HYLANDS ENTERTAINMENT & MEDIA REPORT CHINA HYLANDSLAW.COM

Hylands Entertainment & Media Report

China

February 2012

CHINESE VP XI JINPING AND US VP JOSEPH BIDEN IN THIS ISSUE

On December 15, 2011, the PRC State Council Legislative Affairs Office (SCLAO) issued a draft for comments of the Film Industry Promotion Law (Draft Law). Recently, Hylands Law Firm has attended several seminars, one held by the Beijing Lawyers Association, to offer expert advice on the Draft Law.

The foundation document in relation to the China film industry is the 2001 Administration of Films Regulations (Regulations), which are administrative Regulations, therefore applying to production, import, export, distribution and broadcasting of feature, documentary, popular-science, animation, and special-topic films, etc. Subject to the Regulations, participation in production, distribution or broadcast of films shall be examined and ratified by the relevant administrative bodies.

The culture industry has been deemed an important industry in China’s “12th Five-Year Plan”, as well as an essential power that can promote economic restructuring and development. The culture industry could not development further without a stable, State-supported policy. Therefore, it is significant to confirm such support by legislation and modify the strict laws on culture industry. There are several interesting points to note in the Draft Law as follows:

1. Scope of the Law The Draft Law shall apply to activities of film-making, production, release and distribution, etc., within the territory of the People’s Republic of China. Compared with the Regulations, the Draft Law does not cover film import and export. Since

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End of the 20-Foreign Film Quota?

Page 2

News and Policy SARFT Encourages Increased Taiwan TV Imports, and much more

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China’s Focus on the Film Industry: Comments on the New Film Industry

Promotion Law (Draft)

By Yu Rong and Li Zhengning

HYLANDS ENTERTAINMENT & MEDIA REPORT CHINA HYLANDSLAW.COM

On the last day of his week-long US visit, China’s Vice President (and likely future President) Xi Jinping in a meeting with US Vice President Joseph Biden, agreed to allow an additional 14 foreign films (all of which must be in an enhanced format – i.e., 3-D or IMAX) to be imported into China each year. The requirement of the enhanced format allows the 14 additional films to be seen as a special category, without, therefore, modifying the present 20-foreign film quota – a politically sensitive issue in China.

The agreement, which the White House declared “will allow significantly more job-supporting U.S. film exports to China and provide fairer compensation to U.S. film producers for the movies being shown there," will also allow the increase of a foreign studio’s permitted share of

box-office receipts from a film released in China to 25% from 13-17.5%, will provide the foreign studio new rights to audit film revenue and consult on marketing plans, and stipulates that a Chinese partner will not be allowed to claim a material breach of a distribution agreement due to the PRC censors declared rejection of a project.

The agreement should also help independent filmmakers get a share of the Chinese film market. Independent Film and Television Alliance President-CEO Jean Prewitt said, “Our sector has been unable to

benefit fully from the existing revenue-sharing importation quotas and has had limited avenues through which to distribute. For the first time, through this agreement, there is a promise of creating a commercial foundation that will allow independent producers to participate more fully in the Chinese marketplace.”

Please see the full White House statement here: http://www.ustr.gov/about-us/press-office/press-releases/2012/february/united-states-achieves-breakthrough-movies-disput

China’s Box Office Hits Rmb13 Billion in 2011 China’s (mainland) box-office reached Rmb 13 billion in 2011, coinciding with the addition of an average of eight new theatrical screens each day. The Rmb100 million box office mark was hit by 15 domestic and 17 foreign films, setting a new China film market record. Among the 15 domestic films, only two films—The Founding of a Party and Love is Not Blind — surpassed the 300 million mark. Of the 17 foreign films, the box office receipts for Transformers Ⅲ amounted to Rmb 1 billion, while Kung Fu PandaⅡ, Pirates of The CaribbeanⅤ, and Harry Potter Ⅷ were about 400 million each. Industry experts believe that one of the reasons for China’s

strong 2011 box office growth was the continuous increasing number of China’s movie screens; the daily opening average increased to eight in 2011. Additionally, 3D screening of Hollywood imports, which are not restricted by the import quota, also contributed to the strong growth.

