Item 1. Business
Item 1. Business
Overview
Pony Group Inc. (‘Company” or “Pony”)
was incorporated on January 7, 2019 in the state of Delaware.
Our Corporate History
On March 7, 2019, Pony Group Inc (the “Purchaser”),
and Wenxian Fan, the sole owner of Pony Limousine Services Limited, entered into a Stock Purchase Agreement (the “Purchase Agreement”),
pursuant to which Wenxian Fan (the “Seller”) would sell to the Purchaser, and the Purchaser will purchase from the Seller,
10,000 shares of the Pony Limousine Services Limited (“Pony HK”), which represented 100% of the shares. On March 7, 2019,
this transaction was completed.
Pony Limousine Services Limited is a limited liability
company formed under the laws of Hong Kong on April 28, 2016, which was formed by Wenxian Fan. Its registered office is located at Flat/Rm
01 11/F, Lucky Comm Bldg, 103 Des Voeux Rd West, Sheung Wan, Hong Kong. On February 2, 2019, Universe Travel Culture & Technology
Ltd. (“Universe Travel”) was incorporated as a wholly-owned PRC subsidiary of Pony HK.
Our Corporate Structure
We do not have or intend to set up any subsidiary
or enter into any contractual arrangements to establish a variable interest entity (“VIE”) structure with any entity in China.
The following diagram illustrates our corporate structure, including our subsidiaries as of the date of this Report:
Our holding company structure
presents unique risks as our investors may never directly hold equity interests in our Hong Kong or Shenzhen operating subsidiary and
will be dependent upon dividends and other distributions from our subsidiaries to finance our cash flow needs. Our ability to receive
dividends and other contributions from our subsidiaries are significantly affected by regulations promulgated by Hong Kong and PRC authorities.
Any change in the interpretation of existing rules and regulations or the promulgation of new rules and regulations may materially affect
our operations and or the value of our securities, including causing the value of our securities to significantly decline or become worthless.
For a detailed description of the risks facing the Company associated with our structure, please refer to “ Item 1A. Risk Factors
– Risks Related to Doing Business in China.”
Currently, PRC laws and regulations
do not prohibit direct foreign investment in our Hong Kong or Shenzhen operating subsidiary. Nonetheless, in light of the recent statements
and regulatory actions by the PRC government, such as those related to Hong Kong’s national security, the promulgation of regulations
prohibiting foreign ownership of Chinese companies operating in certain industries, which are constantly evolving, and anti-monopoly concerns,
we may be subject to the risks of uncertainty of any future actions of the PRC government in this regard, which would likely result in
a material change in our operations, including our ability to continue our existing holding company structure, carry on our current business,
accept foreign investments, and offer or continue to offer securities to our investors, and the resulting adverse change in value to our
common stock. We may also be subject to penalties and sanctions imposed by the PRC regulatory agencies, including the China Securities
Regulatory Commission, or CSRC, if we fail to comply with such rules and regulations, which would likely adversely affect the ability
of the Company’s securities to continue to trade on the OTCQB, which would likely cause the value of our securities to significantly
decline or become worthless.
1
The Holding Foreign Companies Accountable Act (the “HFCA Act”)
As more stringent criteria applying to emerging
market companies upon assessing the qualification of their auditors have been imposed by the United States Securities and Exchange Commission
(the “SEC”) and the Public Company Accounting Oversight Board (the “PCAOB”) recently, and under the HFCA Act,
our securities may be prohibited from being traded on the over-the-counter (the “OTC”) markets if our auditor is not inspected
by the PCAOB for three consecutive years, and this ultimately could result in trading in our securities being prohibited.
The HFCA Act was enacted on December 18, 2020.
The HFCA Act states that if the SEC determines that an issuer’s audit reports issued by a registered public accounting firm have
not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such issuer’s
securities from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On March
24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the
HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under
a process to be subsequently established by the SEC. If we fail to meet the new rules before the deadline specified thereunder, we could
face possible prohibition from trading on the OTCQB, deregistration from the SEC and/or other risks, which may materially and adversely
affect, or effectively terminate, our securities trading in the United States. On December 2, 2021, the SEC issued amendments to finalize
rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies
as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction
and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions.
Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating
Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an issuer’s
securities from trading on any U.S. stock exchanges or the OTC markets if its auditor is not subject to PCAOB inspections for two consecutive
years instead of three thus reducing the time before our securities may be prohibited from trading or being delisted.
On December 16, 2021, the PCAOB issued a determination,
under the HFCA Act, on registered public accounting firms headquartered in Hong Kong and the mainland China of the People’s Republic
of China that it is unable to inspect or investigate completely. As of this Report, our auditor, BF Borgers CPA PC, is not headquartered
in China nor Hong Kong and thus is not subject to such determination.
As a firm registered
with the BF Borgers CPA PC is subject to laws in the United States which provide that the PCAOB shall conduct regular inspections to assess
the auditor’s compliance with the applicable professional standards. We have no intention of dismissing BF Borgers CPA PC in the
future or engaging any auditor not based in the U.S. and not subject to regular inspection by the PCAOB. There is no guarantee, however,
that any future auditor engaged by the Company would remain subject to full PCAOB inspection during the entire term of our engagement.
If it is later determined that the PCAOB is unable to inspect or investigate our auditor completely, investor may be deprived of the benefits
of such inspection. Any audit reports not issued by auditors that are completely inspected by the PCAOB, or a lack of PCAOB inspections
of audit work undertaken in China or Hong Kong that prevents the PCAOB from regularly evaluating our auditors’ audits and their
quality control procedures, could result in a lack of assurance that our financial statements and disclosures are adequate and accurate.
Future developments in
respect of increased U.S. regulatory access to audit information are uncertain, as the legislative developments are subject to the legislative
process and the regulatory developments are subject to the rule-making process and other administrative procedures.
See also “ Item
1A. Risk Factors – Risks Related to Doing Business in China — Our common stock may be delisted under the Holding Foreign
Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our common stock, or the threat of their being
delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the
Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would amend the HFCA Act and require the SEC to prohibit an
issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive
years instead of three .”
2
Regulatory Permissions and Developments
We have determined that the laws and regulations
of the PRC do not currently have any material impact on our business, financial condition or results of operations. However, there is
no assurance that there will not be any changes in the economic, political and legal environment in Hong Kong, where Pony HK operates,
in the future. If there is significant change to current political arrangements between mainland China and Hong Kong, companies operated
in Hong Kong such as us may face similar regulatory risks as those operated in PRC, including their ability to offer securities to investors,
list their securities on a U.S. or other foreign exchange, conduct their business or accept foreign investment. In light of China’s
recent expansion of authority in Hong Kong, there are risks and uncertainties which we cannot foresee for the time being, and rules and
regulations in China can change quickly with little or no advance notice. The Chinese government may intervene or influence our current
and future operations in Hong Kong at any time, or may exert more control over offerings conducted overseas and/or foreign investment
in issuers likes ourselves. See “ Item 1A. Risk Factors – Risks Related to Doing Business in China .”
We are aware that, recently, the PRC government
initiated a series of regulatory actions and statements to regulate business operations in certain areas in China with little advance
notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed
overseas using variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the
efforts in anti-monopoly enforcement. For example, on July 6, 2021, the General Office of the Communist Party of China Central Committee
and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and
promote the high-quality development of the capital market, which, among other things, requires the relevant governmental authorities
to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed
overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. Also, on July 10, 2021,
the Cyberspace Administration of China (the “CAC”) issued a revised draft of the Measures for Cybersecurity Review for public
comments, or the Revised Draft, which required that, among others, in addition to “operator of critical information infrastructure”,
any “data processor” controlling personal information of no less than one million users (which to be further specified) which
seeks to list in a foreign stock exchange should also be subject to cybersecurity review, and further elaborated the factors to be considered
when assessing the national security risks of the relevant activities.
