SETTLEMENT AGREEMENT

This Settlement Agreement, effective as of the _________(M,D,Y), is by and between AAA (“AAA”), duly organized and existing under the laws of the State of _________(PLACENAME), and BBB, Inc. (“BBB”) a corporation duly organized and existing under the laws of the State of _________(PLACENAME) and having their principal places of business at _________. As used in this Settlement Agreement, the term “party” means BBB or AAA, as the context indicates, and the term “party” means BBB and AAA.

WHEREAS, there is an action currently pending in the Superior Court of the State of _________(PLACENAME), Judicial District of Fairfield at Bridgeport, entitled AAA v. BBB, Inc., Docket No. CV _________ (the “Action”)

WHEREAS, in the Action, AAA, as plaintiff, has asserted claims against BBB as defendant, that AAA is entitled to payment from BBB under or in connection with two lease agreements as amended between AAA and BBB relating to property located at _________ (the “Leases”), and a judgment obtained by AAA against BBB entered on or about _________(M,D,Y) by the District Court of _________(PLACENAME) for Anne Arundel County in the case entitled AAA vs. BBB, Inc. Case No._________ (” Judgment”);

WHEREAS, in the Action, BBB has denied AAA’s allegations that it is entitled to payment under the Leases and the Judgment and asserted several affirmative defenses; and

WHEREAS, the parties, after due consideration, have determined to resolve and settle any and all claims, controversies, disputes and causes of action, whether asserted or unasserted, known or unknown, or whether in law, equity or otherwise, relating to, arising out of, or in any way concerning the Action and/or the Leases and/or the Judgment, without any admission of liability or wrongdoing on the part of or on behalf of either party, pursuant to the terms and conditions enumerated hereafter.

1. Consideration.

A. This Settlement Agreement must be approved by the Superior Court of the State of _________(PLACENAME), Judicial District of Fairfield at Bridgeport (the “Court”) after a hearing which shall be scheduled as soon as is practicable (the “Hearing”). If the Court fails or refuses to approve this Settlement Agreement, it shall be of no force or effect on either party hereto.

B. Immediately upon the occurrence of the last of (a) Court approval of this Settlement Agreement and (b) AAA’s receipt of the shares of stock described in paragraph 1 (C) below, BBB and AAA will (1) take all steps necessary to withdraw the Action with prejudice and will direct their respective attorneys to execute and file a withdrawal with prejudice in the form attached as Exhibit A and (2) will direct the attorneys to execute and file a Satisfaction of Judgment in the form attached hereto as Exhibit B. Each party will bear its own costs and expenses, including attorney fees.

C. Within ten (10) days of the occurrence of the last of (a) execution and delivery of this Settlement Agreement by both parties and (b) Court approval of this Settlement Agreement, BBB shall issue to AAA that number of shares of BBB common stock, par value $,_________ per share (the “Shares”), having the aggregate value of $,_________ based upon a price per share which shall be the average of the closing prices of the shares on the NASD Over -the- Counter Electronic Bulletin Board for each of the ten (10) trading days immediately preceding the date of this Agreement.

D. In no event shall AAA sell or transfer, on any trading day, a number of Shares that exceeds ten percent (10%) of the ten-day average trading volume for the class of common stock of which the Shares are a part, calculated as reported on the NASD Over -The-Counter Electronic Bulletin Board for the ten trading days ending with the trading day immediately preceding the day of AAA’s sale or transfer.

E. It is the intent of the parties that, upon delivery of the Shares to AAA, resale of the Shares in the United States by AAA shall be exempt from registration under the Securities Act of 1933, as amended (as so amended, the “Securities Act”), by virtue of Section 3(a)(10) of the Securities Act. In connection therewith, the parties intend that the Court approval referred to in paragraph 1 of this Settlement Agreement be after a hearing upon the fairness of the terms and conditions of this Settlement Agreement.