The huge Chinese film market has not only encouraged greater investment in the film industry, but has also drawn the attention of many overseas film enterprises with regard to importation, co-production policy, cinema construction and China’s online market. In addition, the Chinese government has recently promulgated the Promotion of Chinese Film Law, which was drafted to continue the film industry’s prosperous development.

Revenue Capped at France's CNC The French Senate has passed a bill to cap revenues of the Centre national du cinéma et de l'image animée (CNC), the state film and TV agency, at €700 million ($938 million), and divert the excess into the national budget.

The CNC's revenue streams from taxes on film tickets, TV channels, VOD, mobile, Internet, DVDs and other film-related products, which serve to fund the film industry, will each have an individual cap. Excess from taxes on Internet service providers will be used to finance the

CHINA ENTERTAINMENT NEWS AND POLICY

End of the 20-Foreign Film Quota? Not So Fast White House: United States Achieves Breakthrough on

Movies in Dispute with China

HYLANDS ENTERTAINMENT & MEDIA REPORT CHINA 3

National Music Center (NCM), which is set to launch next year. The measure provoked uproar in the French film and TV business when it was passed by the National Assembly. Industry players and unions lobbied so energetically against the bill that the government suggested an amendment that restricted the cap to revenue from taxes on TV services, but the Senate rejected that.

The measure could yet be overturned, however, by a bipartisan commission, made up of politicians from both chambers, which will seek a more consensual approach.

Huayi Brothers and Bona Film Group Co-operate to Develop Overseas Market Huayi Brothers Media Corporation and Bona Film Group Limited, two leading film distributors in China, announced that both of the companies will acquire stakes in China Lion Film Distribution for the purpose of releasing Chinese films at the same time around the world.

Huayi and Bona are trying to increase the copyright values of their films in the overseas market. The cooperation also provides a way for Chinese films to reach overseas culture industries. According to the principles of reciprocity in international trade, the possibility exists for the United States to request China to open the film distribution business to Hollywood or make other concessions in the film industry.

Web portal first introduced overseas copyright Chinese video web portal, iQiyi, recently announced a first-of-its-kind transaction of purchasing the copyright of the template of a foreign program to be ultimately produced by the local website. In this case, iQiyi has purchased the program template of the English TV program called Date My Car. Date, a dating reality show, which became popular both in the UK and France. Whether a program’s template should be protected under copyright law is still a controversial topic.

Culture Industries Tax Incentives The State Administration of Taxation states has indicated that it will continue carrying out tax preferential policies aimed at granting a series of tax incentives on which small-size and medium-size enterprises would benefit.

The policies that the Chinese taxation and finance administration have carried out to promote culture industry include: (1) an exemption from VAT and business tax for revenues obtained from film copy sales, film copyright transfer, film distribution as well as film projection in rural areas for film group companies (including member enterprises), film studios and other film enterprises authorized by their corresponding broadcast, film and television administrations to be engaged in film production, distribution and projection; (2) an exemption from business tax for the basic maintenance fees of cable digital television for enterprises dealing with broadcast and television operations and service; (3) an export tax rebate on VAT for the exporting of books, newspapers, periodicals, audio-video products, e-publications, as well as finished films and television programs; (4) an exemption from business tax for revenue derived from overseas performance for cultural enterprises; (5) a preferential corporate income tax rate of 15% for (approved) high and new technology cultural enterprises in the fields of culture industry supportive technologies; (6) the option to deduct as a property loss before tax for unsold publications, books unsold after five years, audio-video products, e-publications and transparencies unsold after two years as well as newspapers and calendars unsold for over a year; (7) an exemption from tariffs according to related taxation regulations currently in force for self-use equipment together with accessories and spare parts and imported for producing major cultural products, and which cannot be manufactured domestically.

These policies remove a heavy financial burden for culture and related industries, and can positively affect investment in these areas during the world economic downturn.

