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Note 22 - Restricted Net Assets
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3 Months Ended | ||||||
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Mar. 31, 2012
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| Restricted Assets Disclosure [Text Block] |
As
most of the Company’s operations are conducted through
its PRC subsidiary and VIEs, the Company’s ability to
pay dividends is primarily dependent on receiving
distributions of funds from its PRC subsidiary and VIEs.
Relevant PRC statutory laws and regulations permit payments
of dividends by its PRC subsidiary and VIEs only out of their
retained earnings, if any, as determined in accordance with
PRC accounting standards and regulations and after it has met
the PRC requirements for appropriation to statutory reserves.
Paid in capital of the PRC subsidiary and VIEs included in
the Company’s consolidated net assets are also
non-distributable for dividend purposes.
In
accordance with the PRC regulations on Enterprises with
Foreign Investment, a WFOE established in the PRC is required
to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and
bonus fund which are appropriated from net profit as reported
in the enterprise’s PRC statutory accounts. A WFOE is
required to allocate at least 10% of its annual after-tax
profit to the general reserve until such reserve has reached
50% of its registered capital based on the enterprise’s
PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the
discretion of the board of directors. The aforementioned
reserves can only be used for specific purposes and are not
distributable as cash dividends. Rise King WFOE is subject to
the above mandated restrictions on distributable profits.
Additionally, in accordance with the Company Law of the PRC,
a domestic enterprise is required to provide a statutory
common reserve of at least 10% of its annual after-tax profit
until such reserve has reached 50% of its registered capital
based on the enterprise’s PRC statutory accounts. A
domestic enterprise is also required to provide for a
discretionary surplus reserve, at the discretion of the board
of directors. The aforementioned reserves can only be used
for specific purposes and are not distributable as cash
dividends. All of the Company’s PRC VIEs are
subject to the above mandated restrictions on distributable
profits.
As
a result of these PRC laws and regulations, the
Company’s PRC subsidiary and VIEs are restricted in
their ability to transfer a portion of their net assets to
the Company. As of March 31, 2012 and December 31,
2011, net assets restricted in the aggregate, which include
paid-in capital and statutory reserve funds of the
Company’s PRC subsidiary and VIEs that are included in
the Company’s consolidated net assets, was
approximately US$4.8 million and US$4.7 million,
respectively.
The
New PRC Enterprise Income Tax (“EIT”) Law, which
was effected on January 1, 2008, also imposed a 10%
withholding income tax for dividends distributed by a foreign
invested enterprise to its immediate holding company outside
China, which were exempted under the previous EIT
law. A lower withholding tax rate will be applied
if there is a tax treaty arrangement between mainland China
and the jurisdiction of the foreign holding company. Holding
companies in Hong Kong, for example, will be subject to a 5%
rate. Rise King WFOE is invested by its immediate
holding company in Hong Kong and will be entitled to the 5%
preferential withholding tax rate upon distribution of the
dividends to its immediate holding company.
The
ability of the Company’s PRC subsidiary and VIEs to
make dividends and other payments to the Company may also be
restricted by changes in applicable foreign exchange and
other laws and regulations.
Foreign
currency exchange regulation in China is primarily governed
by the following rules:
Currently,
under the Administration Rules, Renminbi is freely
convertible for current account items, including the
distribution of dividends, interest payments, trade and
service related foreign exchange transactions, but not for
capital account items, such as direct investments, loans,
repatriation of investments and investments in securities
outside of China, unless the prior approval of the State
Administration of Foerign Exchange (the “SAFE”)
is obtained and prior registration with the SAFE is made.
Foreign-invested enterprises like Rise King WFOE that need
foreign exchange for the distribution of profits to its
shareholders may effect payment from their foreign exchange
accounts or purchase and pay foreign exchange rates at the
designated foreign exchange banks to their foreign
shareholders by producing board resolutions for such profit
distribution. Based on their needs, foreign-invested
enterprises are permitted to open foreign exchange settlement
accounts for current account receipts and payments of foreign
exchange along with specialized accounts for capital account
receipts and payments of foreign exchange at certain
designated foreign exchange banks.
Although
the current Exchange Rules allow the convertibility of
Chinese Renminbi into foreign currency for current account
items, conversion of Chinese Renminbi into foreign exchange
for capital items, such as foreign direct investment, loans
or securities, requires the approval of SAFE, which is under
the authority of the People’s Bank of China. These
approvals, however, do not guarantee the availability of
foreign currency conversion. The Company cannot be sure that
it will be able to obtain all required conversion approvals
for its operations or the Chinese regulatory authorities will
not impose greater restrictions on the convertibility of
Chinese Renminbi in the future. Currently, most of the
Company’s retained earnings are generated in Renminbi.
Any future restrictions on currency exchanges may limit the
Company’s ability to use its retained earnings
generated in Renminbi to make dividends or other payments in
U.S. dollars or fund possible business activities outside
China.
As
of March 31, 2012 and December 31, 2011, there was
approximately US$34.1 million and US$34.0 million retained
earnings in the aggregate, respectively, which was generated
by the Company’s PRC subsidiary and VIEs in Renminbi
included in the Company’s consolidated net assets,
aside from US$2.3 million and US$2.2 million statutory
reserve funds as of March 31, 2012 and December 31, 2011,
respectively, that may be affected by increased restrictions
on currency exchanges in the future and accordingly may
further limit the Company’s PRC subsidiary’ and
VIEs’ ability to make dividends or other payments in
U.S. dollars to the Company, in addition to the approximately
US$4.8 million and US$4.7 million restricted net assets as of
March 31, 2012 and December 31, 2011, respectively, as
discussed above.
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