F. AAA hereby represents to BBB that it is an “accredited investor” within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act. AAA has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in the Shares. AAA recognizes that BBB has a limited financial and operating history and that an investment in any of the Shares involves a high degree of risk. AAA acknowledges receipt from BBB of information satisfactory to AAA regarding BBB and the Shares. AAA has had an opportunity to review the books and records of BBB and an opportunity to ask questions of and receive answers from officers of BBB concerning the Shares and the terms and conditions of this transaction, and all such questions have been answered to AAA ‘s satisfaction. Nothing in this Agreement shall affect in any way the obligation of a holder of Shares to comply with all applicable Federal and State securities laws upon any resale of Shares.

G. AAA and BBB agree that, notwithstanding any provision of this Agreement to the contrary, at the option of AAA, its rights, obligations and interests existing prior to the date of this Agreement shall be reinstated to the extent that a court of competent jurisdiction shall determine that (1) the transfer of the Shares to AAA was a voidable preferential transfer or a fraudulent transfer or a fraudulent conveyance under state or federal law or (2) for any other reason, such transfer is rescinded, deemed to be rescinded or an amount is determined to be payable by AAA by virtue thereof to BBB or its representatives, successors, bankruptcy estate or federal or state receiver.

2. No Admission of Liability. Nothing in this Settlement Agreement shall be construed as an acknowledgment, admission, concession, or stipulation of liability or wrongdoing by either party.

3. Leases. The Leases and all obligations arising thereunder are hereby terminated

4. Releases.

A. Release by AAA. In consideration of receipt of the Shares and of the Companies entering into this Agreement, AAA agrees to, and hereby does irrevocably, unconditionally and generally release and forever discharge BBB and its affiliates, parents, subsidiaries, predecessors, divisions, directors, officers, shareholders, employees, agents, attorneys, and successors and assigns from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, counterclaims and demands whatsoever, in law, admiralty or equity, known or unknown, against BBB, which AAA ever had, or which AAA now has as of the date of this Agreement including, but not limited to, any and all claims arising out of the Leases and/or the Judgment and/or which were asserted or could have been asserted in the Action.

B. Release by BBB. In consideration of AAA entering into this Agreement, BBB agrees to, and hereby does irrevocably, unconditionally and generally release and forever discharge AAA and its affiliates, parents, subsidiaries, predecessors, divisions, directors, officers, shareholders, employees, agents, attorneys, and successors and assigns from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, counterclaims and demands whatsoever, in law, admiralty or equity, known or unknown, against AAA, which BBB ever had, or which BBB now has as of the date of this Agreement including, but not limited to, any and all claims arising out of the Leases and/or Judgment and/or which were asserted or could have been asserted in the Action.

C. The parties declare that they fully understand the terms and scope of the above releases and that they have had the opportunity to be, or have been, advised by counsel in connection with the above releases and the settlement of any and all potential disputes between them.

5. Modification & Amendments. This Settlement Agreement may not be modified, altered, or amended except by written agreement of the parties.

6. Waiver. Any waiver of any provision of this Settlement Agreement must be in writing. Any waiver or failure to enforce any provision of this Settlement Agreement on one occasion will not be deemed a waiver of any other provision or of such provision on any other occasion.

7. Binding Effect. This Settlement Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.

8. Assignment of Claims. AAA represents and warrants that it has not assigned any claim that it had or may have against BBB, its affiliates, parents, subsidiaries, predecessors, divisions, directors, officers, shareholders, employees, agents, attorneys, and successors and assigns, including but not limited to the Judgment and/or those claims set forth in the Action.

9. Choice of Law. This Settlement Agreement is made in the state of _________(PLACENAME) and will be construed and governed in accordance with _________(PLACENAME) law as applied to contracts made and performed entirely within _________(PLACENAME).

10. Severability. The provisions of this Settlement Agreement shall be deemed severable. Therefore, if any part or provision of this Settlement Agreement is rendered void, invalid, or unenforceable, in any jurisdiction, then such part or provision shall be severed from the remainder of this Settlement Agreement only as to such jurisdiction. Such severance shall not affect the validity or enforceability of the remainder of this Settlement Agreement unless the severance substantially impairs the value of the whole agreement to any party.