Except for the Basic Law, national laws of the
PRC do not apply in Hong Kong unless they are listed in Annex III of the Basic Law and applied locally by promulgation or local legislation.
National laws that may be listed in Annex III are currently limited under the Basic Law to those which fall within the scope of defense
and foreign affairs as well as other matters outside the limits of the autonomy of Hong Kong. National laws and regulations relating to
data protection, cybersecurity and anti-monopoly have not been listed in Annex III and do not apply directly to Hong Kong and, as such,
the CAC and CSRC do not currently have jurisdiction over companies operating in Hong Kong.
We have determined that we are not currently required
to obtain any permission or approval from the CSRC, the CAC or any other regulatory authority in the PRC for our operations, the trading
of our securities on the OTCQB and the offering of our securities to foreign investors. The business of our Hong Kong subsidiary, Pony
HK is not subject to cybersecurity review with the CAC, given that PRC laws on data protection and cybersecurity do not currently apply
to Hong Kong. Further, for our Shenzhen subsidiary, Universe Culture, and to the extent that if we become subject to such PRC laws in
the future, we do not believe we are required to conduct a cybersecurity review because (i) we do not possess a large amount of personal
information on more than one million users in our business operations; and (ii) data processed in our business does not have a bearing
on national security and thus may not be classified as core or important data by the authorities. However, our operations could be adversely
affected, directly or indirectly, by existing or future laws and regulations relating to our business or industry, if we inadvertently
conclude that such approvals are not required when they are, or applicable laws, regulations, or interpretations change and we are required
to obtain approval in the future. We may be subject to penalties and sanctions imposed by the PRC regulatory agencies, including the CSRC,
if we fail to comply with such rules and regulations, which could adversely affect the ability of the Company’s securities to continue
to trade on the OTCQB, which may cause the value of our securities to significantly decline or become worthless.
In addition, in light of the recent statements
and regulatory actions by the PRC government, such as those related to Hong Kong’s national security, the promulgation of regulations
prohibiting foreign ownership of Chinese companies operating in certain industries, which are constantly evolving, and anti-monopoly concerns,
we may be subject to the risks of uncertainty of any future actions of the PRC government in this regard including the risk that the PRC
government could disallow our holding company structure, which may result in a material change in our operations, including our ability
to continue our existing holding company structure, carry on our current business, accept foreign investments, and offer or continue to
offer securities to our investors. These adverse actions could cause the value of our securities to significantly decline or become worthless.
3
There may be prominent risks associated with Pony
HK’s operations being in Hong Kong. For example, as a U.S.-listed public company operating primarily in Hong Kong, we may face heightened
scrutiny, criticism and negative publicity, which could result in a material change in our operations and the value of our common stock.
Additionally, we are subject to certain legal and operational risks associated with our business operations in Hong Kong, which is subject
to political and economic influence from China. PRC laws and regulations governing our current business operations are sometimes vague
and uncertain, and we may face the risk that changes in the policies of the PRC government could have a significant impact upon the business
we conduct in Hong Kong and the profitability of such business. Therefore, these risks associated with having part of our operations in
Hong Kong could likely cause the value of our securities to significantly decline or be worthless. Furthermore, these risks would likely
result in a material change in our business operations or a complete hinderance of our ability to offer or continue to offer our securities
to investors. Furthermore, changes in Chinese internal regulatory mandates, such as the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “M&A Rules”), the Anti-Monopoly Law, the Cybersecurity Law and the Data Security
Law, may target the Company’s corporate structure and impact our ability to conduct business in Hong Kong and in Shenzhen, accept
foreign investments, or list on an U.S. or other foreign exchange.
The U.S. government,
including the SEC, has recently made statements and taken certain actions that may lead to significant changes to U.S. and international
relations, and will impact companies with connections to the United States or China (including Hong Kong). The SEC has issued statements
primarily focused on companies with significant China-based operations. For example, on July 30, 2021, Gary Gensler, Chairman of the SEC,
issued a Statement on Investor Protection Related to Recent Developments in China, pursuant to which Chairman Gensler stated that he has
asked the SEC staff to engage in targeted additional reviews of filings for companies with significant China-based operations.
