Welcome to the

1. Welcome to the Third Annual Greenebaum China Business Summit

2. Opening Remarks Robert L. Brown, Esq. Chair, China Team Greenebaum Doll & McDonald 502/587-3716 rlb@gdm.com

3. China: The New Franchising Frontier Sean P. Gallagher, Esq. Greenebaum Doll & McDonald 502/587-3773 spg@gdm.com

4. Product Distribution China: Population of 1.3 billion How do I put my products in the hands of consumers?

5. Methods of Distribution Company owned stores Distributorships and dealerships Franchising

6. What is Franchising? Trademark license Payment of franchise fee Significant assistance or significant control

7. Why Franchise? Availability of capital Allocate the risk of failure of any single unit to the franchisee who owns and operates that unit Knowledge of franchisee

8. Measures for the Regulation of Commercial Franchise Issued by the Ministry of Commerce Effective February 1, 2005 To promote �healthy and orderly development of commercial franchising� Commercial Franchise Regulation pending before the State Council � stay tuned

9. Disclose, Disclose, Disclose! What? Financial information, estimated initial investment, sources of products and supplies, information on existing and terminated franchises. All disclosures �requested� by a franchisee � Yikes! When? At least 20 days prior to signing franchise agreement (or anytime at the request of a franchisee?) Why? Liability for economic losses caused by inadequate disclosures or misrepresentations.

10. Relationship Rules Term: Not less than 3 years. Standard of performance. Franchisor must operate in accordance with the principles of fair dealing, honesty and trustworthiness. What does that mean? Implied covenant of good faith and fair dealing? Filing of Franchise Agreement. Implications are unclear.

11. Foreign-Invested Enterprise Two company-owned units in China for more than one year prior to offering franchises for sale? Cross-border franchising? Unclear whether it falls under Franchise Measures.

12. International Expansion into China and Elsewhere. Understanding which countries (such as China) have franchise specific laws. Type of disclosure documents. International Disclosure Document. Traditional UFOC with a country-specific wrap. Geographic or language-specific disclosure document. To disclose or not to disclose � that is the question! Talk with your attorney early in the process.

13. Foreign Investment and Recent Changes to China�s Corporate Law Haifeng Hong Greenebaum Doll & McDonald 502/587-3568 hh@gdm.com

14. Foreign Investment in China Foreign Direct Investment by Vehicle Type (January-November 2004 and 2005)

15. Foreign Investment in China Industry Updates Distribution Rights Definition: to sell imported or locally sourced goods directly at the wholesale or retail levels within China Previously, domestic import-export agents and distributors are necessary July 2005: PRC Ministry of Commerce issued application procedures through which FIEs can obtain distribution rights

16. Foreign Investment in China Industry Updates Banking Liberalization since 2001; Remove restrictions by Dec 1, 2006 Expanded local presence: Seven more cities Reduced minimum operating capital requirement: RMB100 million ($12.4 million) Foreign Banks� Stake Acquisitions

17. Foreign Investment in China What to Watch in the Near Future? Income Tax unification Official Rate: 33% Post-adjustment: Foreign Invested Enterprises (FIE) (11%) v. Domestic Companies (23%) Unified Legislation in 2007 expected Prediction on Unified Legislation: current incentives available for projects existing prior new tax regime new corporate income tax: around 25% tax incentives based on industry and geographic location

18. Foreign Investment in China What to Watch in the Near Future? The Antimonopoly Law Expected to be passed in late 2006 Increased access to certain markets dominated by State Owned Enterprises (SOEs) �Public Interest" concern

19. Foreign Investment in China What to Watch in the Near Future? Intellectual Property Rights U.S.- China Joint Commission on Commerce and Trade (JCCT): July 2005 to increase criminal prosecutions to criminalize the export of counterfeit goods to accede WIPO Internet treaties by June 2006 and combat internet piracy

20. Recent Changes to China�s Corporate Law New Law New Legislation Amendment of the Corporate Law Passed on October 27, 2005, effective on January 1, 2006 Background

21. Recent Changes to China�s Corporate Law Relaxation of the Rules Governing the Establishment and Investment of a Company Minimum Capital Contributions Joint stock companies: RMB5 million (US$619,594) Other LLCs: RMB30,000 (US$3,718) New criteria for a company�s investment in other companies No limitation on a company�s total investments in other companies Joint and several liability to the invested companies� debts

