Welcome to the

1. Welcome to the Third Annual Greenebaum China Business Summit

2. Opening Remarks Robert L. Brown, Esq. Chair, China Team Greenebaum Doll & McDonald 502/587-3716 rlb@gdm.com

3. China: The New Franchising Frontier Sean P. Gallagher, Esq. Greenebaum Doll & McDonald 502/587-3773 spg@gdm.com

4. Product Distribution • China: Population of 1.3 billion • How do I put my products in the hands of consumers?

5. Methods of Distribution • Company owned stores • Distributorships and dealerships • Franchising

6. What is Franchising? • Trademark license • Payment of franchise fee • Significant assistance or significant control

7. Why Franchise? • Availability of capital • Allocate the risk of failure of any single unit to the franchisee who owns and operates that unit • Knowledge of franchisee

8. Measures for the Regulation of Commercial Franchise • Issued by the Ministry of Commerce • Effective February 1, 2005 • To promote “healthy and orderly development of commercial franchising” • Commercial Franchise Regulation pending before the State Council – stay tuned

9. Disclose, Disclose, Disclose! • What? • Financial information, estimated initial investment, sources of products and supplies, information on existing and terminated franchises. All disclosures “requested” by a franchisee – Yikes! • When? • At least 20 days prior to signing franchise agreement (or anytime at the request of a franchisee?) • Why? • Liability for economic losses caused by inadequate disclosures or misrepresentations.

10. Relationship Rules • Term: Not less than 3 years. • Standard of performance. • Franchisor must operate in accordance with the principles of fair dealing, honesty and trustworthiness. • What does that mean? • Implied covenant of good faith and fair dealing? • Filing of Franchise Agreement. • Implications are unclear.

11. Foreign-Invested Enterprise • Two company-owned units in China for more than one year prior to offering franchises for sale? • Cross-border franchising? • Unclear whether it falls under Franchise Measures.

12. International Expansion into China and Elsewhere. • Understanding which countries (such as China) have franchise specific laws. • Type of disclosure documents. • International Disclosure Document. • Traditional UFOC with a country-specific wrap. • Geographic or language-specific disclosure document. • To disclose or not to disclose – that is the question! • Talk with your attorney early in the process.

13. Foreign Investment and Recent Changes to China’s Corporate Law Haifeng Hong Greenebaum Doll & McDonald 502/587-3568 hh@gdm.com

14. Foreign Investment in China • Foreign Direct Investment by Vehicle Type (January-November 2004 and 2005)

15. Foreign Investment in China Industry Updates • Distribution Rights • Definition: to sell imported or locally sourced goods directly at the wholesale or retail levels within China • Previously, domestic import-export agents and distributors are necessary • July 2005: PRC Ministry of Commerce issued application procedures through which FIEs can obtain distribution rights

16. Foreign Investment in China Industry Updates • Banking • Liberalization since 2001; Remove restrictions by Dec 1, 2006 • Expanded local presence: Seven more cities • Reduced minimum operating capital requirement: RMB100 million ($12.4 million) • Foreign Banks’ Stake Acquisitions

17. Foreign Investment in China What to Watch in the Near Future? • Income Tax unification • Official Rate: 33% • Post-adjustment: Foreign Invested Enterprises (FIE) (11%) v. Domestic Companies (23%) • Unified Legislation in 2007 expected • Prediction on Unified Legislation: • current incentives available for projects existing prior new tax regime • new corporate income tax: around 25% • tax incentives based on industry and geographic location

18. Foreign Investment in China What to Watch in the Near Future? • The Antimonopoly Law • Expected to be passed in late 2006 • Increased access to certain markets dominated by State Owned Enterprises (SOEs) • “Public Interest" concern

19. Foreign Investment in China What to Watch in the Near Future? • Intellectual Property Rights • U.S.- China Joint Commission on Commerce and Trade (JCCT): July 2005 • to increase criminal prosecutions • to criminalize the export of counterfeit goods • to accede WIPO Internet treaties by June 2006 and combat internet piracy

20. Recent Changes to China’s Corporate Law New Law • New Legislation • Amendment of the Corporate Law • Passed on October 27, 2005, effective on January 1, 2006 • Background

21. Recent Changes to China’s Corporate Law • Relaxation of the Rules Governing the Establishment and Investment of a Company • Minimum Capital Contributions • Joint stock companies: RMB5 million (US$619,594) • Other LLCs: RMB30,000 (US$3,718) • New criteria for a company’s investment in other companies • No limitation on a company’s total investments in other companies • Joint and several liability to the invested companies’ debts

