1. Company Background

The corporate revenues of the foreign-invested company in Beijing and itssubsidiary in Lang Fang can be divided into two types : Commission based revenue and Software based revenue. The Beijing Company's revenue is from commission and software production while the Lang Fang Company's is from set typing, where all revenue are from overseas. In addition, the Beijing Company has its own software copyrightsbut the Lang Fang Company did not apply for software copyrights.

 

2. RTF Analysis

1)  Analysis of Beijing Company's current situation

- Relevant qualifications

It has 2 software qualifications , copyrights on file conversion and automatic publishing system.

- Relevant business

It uses software's copyright technology to provide technology related automatic typesetting business and acts as an agent on behalf of the overseas enterprises for thesales of related publications.

- Contract design

Sales of 9803 classified software – technology related automatic typesetting services ; typesetting,production, format conversion, image processing contracts – sales publication agentson behalf of the foreign enterprises.

-  Tax effect

Sales of 9803 classified software are VATexempted

-  Risk analysis

If enterprise providesits clients the 9803 classified software via email or CD-ROM, such business isregarded within the 9803 classified software scope. But if it uses its own technology to help clients amend corresponding files, this business is regardedas the provision of technology services and belongs to the taxable servicesbracket. The enterprise should pay VAT at the rate of 6%. If the revenue can beidentified as offshore Information Technology Outsourcing (ITO) income or isregarded as technology import and export revenue, its taxes can be exempted.Therefore, the Beijing Company's revenue should be determined as whether 9803 classified software or not.

-  Note

The Customs and the Tax Bureau pay much attention to whether companies unreasonably use the 9803 software qualification to avoid tax, and once companies are being caught,stringent measure will be taken .

2) Analysis of Lang Fang Company’scurrent situation

- Relevant qualifications

I t has no softwarecopyrights

- Relevant business

It provides typesettingbusiness.

- Contract description

Lang Fang Company’sannual publishing revenue is about 8 million RMB and BT is about400,000-500,000 RMB.

- Current situation

Business competitiveness is rather weak, the personnel expenditure is large, and it belongs to the sunsetindustry. Meanwhile, Lang Fang is a secondary city where tax laws andregulations are not perfect and where more tax incentives are available comparedwith Beijing tax policies.

- Exit costs analysis

a) Staff severance payment

Article 47: The economic compensationis based on the staff's years of work commitment, that is, for every full year ; a month salary should be given out.  Formore than 6 months but less than 1 year of work commitment, a one year's salaryshould be taken as the base. For less than 6 months, a half month's salaryshould be given out.  If the employee's monthlywage is 3 times higher than the relevant municipality previous years’ announcedaverage monthly wages, the 3 times monthly wages should be the base and themaximum compensation payment period should not exceed 12 years.  The monthly wage referred to is the previous12 months' average wage before their labour contract is relieved or terminated.
Note: Employees employed before 2008 should be compensated based on differentregulations.

b) Bankruptcy materials- ChapterXI:  Legal Liability

ü  Article 113: TheCompany's bankruptcy property should be compensated in the following sequenceafter the bankruptcy expenses and community debts are being repaid.

(1) Wages, medical insurance,disability benefits, pension costs should be included in the employee's personal accounts of basic insurance, medical insurance with any other compensationsstated by relevant laws and regulations.

(2) Payment of the socialinsurance fee mentioned above and taxes should be settled

(3) Ordinary bank ruptcyclaims

• Article 124: After thecompletion of the bankruptcy proceedings, the bankrupt's guarantor and other jointdebtors and creditors, in accordance with the bankruptcy liquidation procedure,have to continue to bear the responsibility for repayment if the debts are notcleared,

• Article 125: If the Companydirector, supervisor or senior manager violates his duty and diligence, thus, leadingto bankruptcy of the enterprise, he shall bear civil liability.  People with the aforesaid circumstances cannothold the post of directors, supervisors and senior managers within three yearsafter the date of termination of the insolvency proceedings.

• Article 129: If thedebtors violate this law provision and leave their domicile, the court may baseon the law reprimand, impose detention, and fine.

• Article 130: If managersdid not perform their duties faithfully and diligently, the court may base onthe law impose a fine and if they cause losses to creditors, debtors or third parties,they should compensate for it.

• Article 131: If oneviolates this provision and constitutes a crime, he should be held criminallyresponsible.

3. RTF Solutions

1)  Whole Plan

Reclassify and re-structurethe commission and software revenue

- Establish two WFOEs, where one's main businessis software; the other's main business is commission-related.

- Software business tax analysis: If technology-relatedincome earned is not only from the provision of software products but also theprovision of the software written operational guides and goals and if therevenue also within the taxable services bracket, then the business is notdirectly related to software products sales and the offshore outsourcingrevenue can be VAT exempted. However, regarding manual typesetting, suchbusiness cannot enjoy tax preference and the company should pay 6% VAT. Thecompany should consider whether to keep the typesetting business based on its incomingprofits.

- Commission business tax analysis: Thisbusiness can be divided into two parts, one is the agent commission costs ofthe sales and the other is helping customers to use technology for theprovision of image and text publishing, converting, formatting, processing services.For the commission business 6% VAT needs to be incurred on the income, however,offshore outsourcing income can be VAT exempted.

2) Operational mode

- Set up another WFOE in Beijing and apply fortechnology related automated typesetting software copyrights. Then, use thecopyrights to apply for the software products registration, the softwareenterprise registration and the advanced technology service outsourcingenterprises (ATSE).

- Bring in the new profitable business into thenew WFOE and transfer the relevant staff and adopt the relevant accountingfinancial system, contract design and planning, tax planning and so on.

- After the smooth operation of the new company,the old company's business and restructuring problems can be considered again, whereby,whether to keep the business running or to stop the manual publishing businessand close down the Lang Fang Company.