Rules for Monitoring Internet A/V and Investigation Procedures Issued Copyright Protection Center of China (CPCC) has issued a new rule on video and audio monitoring on the Internet and investigation and evidence collection, which states the detailed procedure on monitoring, investigation and evidence collection. CPCC will institute the use of software that can automatically monitor the pirating of information posted on the Internet. Once certain pirated information is found, the software should be able to send a remove/take-down order automatically. This service will help to protect rights owners and save great time and cost.

SARFT Encourages Increased Taiwan TV Imports To further promote the implementation of relevant policies for the development of Taiwanese entertainers to create more opportunities in the mainland, SARFT has reaffirmed and strengthed the promotion of cross-strait cooperation and exchange with the implementing of the following specific measures:

First, actively encourage cross-strait co-production of the film and television drama productions, by having SARFT taking an active role in communicating with Taiwanese producers, shortening the censorship procedures, and by allowing the co-production to receive broadcast time on CCTV.

Second, to take positive measures to encourage and promote Mainland-related institutions to increase the introduction of television drama in Taiwan.

Third, continue to welcome the Taiwanese entertainers to the Mainland and to become more

HYLANDS ENTERTAINMENT & MEDIA REPORT CHINA 4

involved in production-related radio and television programs.

In accordance with the newly-revised Industrial Catalog Guiding Foreign Investment, China has kept strict market access rules for the entertainment and media indsutries in effect. However, under CEPA and ECFA, the co-operation between Mainland and Hong Kong, Macao and Taiwan should be further deepened in the future.

Theme Park Service Standards Issued Drafted by the Changzhou Dinosaur Park and National Standards Committee, the Theme Park Service Standards were promulgated on Dec

1st, 2011. In addition to clarifying what exactly a “theme park” is, the Standards include ten detailed categories of services that must be complied with at theme parks, and which is hoped shall provide valuable reference for the theme park projects in the future.

SARFT Releases Distribution and Projection Rules According to new rules issued by SARFT, cinemas will be able to obtain a share of no greater than 50% of the box office in the first round of projection for any particular film (the percentage comports with international norms). To protect theater investors, real estate agents may not charge a fee exceeding 15% of

the annual box office. Theaters may join theater chains by contracts, and the term of the contract should be less than 3 years. During the term, once the certain theaters are empowered to form a theater chain, theaters may dissolve the contracts through negotiation with the theater chain. It is hoped that theaters will replace the production company in producing pre-movie adverts. Such policy aims to balance production, distribution and projection industries. However, due to lack of sufficient binding force of these new rules, it is unclear when (or even whether) they will be ultimately followed in practice.

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the Draft Law will have greater authority than the Regulations, in the event of any inconsistency, the Draft Law shall be applied. However, for issues regarding film import and export, the Regulations shall still apply.

Compared with the Regulations, the Draft Law sets out a definition for film (“works which are produced by audio-visual technology and artistic medium and recorded on footage or digital material, consisting of a series of images, with or without accompanying sound, and which can be Hylan complying with the technical standard of cinema broadcasting or mobile-cinema broadcasting”). Although there are surely similarities, the definition in the Draft Law is in fact inconsistent with that found in the Copyright Law: the Copyright Law does not define “film work” as that which must be able to be screened to the public. Therefore, if the film will not be screened to the public, the work may be protected under the Copyright Law, but will not enjoy any of the protections under the Draft law.

2. Broadening the Definition of Producer Regarding studio companies in China, the Regulations stipulate that there are studio companies that are approved to produce films as they wish and on a continuous basis (i.e. ordinary production company), and that there are other types of studio companies, however, that may be approved to produce films on a project-by-project basis (i.e., single-film production companies). For co-production projects, the Chinese producer must be of the former type. The Draft Law makes some changes to this situation. That is, either type of studio can take part in co-productions, and after completing the production of

two films, the single-film production company may apply to become an ordinary production company. As well, while the Regulations only allow approved production companies to cooperate with foreign parties for co-productions, the Draft Law loosens those restrictions by allowing any production company that has at least one film publically screened in China to participate.

If the Draft Law comes into force as is, it would be expected, therefore, that many more film studios will appear in China, which should create a situation where more films are produced in the Chinese film market.

However, the Draft Law does not clarify whether public organizations, such as government institutions and units like China Central Television (CCTV), are covered by the Draft Law, even though government studios produce a great amount of material.