22. Recent Changes to China’s Corporate Law • Improvement to Corporate Governance • Minority Shareholders Protection • Access to the accounts of the corporation • Resort to courts to revoke relevant resolution made in violation of convening procedures or voting methods as required by articles of the corporation or law: 60-day limitation • Derivative lawsuit against directors or senior managers

23. Recent Changes to China’s Corporate Law • Improvement to Corporate Governance (cont’d) • Employee’s Right-to-Know • Important corporate issues • Decisions affecting the company • Legal Representative • Chairman of BOD • Managing director or Manager • Under old law: only chairman of BOD

24. Recent Changes to China’s Corporate Law • Piercing the Corporate Veil • Jointly and Severally Liability for Corporation’s Debt • Abuse of independent legal status of a corporation • Intentionally remove the corporation’s debts • Cause material loss to creditors of the corporation

25. Summary • An Evolving Market • Opportunity v. Risk Note: The information included in this presentation is based on the following sources: • The China Effect, China Business Review, April, 2006 • Foreign Investment in China, The US –China Business Council, January, 2006 • Changes to China’s Corporate Law, Greenebaum International Letter, Issue 1, 2006

26. Tax Aspects of Structuring Investments in China Gregory S. Shumate Greenebaum Doll & McDonald 859/655-6884 gss@gdm.com

27. General U.S. International Tax Concepts • U.S. taxes its U.S. citizens, resident aliens and U.S. corporations on their world wide income • Objective of doing business in China: Maximize Repatriation of Earnings through Minimization of Worldwide Tax By: • Deferring US Tax • Utilizing Foreign Tax Credit • Utilizing Income Tax Treaty Protection • Expense Allocation

28. Phase 1:Start-Up Phase-- Direct Sales • Direct Sales to Chinese Customers • Minimum Foreign Presence in Start-up Phase • Objective: No China Income Tax on Business Income • Local Law Taxable Business Presence • U.S.-China Income Tax Treaty • Separate Standard under Treaty - Avoidance of Permanent Establishment (“PE”) • Office or other fixed place of business in China---PE • Employees or dependent agents in China who habitually conclude contracts on behalf of U.S. company and has ability to bind U.S. company--PE • Factory or inventory storage, display, delivery, 3rd party processing, purchase of goods & merchandise in China—No PE • 6 month construction projects and 12 month service contracts—No PE • Web based sales, phone, mail order, fax or other non-China based sales office—No PE

29. Advantages/Disadvantages of Direct Sales • Advantages include simplicity, no need for establishment of an international structure, minimal tax planning and no China income tax • No substantial financial investment • Consider Export Incentives: DISC to reduce U.S. income tax rate on exports • Disadvantages include no foreign presence or control over local marketing, sales, quality control, delivery, etc.

30. Phase 2: Representative Office • Overseas Expansion Phase: Branch office not permitted, so a Representative Office is an option • Liason, marketing support, market research and information gathering • No profit motive, so no fixed place of business and no China tax

31. Phase 3: Taxation of Foreign Investment Enterprises • Choice of Entity • China/Foreign Equity JV • Cooperative JV • Wholly Foreign Owned Enterprise • Foreign Invested Shareholding Company • All treated as Corporation for US tax purposes • Deferral of U.S. income tax until profits are repatriated or application of anti-deferral rules (i.e., CFC, Subpart F rules) • Indirect Foreign Tax Credits applies to dividends

32. Holding Company Structure • Defer U.S. tax and redistribute profits to foreign subsidiaries without U.S. repatriation through use of holding company structure. • Controlled Foreign Corporations (“CFC”), Subpart F and anti-deferral rules • Passive income and foreign base sales and service income • Manufacturing and same country exceptions to Subpart F • Check the box (Form 8832) on lower tier subsidiaries (disregarded entities) to prevent Subpart F income • Fail definition of CFC through ownership rules • Favorable Holding Company Jurisdictions • Netherlands • Hong Kong (HK and PRC separate countries for US tax purposes) • Cayman Islands

33. Foreign Tax Credit • FTC partially alleviates Double Tax Problem • Foreign Tax Credit Limitation • U.S. will tax profits that are subject to a lower rate of tax in another country • Thus, deferral of U.S. tax is usually preferred • Declining worldwide tax rates vs. higher U.S. tax rate • Direct vs. Indirect Foreign Tax Credit

34. Questions? Third Annual Greenebaum China Business Summit