22. Recent Changes to China�s Corporate Law Improvement to Corporate Governance Minority Shareholders Protection Access to the accounts of the corporation Resort to courts to revoke relevant resolution made in violation of convening procedures or voting methods as required by articles of the corporation or law: 60-day limitation Derivative lawsuit against directors or senior managers

23. Recent Changes to China�s Corporate Law Improvement to Corporate Governance (cont�d) Employee�s Right-to-Know Important corporate issues Decisions affecting the company Legal Representative Chairman of BOD Managing director or Manager Under old law: only chairman of BOD

24. Recent Changes to China�s Corporate Law Piercing the Corporate Veil Jointly and Severally Liability for Corporation�s Debt Abuse of independent legal status of a corporation Intentionally remove the corporation�s debts Cause material loss to creditors of the corporation

25. Summary An Evolving Market Opportunity v. Risk Note: The information included in this presentation is based on the following sources: The China Effect, China Business Review, April, 2006 Foreign Investment in China, The US �China Business Council, January, 2006 Changes to China�s Corporate Law, Greenebaum International Letter, Issue 1, 2006

26. Tax Aspects of Structuring Investments in China Gregory S. Shumate Greenebaum Doll & McDonald 859/655-6884 gss@gdm.com

27. General U.S. International Tax Concepts U.S. taxes its U.S. citizens, resident aliens and U.S. corporations on their world wide income Objective of doing business in China: Maximize Repatriation of Earnings through Minimization of Worldwide Tax By: Deferring US Tax Utilizing Foreign Tax Credit Utilizing Income Tax Treaty Protection Expense Allocation

28. Phase 1:Start-Up Phase-- Direct Sales Direct Sales to Chinese Customers Minimum Foreign Presence in Start-up Phase Objective: No China Income Tax on Business Income Local Law Taxable Business Presence U.S.-China Income Tax Treaty Separate Standard under Treaty - Avoidance of Permanent Establishment (�PE�) Office or other fixed place of business in China---PE Employees or dependent agents in China who habitually conclude contracts on behalf of U.S. company and has ability to bind U.S. company--PE Factory or inventory storage, display, delivery, 3rd party processing, purchase of goods & merchandise in China�No PE 6 month construction projects and 12 month service contracts�No PE Web based sales, phone, mail order, fax or other non-China based sales office�No PE

29. Advantages/Disadvantages of Direct Sales Advantages include simplicity, no need for establishment of an international structure, minimal tax planning and no China income tax No substantial financial investment Consider Export Incentives: DISC to reduce U.S. income tax rate on exports Disadvantages include no foreign presence or control over local marketing, sales, quality control, delivery, etc.

30. Phase 2: Representative Office Overseas Expansion Phase: Branch office not permitted, so a Representative Office is an option Liason, marketing support, market research and information gathering No profit motive, so no fixed place of business and no China tax

31. Phase 3: Taxation of Foreign Investment Enterprises Choice of Entity China/Foreign Equity JV Cooperative JV Wholly Foreign Owned Enterprise Foreign Invested Shareholding Company All treated as Corporation for US tax purposes Deferral of U.S. income tax until profits are repatriated or application of anti-deferral rules (i.e., CFC, Subpart F rules) Indirect Foreign Tax Credits applies to dividends

32. Holding Company Structure Defer U.S. tax and redistribute profits to foreign subsidiaries without U.S. repatriation through use of holding company structure. Controlled Foreign Corporations (�CFC�), Subpart F and anti-deferral rules Passive income and foreign base sales and service income Manufacturing and same country exceptions to Subpart F Check the box (Form 8832) on lower tier subsidiaries (disregarded entities) to prevent Subpart F income Fail definition of CFC through ownership rules Favorable Holding Company Jurisdictions Netherlands Hong Kong (HK and PRC separate countries for US tax purposes) Cayman Islands

33. Foreign Tax Credit FTC partially alleviates Double Tax Problem Foreign Tax Credit Limitation U.S. will tax profits that are subject to a lower rate of tax in another country Thus, deferral of U.S. tax is usually preferred Declining worldwide tax rates vs. higher U.S. tax rate Direct vs. Indirect Foreign Tax Credit

34. Third Annual Greenebaum China Business Summit Questions?