11. Entire Agreement. BBB and AAA declare (a) that they have carefully read this Settlement Agreement, (b) that they know and understand its contents, (c) that its execution is a voluntary and authorized act, and (d) that they have not been influenced to execute it by any representation of the other party not contained in this Settlement Agreement. This Settlement Agreement has resulted from negotiations between parties who are represented by counsel, who have substantially equal bargaining power, and who are under no compulsion to execute or deliver a disadvantageous agreement. No ambiguity or omission in this Settlement Agreement shall be construed or resolved against a party on the ground that this Settlement Agreement or any of its provisions was drafted or proposed by that party.

12. Counterparts.

A. This Settlement Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

B. This Settlement Agreement shall be binding upon the exchange of facsimile copies of signature pages from separately signed originals, and then subsequently formalized by the prompt exchange of the signed originals.

IN WITNESS WHEREOF, the parties hereto have caused this Settlement Agreement to be duly executed by their duly authorized representatives as of the effective date set forth above.

AAA,
a _________(PLACENAME) limited partnership

By: CCC, L.P.
a _________(PLACENAME) limited partnership, its Sole Member

By: DDD COMPANY,
a _________(PLACENAME) Corporation, its Authorized Agent

By: /s/ _________
Name: _________
Title: _________

BBB, INC.

By: /s/ _________
Name: _________
Title: _________

This Funding Agreement (the “Agreement”) is made and entered into as of _________(M,D,Y), by and between AAA, Inc. (“AAA Company”) and BBB Incorporated (the “Company”).

RECITALS

A. The parties hereto have executed an Asset Purchase Agreement of even date herewith, by and among AAA Company, CCC Corporation (“CCC”) and the Company (the “Purchase Agreement”), whereby CCC has agreed to purchase certain assets of the Company (the “Transaction”).

B. AAA Company has requested that the Company continue its development and related activities until the closing of the Transaction, and the Company desires to comply with AAA Company’s request.

NOW THEREFORE, the parties agree as follows:

1. Obligations of the Company. Beginning on the date of this Agreement and continuing until the End Date (defined below) unless earlier terminated as specified below, the Company agrees to continue to employ the Designated Employees (as defined in the Purchase Agreement) at the same salary and benefit levels as the date hereof through the termination of this agreement, and to assign such employees to work on the continued development and enhancement of the DDD and EEE operating systems or other software, products, documentation, specifications or development tools and environments of the Company (including all versions or portions of any of the foregoing under development) as reasonably requested by AAA Company (the “Agreed Obligations”); provided, however, that neither (a) the Company’s right to terminate any Designated Employee if in the Company’s sole judgment such termination is in the best interests of the Company nor (b) the right of any Designated Employee to resign from the Company shall be limited by this Agreement. The parties agree that there are no third party beneficiaries to this Agreement and no rights, benefits, privileges or entitlements are accorded to any third party under this Agreement, including without limitation, the Designated Employees.

2. Consideration. As consideration for the Agreed Obligations, AAA Company agrees to pay the Company an amount equal to $,_________ multiplied by the number of Designated Employees employed by the Company at the start of the applicable weekly period (the “Weekly Sum”) at the end of such oneweek period, with the first Weekly Sum being due on _________(M,D,Y) and weekly thereafter with respect to each subsequent weekly period unless this Agreement is earlier terminated as specified below. Such Weekly Sum shall be due and payable no later than 1:p.m. local time at the end of the applicable oneweek period, to be paid by wire transfer to the account specified by the Company. In the event of termination of this Agreement during a oneweek period, AAA Company shall be required to pay the entire Weekly Sum for such oneweek period. The parties agree that time is of the essence with respect to the payment of each Weekly Sum.

(a) Term; Termination. This Agreement shall continue in full force and effect until the earliest to occur of (i) of the Closing Date (as defined in the Purchase Agreement), (ii) the date of termination of the Purchase Agreement in accordance with Article 10 of the Purchase Agreement, and (iii) termination of this Agreement by mutual written consent of AAA Company and the Company (the “End Date”).