For a detailed description of the risks facing
the Company and the risks associated with having our operations in Hong Kong, please refer to “ Item 1A. Risk Factors –
Risks Related to Doing Business in China. ”
Our Services
The business nature of the Company is to provide
carpooling, airport pick-up and drop-off, and personal drivers services for travelers between Guangdong Province and Hong Kong.
We offer our customers seamless, customized and
on-demand access to a variety of transportation options. Currently, most of our customers are entities such as business companies, travel
agencies or societal associations. To be as flexible and convenience as possible to our customers, we take orders from customers any time
through WeChat, Tencent QQ, email and phone call, upon which we obtain a quote from our car fleet companies and forward it to the customer.
Once the order is confirmed, the accepted car fleet company will perform the service by sending a driver to pick up the customer at the
scheduled time. We charge the car fleet company a 5-15% service fee on each completed order.
Sales and Marketing
We market our services to users directly through
word-of-mouth referrals, brand advertising. We plan to attract consumers and promote offerings on our “Let’s Go” application
through sponsored events, social networking sites including Facebook, Twitter and Instagram and other similar initiatives.
4
Seasonality
Our current operations experience seasonality.
We see high demands of our services during the golden weeks in China which was intended to help expand the domestic tourism market. Our
business slows down during February to April.
Intellectual Property
We currently do not have any intellectual property.
In July 2019, we started the process of registering our trademark with the Trade Marks Registry in Hong Kong.
Competition
Competition in the car service industry is intense
and evolving. Our primary competitors are Shenzhen Anxun Automobile Rental Co., Ltd, The Motor Transport Company of Guangdong and Hong
Kong Limited and China Comfort (Shenzhen) Travel Services Co. Ltd. We believe the primary competitive factors in our markets include pricing,
user experience, brand, technological innovation, safety and reliability. We believe we compete favorably across these factors. We are
strategically positioned in the Guangdong-Hong Kong market where the demand for traveling between these two places is high. However, many
of our competitors and potential competitors are larger and have greater brand name recognition, longer operating histories, larger marketing
budgets and established marketing relationships, access to larger customer bases and significantly greater resources for the development
of their offerings. For additional information about the risks to our business related to competition, see the section titled “Risk
Factors— We face intense competition and could lose market share to our competitors, which could adversely affect our business,
financial condition and results of operations.”
Employees
As of the date of this Report, we have a total
of 3 full-time employees and 1 part-time employee working for customer services. The following table sets forth the number of our employees
categorized by function as of that date:
Function
Total Number of Employees
Technology & Product Development
2
Human Resource & Administration
1
Customer Services
1
Total
4
Facilities
We lease an office at Engineer Experiment Building, A202, 7 Gaoxin
South Avenue, Nanshan District, Shenzhen, Guangdong Province, China, encompassing approximately 205 square meters of space for a monthly
rent of RMB 10,000 (approximately $1,570). The lease for this facility expires on February 28, 2022. We believe the rented space is sufficient
for our current operations. We believe our facilities are sufficient for our current needs.
Insurance
We currently do not have any insurance coverage
other than participation in various governm 可 ent statutory social
security plans, including a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury
insurance plan, a maternity insurance plan and a housing provident fund.
Legal Proceedings
From time to time, we may in the future become
a party to various legal or administrative proceedings arising in the ordinary course of our business, including actions with respect
to intellectual property infringement, violation of third-party licenses or other rights, breach of contract and labor and employment
claims. We are currently not a party to, and we are not aware of any threat of, any legal or administrative proceedings that, in the
opinion of our management, are likely to have any material and adverse effect on our business, financial condition, cash-flow or results
of operations.