3. Film Distribution Modification

According to the Regulations, for the purpose of establishing a film distribution unit, an application shall be submitted to the film administration department of the local people’s government of a province, an autonomous region, or a municipality directly under the Central Government. Where the department concerned approves the application, a Permit for Film Distribution shall be issued, and the applicant shall, by presenting the Permit, register with the administrative department for industry and commerce (AIC) and shall, according to law, procure a business license. Where a film distribution intends to terminate its filming business, it shall go to the original

HYLANDS ENTERTAINMENT & MEDIA REPORT CHINA 5

AIC to have its registration cancelled, and shall report to the original film administration department that conducted examination and granted approval. However, according to Interim Provisions on Operation Qualification Access for Movie Enterprises, the companies, enterprises and other economic organizations inside China (excluding foreign-funded enterprises) are encouraged to establish companies exclusively operating the distribution of domestically produced films under the condition that the applicant has been entrusted by a movie production entity to have represented the distribution of two movies or has been entrusted by a TV series production entity to have distributed two TV series. The Film Administrative Regulations also stipulate that the establishment of a film distribution should have the organization and professionals that meet the needs of its scope of business. But, from a comparison of the Provisions and the Regulations, it can be seen that there is some inconsistency: when establishing a film distribution unit, it is unclear whether approval must come first and then establishment, or, establishment first and then an enlargement of the scope of business after approval.

The Draft Law seems to try to bring some clarity to the above issue. According to Article 30, for the purpose of establishing a film distribution unit, the applicant should have sufficient funds and submit an application to the film administration department of the local people’s government of a province, an autonomous region or a municipality directly under the Central Government (for the purpose of establishing an inter-provincial, inter-autonomous-regional or inter-municipal film distribution unit, an application shall be submitted to the radio, film and television administration department under the State Council). This clearly specifies that distribution is no longer exclusive to certain enterprises, but has become a special business scope. Any company, enterprise or other economic organization with the appropriate amount of funds, could apply for distribution as a business scope after the relevant departments’ approval. However, in order to take advantage of the new law, some adjustments should be made to the Interim Provisions on Operation Qualification Access for Movie Enterprises. The Draft Law also has no clear specification regarding whether or not the non-profit organizations, public enterprise and government -backed TV stations could apply to establish a distribution unit.

4. Recognition of Films’ Nationality

The Chinese government limits imports for theater releases to 20 foreign films per year. To avoid this quota system, more and more Sino-foreign co-produced movies are produced every year. Therefore, there are a lot of complex criteria for the identification of a film’s nationality.

According to the Draft Law, Article 18, a co-produced film, whose copyright is enjoyed by a domestic enterprise, shall be regarded as a domestic film. Where domestic enterprise doesn’t enjoy the copyright of the film, all of the negative, working print or copy of the film shall be shipped out of the Chinese territory. This article has simplified the definition of domestic film, but we should also notice that:

a. Presently, there are 3 types of co-production: joint production, assisted production and commissioned production. It is not clear if the Draft Law covers all 3 types or just one.

b. Copyright shall include personal/moral rights and property/economic rights. The copyright referred to in Article 18 does not specify the required ownership of how many of those copyright rights will amount to owning the Copyright for purposes of enjoying the stipulations set out in the Draft Law.

If the above issue is not clarified, and therefore leaving the issue as to what shall qualify as a domestic film unresolved, this will create much difficulty in the industry.

5. Issues That the Draft Does Not Concern

The Draft Law makes no mention about audio-visual programs from an Internet information service provider or how foreign investment may be injected into the Chinese film business. We believe, however, that the effects of this film promotion law will be witnessed clearly on the screen. Existing provisions are still effective on the other films, too.

Secondly, the film industry is very comprehensive and beaucratic; with departments overseeing production, distribution and projection, there will certainly be a slow legislative process. Thirdly, in those areas that the Draft Law does not cover, the newly-revised Industrial Catalog Guiding Foreign Investment makes clear specification about the industry category. Lastly, from all the time and effort (and of course statements from officials), it is clear that China means to continue to strongly encourage develop its film business in the future.

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