3. Governing Law. This Agreement shall be governed in all respects by the internal laws of the State of California.

4. Interpretation. In the event that any provisions or any capitalized term used herein shall conflict with the terms or conditions of the Purchase Agreement, the terms and conditions of the Purchase Agreement shall govern.

5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.

IN WITNESS WHEREOF, the parties have executed this Agreement the date first written above.

AAA, Inc.
By:/s/ _________
Name: _________
Title: _________

BBB Incorporated
By:/s/ _________
Name:_________
Title:_________

THIS FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT (this “Amendment”) dated as of _________(M/D/Y),is by and between AAA Control, Inc., a _________(Placename) corporation (“Pledgor”), and BBB, L.L.C.(“BBB”), as Collateral Agent for the Noteholders (as hereinafter defined) (the “Secured Party”).

RECITALS:

A. Pledgor, BBB and CCC, L.P. (“Main Street”) have entered into that certain Note Purchase Agreement dated as of _________(M/D/Y), as amended by that certain First Amendment to Note Purchase Agreement dated as of _________(M/D/Y)(the “Note Purchase Agreement Amendment”) (herein, as the same may be further amended, modified, supplemented, extended, rearranged, and/or restated from time to time, called the “Note Purchase Agreement”), pursuant to which, upon the terms and conditions therein set forth, Pledgor has issued its _________% Senior Secured Notes due _________(M/D/Y), in the aggregate principal amount of $,_________(herein, as the same may be amended, modified, supplemented, extended, rearranged, and/or restated from time to time, together with any notes given by Pledgor in extension, replacement, rearrangement, modification and/or substitution thereof or therefor, collectively called the “Notes” and any holders of the Notes, collectively called the “Noteholders”).

B. Each of BBB and Main Street requires that this Amendment be entered into by Pledgor as a condition precedent to the effectiveness of the Note Purchase Agreement Amendment.

C. Pledgor and the Secured Party have entered into that certain Stock Pledge Agreement dated as of _________(M/D/Y)(the “Agreement”) and they now desire to amend the Agreement as hereinafter provided.

NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

Amendments to Agreement

1.01. Subsection 1.01(a) of the Agreement is hereby amended and restated in its entirety as follows:

“(a) all shares of capital stock of IWC Services, Inc. and Code 3, Inc. (the “Companies”);”

1.02. Section 2.04 and Subsection 5.01(a) of the Agreement are hereby amended by deleting the word “Company” in the last line of each thereof and inserting in its place the word “Companies”.

Stock Pledge Agreement

1.03. Section 3.03 of the Agreement is hereby amended by adding the phrase “(i) hereafter own the capital stock of any other entity or (ii)” after the word “shall” in the first line thereof.

ARTICLE II

Miscellaneous

2.01. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of Pledgor and Secured Party and their respective heirs, successors, and assigns, except that Pledgor may not assign any of its rights or obligations under the Agreement, as amended by this Amendment, without the prior written consent of Secured Party except to the extent permitted by the Note Purchase Agreement.

2.02. Amendment; Entire Agreement. The Agreement, as amended by this Amendment, together with any applicable pledge or other agreement required by applicable laws, embodies the final, entire agreement among the parties hereto and supersedes any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof. The provisions of the Agreement, as amended by this Amendment, may be amended or waived only by an instrument in writing signed by the parties hereto with the requisite consent of Secured Party as provided in the Note Purchase Agreement.

2.03. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. This Amendment, and the rights and duties of the parties hereto, shall be construed in accordance with and governed by the internal laws of the State of Texas; provided, however that any enforcement of Secured Party’s rights and remedies in any other jurisdiction shall, to the extent required by applicable laws, be governed by the laws of the jurisdiction of enforcement. Each party hereto hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of Texas and of any Texas State court sitting in Houston, Texas for purposes of all legal proceedings arising out of or relating to this Amendment or the transactions contemplated hereby. Each party hereto irrevocably waives, to the fullest extent permitted by law, any objection it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. EACH PARTY TO THIS AMENDMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE AGREEMENT, AS AMENDED BY THIS AMENDMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

2.04. Headings. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment.

2.05. Reaffirmation of Agreement. This Amendment shall be deemed to be an amendment to the Agreement, and the Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Agreement in the Agreement and the other Documents (excluding this Amendment) shall hereafter be deemed to refer to the Agreement, as amended hereby.

