893.5034 Registration/2–2246: Telegram

The Counselor of Embassy in China (Smyth) to the Secretary of State

347. Further information concerning action in Legislative Yuan in returning to Supreme National Defense Council its recommendation for deletion of “doing business” provisions of articles 7 and 292 of revised company law (ReEmbtel 301, Feb. 15, 8 a.m.) may be reported from discussions with Wang Chung-hui, Secretary General, Supreme National Defense Council, S. Y. Wu, Secretary General, Legislative Yuan, and officials of the Ministry of Foreign Affairs. (Please inform Commerce.)

Wang Chung-hui and S. Y. Wu both state Sun Fo, President Legislative Yuan, now favors deletion of “doing business” requirement. Action taken on February 12, however, was virtually unanimous by members of Legislative Yuan; it was not merely a committee action. Wu expressed opinion that Supreme National Defense Council in reconsideration would [repeat its]15 recommendations for [Page 1302] deletion of “doing business” provision in which case Legislative Yuan would have no further recourse.

Wu explained that unequal treaty arguments cited by Legislative Yuan as quoted in Embtel 301, Feb. 15, 8 a.m., were [not influential, at least not with responsible Chinese officials. He stated that main thought in minds of Chinese legislators was possibility of Chinese officials or business men using incorporation in a foreign country as a means for evading proper payment of taxes and responsibilities under Chinese law. If Chinese were able to organize an enterprise, say, as a China Trade Act Company, Wu stated, that company would not have to pay taxes in the United States; it would pay taxes in China, of course, but by virtue of being a foreign corporation with an office abroad it would] be given an advantage in concealing its assets from the Chinese Government for tax paying purposes.

Obvious replies to this confused but apparently effective argument were made to Wu, but it could be helpful if as promptly as possible we could receive from Dept as [an] authoritative, broad statement of relevant aspects of tax exemptions and liabilities in the United States for ordinary corporations doing business abroad with respect to federal and state taxation, together with a statement of position of China [Trade] Act corporations in same respect to use in further clarification of the points at issue. Wu asked for such a statement to assist in his discussions with Legislative Yuan members.

Wu made the unusually frank admission that the Chinese do not expect that the company law can be administered effectively for a few years. During this period, he said, foreign companies would have “advantages” over Chinese companies. This fear of competition from foreigners appears as a real factor in the situation, both with respect to the company law and the commercial treaty negotiations. For example, after pointing to the opportunity for concealing their wealth which deletion of “doing business” provisions allegedly would afford to “bureaucratic capitalists”, the Shang Wu Jih Pao, Feb 18, expresses in its second major criticism of the proposed company law the following: “The other object is that the branch of a foreign company or a Chinese company formed by a foreign resident in accordance with the law will be far ahead of a Chinese state owned or a privately owned corporation in respect of [capital], size, improved technique and efficient management. Our national industries will shrink in size as the result of keen competition and national economy will suffer in consequence”.

In commercial treaty meeting Feb 20, when we began to present Dept’s views with respect to Chinese counterproposals (ReDeptel 304, [Page 1303] Feb 16, 2 p.m.16) we stated that inclusion of “doing business” requirement in article 3, paragraph 2 of Chinese counterdraft was a surprise to Dept in view of public announcement on Jan 30 concerning deletion of this requirement, and that Dept had stated its assumption that this requirement would be deleted from the “counterdraft”. It was stated that we were not yet in [a position to convey our Govt’s views with respect to] “doing business” provision in the counterdraft but in view of the extended consideration already given this matter, there were grounds to believe that the Dept would probably take a [firm stand], and that we hoped the matter would not be an obstacle in our steady negotiations. It was [emphasized that with respect to] articles 7 and 292 we have asked for no right [which the United States is not willing reciprocally] to accord, that we are asking for nothing that we would not ask for and would not be accorded by other countries. By opposing the “doing business” requirement, China appears to be laying down a condition which certainly is not required in the corporation laws of any state in the United States and to the best of our knowledge is not required by any other country in the world. Also we pointed out that our attitude with respect to articles 7 and 292 has not been formulated solely with China Trade Act companies in mind. A general application of the law would as effectively bar from registration such a company as the Texas Company (China) Ltd as it would any China Trade Act company.

Dr. Wang Hua-cheng replied that the matter was one for decision by the Supreme National Defense Council and that if that body voted to delete the “doing business” provisions of articles 7 and 292, the similar provisions would be removed from the Chinese counterdraft. He asked for a written statement of our views vis-à-vis articles 7 and 292 and for affirmation of our statement that other countries have no “doing business” requirement in their corporation laws. It is proposed to base any such further written statement mainly on Dept’s reply to Embtel 301, Feb 15, 8 a.m., and we would appreciate also renewed confirmation of our statement about the uniqueness and lack of accordance with corporate practice of “doing business” requirement.

Embassy is keenly aware that we must not be in a position of intervening in an internal legislative dispute; and that in our commercial treaty negotiations we must not emphasize articles 7 and 292 in such a way that a Chinese concession here could become a major bargaining point for them in withholding or restricting other perhaps more fundamental rights for American business. Also that the possibility could exist that if forced to accept revision with regard to articles 7 and 292, Legislative Yuan might seek to introduce other [Page 1304] amendments or requirements restrictive of rights of foreign companies. It is not yet [sure] that the matter will come up for decision at meeting of Supreme National Defense Council on Feb 25. Dr. Kan Nai-kuang, Vice Minister of Foreign Affairs, has also expressed his view privately to us that if Council’s action is taken at this next meeting, it will be favorable.

  1. Bracketed insertions in this telegram made upon basis of original Embassy copy (Nanking Embassy files, Lot F79, 804.41 Company Law).
  2. Not printed.