with us.

Are there any legislative issues that you would like to bring to our attention?

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