Stock Pledge Agreement

2.06. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

2.07. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first written above.

PLEDGOR: SECURED PARTY:

AAA ,INC., BBB, L.L.C., as
a _________(Placename) corporation Collateral Agent

By: _________ By: _________
Name: _________ Name: _________
Title: _________ Title:_________

Stock Pledge Agreement

THIS TRADEMARK SECURITY AGREEMENT (as such agreement may be amended, supplemented or otherwise modified from time to time, this “Trademark Security Agreement”) made as of _________,_________,_________(M/D/Y), by AAA, INC., a _________(address) corporation, with its principal place of business located at _________(address)(the “Borrower”), in favor of BBB (“Bank of America”), with an office located at _________(address), in its capacity as the Administrative Agent for the Lenders under the Credit Agreement (as defined below) (in such capacity, the “Administrative Agent”).

RECITALS:

The Borrower, certain financial institutions currently and in the future to be parties to the Credit Agreement (such financial institutions being collectively, the “Lenders”), the Administrative Agent, BancAmerica Robertson Stephens, as Arranger (in such capacity, the “Arranger”), Citicorp USA and First Union Capital Markets, in their respective capacities as Syndication Agents (in such capacities, the “Syndication Agents”), and BBB, Citibank, N.A. and First Union National Bank, in their respective capacities as Issuing Banks (in such capacities, the “Issuing Banks”), have entered into a certain Credit Agreement, dated as of _________,_________,_________(M/D/Y)(as such agreement may be amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), which provides for the Lenders to make Loans to the Borrower and for the Issuing Banks to issue Letters of Credit for the account of the Borrower. It is a condition precedent to the making of Loans and the issuance of Letters of Credit under the Credit Agreement that the Borrower shall have executed and delivered this Trademark Security Agreement.

NOW, THEREFORE, in consideration of the above premises and in order to induce the Lenders to make Loans and each Issuing Bank to issue Letters of Credit under the Credit Agreement, the Borrower hereby agrees with the Administrative Agent for its benefit, for the benefit of the Lenders, the Issuing Banks, the Arranger and the Syndication Agents, as follows:

1. Defined Terms.

(a) Unless otherwise defined herein, the capitalized terms used herein which are defined in the Credit Agreement shall have the meanings specified in the Credit Agreement.

(b) The words “hereof,” “herein” and “hereunder” and words of like import when used in this Trademark Security Agreement shall refer to this Trademark Security Agreement as a whole and not to any particular provision of this Trademark Security Agreement, and section references are to sections in this Trademark Security Agreement unless otherwise specified.

(c) All terms defined in this Trademark Security Agreement in the singular shall have comparable meanings when used in the plural, and vice versa, unless otherwise specified.

2. Security Interest in Trademarks.

To secure the prompt and complete payment, observance and performance when due (whether at the stated maturity, by acceleration or otherwise) of all the Obligations, the Borrower hereby assigns and pledges to the Administrative Agent, and hereby grants to the Administrative Agent for its benefit and the benefit of the Lenders, the Issuing Banks, the Arranger and the Syndication Agents, a security interest in all of the Borrower’s right, title and interest in and to the following, whether now-owned or existing or hereafter arising or acquired and wheresoever located (collectively, the “Collateral”):

(a) trademarks, trademark registrations, trade names and trademark applications for any of the foregoing in the United States Patent and Trademark Office or in any other office or with any other official anywhere in the world or which are used in the United States or any state, territory or possession thereof, or in any other place, nation or jurisdiction anywhere in the world, including, without limitation, the trademarks, trademark registrations, service marks, service mark registrations and applications listed on Annex I, attached hereto and made a part hereof, and (i) all renewals thereof, (ii) all income, royalties, damages and payments now and hereafter due and/or payable with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof, and (iv) all rights corresponding thereto throughout the world (all of the foregoing trademarks, and trademark registrations, trade names, service marks, service mark registration and applications, together with the items described in clauses (i) through (iv) in this subparagraph (a), are sometimes hereinafter individually and/or collectively referred to as the “Trademarks”);