5
Regulations
This section sets forth a summary of the most significant
laws, rules and regulations that affect our business and operations in China. We provide our service through third-party transportation
companies and do not own the vehicle ourselves for their operations, therefore we believe we do not need the qualifications related to
vehicle transportation operations.
Regulations Relating to Foreign Investment
The Guidance Catalog of Industries for Foreign Investment
Investment activities in the PRC by foreign investors
shall comply with the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and is amended continuously
by MOFCOM, and the National Development and Reform Commission, or NDRC. According to the Catalog, industries are classified as three categories:
encouraged foreign invested industries, restricted foreign invested industries and prohibited foreign invested industries. Any industry
not listed in the Catalog or any encouraged foreign invested industry listed in the Catalog is a permitted industry. Some restricted industries
are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests
in such joint ventures. Foreign investors are not allowed to invest in industries within the prohibited category. Industries not listed
in the Catalogue are generally open to foreign investment unless specifically restricted by other PRC regulations.
In June 2018, the MOFCOM and the NDRC promulgated
the Special Administrative Measures for the Access of Foreign Investment (Negative List), or the Negative List (2018), effective in July
2018. The Negative List (2018) expands the scope of permitted industries by foreign investment by reducing the number of industries that
fall within the Negative List (2018) where restrictions on the shareholding percentage or requirements on the composition of board or
senior management still exists. In June 2019, the MOFCOM and the NDRC promulgated the Special Administrative Measures for the Access of
Foreign Investment (Negative List) (2019 Edition), or the Negative List (2019) to replace the Negative List (2018), effective in July
2019. The Negative List (2019) has reduced 8 special management measures in the Negative List (2018). We believe that our current business
is to provide travel services and therefore falls in neither the Negative List (2018) nor the Negative List (2019).
Foreign Investment Law
On March 15, 2019, the National People’s
Congress promulgated the Foreign Investment Law, which will become effective on January 1, 2020 and replace three existing laws on foreign
investments in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law and the Foreign Owned Enterprise Law, together with
their implementations and ancillary regulations to become the legal foundation for foreign investment in the PRC.
According to the Foreign Investment Law, the State
Council will publish or approve to publish a catalogue for special administrative measures, or the “negative list.” The Foreign
Investment Law grants national treatment to foreign invested entities, except for those foreign invested entities that operate in industries
deemed to be either “restricted” or “prohibited” in the “negative list.” Because the “negative
list” has yet to be published, it is unclear whether it will differ from the current Negative List. The Foreign Investment Law provides
that foreign invested entities operating in foreign restricted or prohibited industries will require market entry clearance and other
approvals from relevant PRC governmental authorities. Furthermore, the Foreign Investment Law provides that foreign invested enterprises
established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within
five years after the implementing of the Foreign Investment Law.
Interim Administrative Measures for the Record-filing of the Incorporation
and Change of Foreign-invested Enterprises
On September 3, 2016, the Standing Committee of
the National People’s Congress promulgated the Order of the Standing Committee of the National People’s Congress on Amending
Four Laws Including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (the “Order”), which
provides record-filing in lieu of administrative approval for the establishments and alterations of foreign invested enterprises (the
“FIEs”) not subject to special administrative measures. In order to provide more guidance for foreign-invested Enterprises,
the MOFCOM issued the Interim Administrative Measures for the Record-filing for the Establishment and Alteration of Foreign-invested Enterprises
(the “Interim Measure”) on October 8, 2016 (Revised in July 30, 2017 and June 29, 2018), or the Measures. The Measures provided
detail instructions for foreign-invested enterprise to carry out record filing in terms of the change of the enterprise in China.