(b) license agreements with any other party in connection with any Trademarks or such other party’s trademarks or trademark applications, whether the Borrower is a licensor or licensee under any such license agreement, including, but not limited to, the license agreements listed on Annex II attached hereto and made a part hereof, and the right to prepare for sale, sell and advertise for sale, all of the inventory now or hereafter owned by the Borrower and now or hereafter covered by such license agreements (all of the foregoing being hereinafter referred to collectively as the “Licenses”); and

(c) the goodwill of the Borrower’s business connected with and symbolized by the Trademarks;

3. Restrictions on Future Agreements.

The Borrower agrees that until all the Obligations shall have been satisfied in full, no Letters of Credit are outstanding and the Credit Agreement shall have been terminated, the Borrower will not, without the Administrative Agent’s prior written consent, abandon any Trademark, except as would not have a Material Adverse Effect, or enter into any agreement, including, without limitation, any license agreement (other than as necessary to maintain or protect any Trademark), which is inconsistent with the Borrower’s obligations under this Trademark Security Agreement, and the Borrower further agrees that it will not take any action, or permit any action to be taken by any other Persons to the extent that such Persons are subject to its control, including licensees, or fail to take any action, which would affect the validity, priority, perfection or enforcement of the rights transferred to the Administrative Agent under this Trademark Security Agreement, and any such agreement or action if it shall take place shall be null and void and of no effect whatsoever. Nothing in this Section 3 shall be deemed to prevent the Borrower from engaging in transactions permitted under Section 8.02(a)(iv) or (vi) of the Credit Agreement.

4. New Trademarks.

The Borrower represents and warrants that the Trademarks and Licenses listed on Annexes I and II constitute all of the significant trademarks, applications, trade names, service marks, service mark registrations and trademark registrations now owned and material license agreements entered into by the Borrower. If, before the Obligations shall have been satisfied in full, the commitments of the Lenders to extend credit under the Credit Agreement shall have been terminated, the Letters of Credit shall have expired or terminated and the Credit Agreement shall have been terminated, the Borrower shall, after the date hereof, (i) obtain rights to any new trademarks, trademark registrations, trademark applications, service marks, service mark registrations, or trade names, (ii) become entitled to the benefit of any trademarks, trademark registrations, trademark applications, trade names, service marks, service mark registrations, trademark licenses or trademark license renewals or (iii) enter into any new trademark license agreements, the provisions of paragraph 2 above shall automatically apply thereto, and the Borrower shall give to the Administrative Agent prompt written notice thereof of all new trademark registrations and applications. The Borrower hereby authorizes the Administrative Agent to modify this Trademark Security Agreement by amending Annex I or II to include any future trademarks, trademark applications, trade names, service marks, service mark registrations, trademark registrations or license agreements that are the Trademarks or the Licenses, under paragraph 2 above or under this paragraph 4.

5. Additional Representations and Warranties. The Borrower hereby represents, warrants, covenants and agrees that:

(a) Except as otherwise provided or permitted herein or in the Credit Agreement, it is and will continue to be the owner of all its right, title and interest in the Collateral so long as the Trademarks and Licenses shall continue in force. The Trademarks and Licenses are and shall continue to be free from any Lien in favor of a Person except for those Liens permitted by Section 8.02 of the Credit Agreement.

(b) It has the full right and power to grant the security interest in the Collateral made hereby.

(c) It has made no previous assignment, transfer or agreements in conflict herewith or constituting a present or future assignment, transfer, or encumbrance on any of the Collateral.

(d) So long as any Obligations remain outstanding under the Credit Agreement, the commitments of the Lenders to extend credit under the Credit Agreement have not been terminated, any Letter of Credit remains outstanding and the Credit Agreement has not terminated, it will not execute, and there will not be on file in any public office, any effective financing statement or other document or instrument covering the Collateral except as otherwise contemplated or permitted hereby or by the Credit Agreement and the other Loan Documents.