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The M&A Rules
The Provisions Regarding Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the M&A Rules, was jointly promulgated by MOFCOM, China Securities Regulatory Commission,
or CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, State Administration of Taxation, State
Administration of Industry and Commerce and State Administration of Foreign Exchange, or SAFE, on August 8, 2006 and became effective
as of September 8, 2006, and were later amended on June 22, 2009. This M&A Rules governs among other things, the purchase and subscription
by foreign investors of equity interests in a domestic enterprise, and the purchase and operation by foreign investors of the assets and
business of a domestic enterprise. An offshore special purpose vehicle, or SPV, is defined under the M&A Rules as an offshore entity
directly or indirectly controlled by Chinese individuals or enterprises for the purpose of an overseas listing, and the main assets of
which are the rights and interests in affiliated domestic enterprises. Under the M&A Rules, if a SPV intends to merge with or acquire
any domestic enterprise affiliated from the Chinese individuals or enterprises that control the SPV, such proposed merger for approval.
The M&A Rules also require that a SPV shall obtain an approval from the CSRC prior to the listing and trading of its securities on
an overseas stock exchange.
Regulations Relating to Intellectual Property Rights
Software Copyright
The Copyright Law of the PRC, promulgated in 1990
and amended it in 2001 and 2010, and the Regulations on Computer Software Protection, promulgated by the State Council of the PRC on December
20, 2001 and revised on January 8, 2011 and January 1, 2013, provide protection to the rights and interests of computer software copyright
holders. Pursuant to the Regulations on Computer Software Protection, software developed by PRC citizens, legal entities or other organizations
is automatically protected immediately after its development, regardless of whether the software was published. A software copyright owner
may register with the designated registration authorities and obtain a registration certificate, which serves as preliminary proof of
ownership of the copyright and other registered matters. The operational procedures for the registration of software copyright and the
registration of software copyright license and transfer agreements are set forth in the Measures on Computer Software Copyright Registration
promulgated by the National Copyright Administration on February 20, 2002.
Patents
The NPCSC adopted the Patent Law of the PRC in
1984 and amended it in 1992, 2000 and 2008, respectively. A patentable invention, utility model or design must meet three conditions:
novelty, inventiveness and practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual
activities, methods used to diagnose or treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation.
The Patent Office under the State Intellectual Property Office is responsible for receiving, examining and approving patent applications.
A patent is valid for a twenty-year term for an invention and a ten-year term for a utility model or design, starting from the application
date. Except under certain specific circumstances provided by law, any third party user must obtain consent or a proper license from the
patent owner to use the patent, otherwise the use will constitute an infringement of the rights of the patent holder.
Domain Name
On November 5, 2004, the MIIT promulgated the Measures
for Administration of Domain Names for the Chinese Internet, or the Domain Name Measures. According to the Domain Name Measures, “domain
name” shall refer to the character identifier for identifying and locating the hierarchical structure of a computer on the Internet,
which corresponds to the Internet protocol (IP) address of the computer concerned. A domain name registration service shall observe the
principle of “first apply, first register”. Where the domain name is completed, the applicant for the domain name registration
shall be the holder of the domain name.
Trademark
The PRC Trademark Law, adopted in 1982 and revised
in 2001 and 2013, respectively, with its implementation rules adopted in 2002 and revised in 2014, protects registered trademarks. The
Trademark Office handles trademark registrations and grants a protection term of ten years to registered trademarks.
7
Regulations on Foreign Exchange
Foreign Exchange Settlement
The Circular of the State Administration of Foreign
Exchange on Reforming the Management Approach regarding the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, which
was promulgated by the SAFE on March 30, 2015 and became effective as of June 1, 2015, adopts the approach of discretional foreign exchange
settlement, under which the foreign exchange capital in the capital account of a foreign-invested enterprise for which the foreign-invested
enterprise has obtained confirmation by the local SAFE branches regarding the rights and interests of monetary contribution (or the book-entry
registration of monetary contribution by the banks) can be settled at the banks based on the actual operation needs of such foreign-invested
enterprise. The capital in Renminbi obtained by the foreign-invested enterprise from the discretionary settlement of foreign exchange
capital shall be managed under the account pending for foreign exchange settlement payment. The proportion of discretionary settlement
of foreign exchange capital is temporarily determined as 100%, subject to the adjustment of the SAFE.
Regulations Relating to Foreign Exchange Registration
of Overseas Investment by PRC Residents
SAFE Circular 37 promulgated by the SAFE in July
2014, requires PRC residents or entities to register with the SAFE or its local branch their establishment or control of an offshore entity
established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations
when the offshore special purpose vehicle undergoes material events relating to any change of its basic information (including change
of such PRC citizens or residents, name and operation term, and etc.) increases or decreases in investment amount, transfers or exchanges
of shares, or mergers or divisions, etc.
SAFE further enacted the Notice of the SAFE on
Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment, or the SAFE Notice 13, on February 13,
2015, which allows PRC residents or entities to register with qualified banks their establishment or control of an offshore entity established
for the purpose of overseas investment or financing. However, remedial registration applications made by PRC residents that previously
failed to comply with the SAFE Circular 37 will continue to fall under the jurisdiction of the relevant local branch of the SAFE. In the
event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries
of that special purpose vehicle may be prohibited from distributing profits to the offshore parent and from carrying out subsequent cross-border
foreign exchange activities. Further, the special purpose vehicle may be restricted in its ability to contribute additional capital into
its PRC subsidiary.
Regulations Relating to Dividend Distribution
The principal laws and regulations regulating the
distribution of dividends by FIEs in the PRC include the Company Law of the PRC, as amended in 1999, 2004, 2005, 2013 and 2018, the Wholly
Foreign-owned Enterprise Law of the PRC promulgated in 1986 and last amended in 2016 and its implementation regulations promulgated in
1990 and subsequently amended in 2001 and 2014, the Equity Joint Venture Law of the PRC promulgated in 1979 and last amended in 2016 and
its implementation regulations promulgated in 1983 and last amended in 2014, and the Cooperative Joint Venture Law of the PRC promulgated
in 1988 and last amended in 2017 and its implementation regulations promulgated in 1995 and last amended in 2017. Under the current regulatory
regime in the PRC, FIEs in the PRC may pay dividends only out of their accumulated profit, if any, determined in accordance with PRC accounting
standards and regulations. Except otherwise provided by the laws regarding foreign investment, a PRC company is required to set aside
at least 10% of its after-tax profit as general reserves until the cumulative amount of such reserves reaches 50% of the company’s
registered capital. A PRC company shall not distribute any profits until any losses from prior fiscal years have been offset. Profits
retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Regulations Relating to Foreign Debts
Considering that certain foreign debts may be generated
during the oversea or domestic investment from PRC residents, the State Administration of Foreign Exchange promulgated the Administrative
Measures for Registration of Foreign Debts, or the Measures, on April 28, 2013 and became effective on May 13, 2013. This Measures require
the entity to complete several regulatory procedures in terms of foreign debts. For example, after borrowed the foreign debts, debtors
shall carry out registration on local SAFE in relation to the execution of the contract, the drawdown, the prepayment or the foreign exchange
settlement and sales within a specific period. For any change of the foreign debts contract, an amendment registration shall be carried
out with the local SAFE.
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Regulations Relating to Employment and Social Insurance
Pursuant to the PRC Labor Law effective as of January
1, 1995 (as amended on August 27, 2009), and the PRC Labor Contract Law effective as of January 1, 2008 (as amended on December 28, 2012),
a written labor contract shall be executed by employer and an employee when the employment relationship is established, and an employer
is under an obligation to sign an unlimited- term labor contract with any employee who has worked for the employer for ten consecutive
years. In addition, if an employee requests or agrees to renew a fixed-term labor contract that has already been entered into twice consecutively,
the resulting contract must include an unlimited term, with certain exceptions. All employers are required to establish a system for labor
safety and sanitation, strictly abide by state rules and standards and provide employees with appropriate workplace safety training. Moreover,
all PRC enterprises are generally required to implement a standard working time system of eight hours a day and forty hours a week, and
if the implementation of such standard working time system is not appropriate due to the nature of the job or the on, the enterprise may
implement a flexible working time system or comprehensive working time system after obtaining approvals from the relevant authorities.
According to the Social Insurance Law of China
effective from July 1, 2011, and the Housing Fund Regulation which was amended and became effective on March 24, 2002, employers in China
shall pay contributions to the social insurance plan and the housing fund plan for their employees, and such contribution amount payable
shall be calculated based on the employee actual salary in accordance with the relevant regulations.
Regulations on Tax
PRC Enterprise Income Tax Law
On March 16, 2007, the National People’s
Congress promulgated the Law of the PRC on Enterprise Income Tax, which was amended on February 24, 2017 and December 29, 2018, and on
December 6, 2007, the State Council of the PRC enacted The Regulations for the Implementation of the Law on Enterprise Income Tax, or
collectively, the EIT Law. According to the EIT Law, taxpayers consist of resident enterprises and non-resident enterprises. Resident
enterprises are defined as enterprises that are established in China in accordance with PRC laws, or that are established in accordance
with the laws of foreign countries but whose “de facto management body” is located in the PRC. Non-resident enterprises are
defined as enterprises that are set up in accordance with the laws of foreign countries and whose de facto management body is located
outside the PRC, but have either established institutions or premises in the PRC or have income generated from inside the PRC. Under the
EIT Law and relevant implementing regulations, enterprises are subject to a uniform corporate income tax rate of 25%. However, if non-resident
enterprises have not formed permanent establishments or premises in the PRC, or if they have formed permanent establishments or premises
in the PRC but their relevant income derived in the PRC is not related to those establishments, then their enterprise income tax would
be set at a rate of 10% for their income sourced from inside the PRC.
As noted, the EIT Law provides that an income tax
rate of 10% will be applicable to dividends or other gains received by investors who are “non-resident enterprises” and who
meet the requirements for the lower enterprise income tax rate. Such income tax on dividends may be reduced further by the tax treaties
between China and the jurisdictions in which our non-PRC shareholders reside. Specifically, pursuant to an Arrangement between the PRC
and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double Tax
Avoidance Arrangement, and other applicable PRC laws, if a Hong Kong enterprise (being the beneficial owner of dividends from a PRC enterprise)
is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance
Arrangement and other applicable laws, the 10% withholding tax on the dividends that the Hong Kong enterprise receives from the PRC enterprise
may be reduced to 5% subject to approval from the relevant tax authority. However, based on the Notice on Certain Issues with Respect
to the Enforcement of Dividend Provisions in Tax Treaties, or Notice No. 81, issued on February 20, 2009 by the State Tax Administration,
if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a
corporate structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment. Moreover,
based on the Announcement on Certain Issues Concerning the Recognition of Beneficial Owners in Tax Treaties, which was issued on February
3, 2018 by the State Tax Administration, conduit companies, which are established for the purpose of evading or reducing tax, or transferring
or accumulating profits, shall not be recognized as beneficial owners and are thus not entitled to the above tax benefits.
PRC Value-added Tax Law
The Provisional Regulations of the PRC on Value-added
Tax were promulgated by the State Council of the PRC on December 13,1993 and subsequently amended on November 10, 2008, February 6, 2016
and November 19, 2017. The Detailed Rules for the Implementation of the Provisional Regulations of the PRC on Value-added Tax (Revised
in 2011) was promulgated by the Ministry of Finance and the SAT on December 15, 2008 and subsequently amended on October 28, 2011 (collectively,
the “VAT Law”). According to the VAT Law, all enterprises and individuals engaged in the sale of goods, provision of processing,
repair and replacement services, and importation of goods within the territory of the PRC must pay value-added tax, or VAT. Other than
exports (subject to 0% VAT rate) and certain products listed in the VAT Law (subject to 11% VAT rate), the sale and importation of goods
were generally subject to a VAT rate of 17%. Pursuant to the Circular of the Ministry of Finance and the State Administration of Taxation
on Adjusting Value-added Tax Rates, which became effective on May 1, 2018, the previous applicable VAT rate of 17% and 11% are adjusted
to 16% and 10%, respectively.
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