(e) Subject to any limitation stated therein or in connection therewith, all information furnished to the Administrative Agent concerning the Collateral and proceeds thereof, for the purpose of obtaining credit or an extension of credit, is, or will be at the time the same is furnished, accurate and correct in all material respects.

(f) To the best of the Borrower’s knowledge and belief following diligent inquiry, no infringement or unauthorized use presently is being made of any of the Trademarks or Licenses which has or may reasonably be expected to have, alone or in the aggregate, a Material Adverse Effect. The Borrower has advised the Administrative Agent of the existence of material restrictions on the use of the Trademark and Licenses as may be contained in the Borrower’s franchise agreements and license agreements relating to the use of the Trademarks and Licenses.

(g) The Borrower will not sell, assign or otherwise transfer any of its right, title or interest in any of the Collateral except as permitted by the Credit Agreement and provided that to the extent it sells, assigns or otherwise transfers any of its right, title or interest in any of the Collateral to any Subsidiary Guarantor, such Subsidiary Guarantor shall have (i) entered into a trademark security agreement substantially similar in form and substance to this Agreement and (ii) taken all other actions necessary or desirable to perfect such security interest, including, without limitation, any filings with the United States Patent and Trademark Office, any filings and registrations with the United States Copyright Office and any filings under the Uniform Commercial Code in effect in each relevant jurisdiction.

6. Royalties; Term.

(a) The Borrower hereby agrees that any rights granted hereunder to the Administrative Agent for the benefit of the Administrative Agent, the Lenders, the Issuing Banks, the Arranger and the Syndication Agents with respect to all the Collateral as described above shall be worldwide and without any liability for royalties or other related charges from the Administrative Agent to the Borrower.

(b) The term of the security interest granted herein shall extend until the earlier of (i) the expiration or abandonment of each of the Trademarks and Licenses subject to this Trademark Security Agreement, or (ii) the payment in full of the Obligations, the termination of the commitments of the Lenders to extend credit under the Credit Agreement, the termination or expiration of all Letters of Credit and the termination of the Credit Agreement.

7. The Administrative Agent’s Right to Inspect.

Subject to Section 7.06 of the Credit Agreement, the Administrative Agent and the Lenders shall have the right, at any time and from time to time, to inspect the Borrower’s premises and to examine the Borrower’s books, records and operations, including, without limitation, the Borrower’s merchandise quality control processes upon reasonable notice and at such reasonable times and as often as may be reasonably requested. The Borrower agrees (i) not to sell or assign its interest in, or grant any license under, the Collateral without the prior written consent of the Administrative Agent except as otherwise permitted under Sections 8.02 and 8.03 of the Credit Agreement; and (ii) to maintain the quality of any and all merchandise in connection with which the Trademarks are used, substantially consistent with or better than the quality of said merchandise as of the date hereof.

8. Termination of Security Interest.

This Trademark Security Agreement is made for collateral purposes only. Upon payment in full of the Obligations, the termination of the commitments of the Lenders to extend credit under the Credit Agreement, the termination or expiration of all outstanding Letters of Credit and termination of the Credit Agreement, the Administrative Agent shall, at the Borrower’s sole cost and expense, execute and deliver to the Borrower all termination statements, releases or other instruments as may be necessary or proper to re-vest in the Borrower (without recourse to or warranty by the Administrative Agent) full title to the Collateral granted hereby, subject to any disposition thereof which may have been made by the Administrative Agent pursuant hereto or pursuant to the Credit Agreement.

9. Duties of the Borrower.

The Borrower shall have the duty (i) to prosecute diligently any trademark application that is part of the Trademarks pending as of the date hereof or thereafter until the obligations shall have been paid in full, (ii) to make applications on trademarks, as appropriate, and (iii) to preserve and maintain all rights in trademark applications, trademarks, trademark registrations, service marks, and service mark registrations, that are part of the Trademarks except, in the case of (i) or (iii), where the failure to do so would not have or be reasonably expected to have a Material Adverse Effect. Any expenses incurred in connection with such applications shall be borne by the Borrower. The Borrower agrees to retain an experienced trademark attorney for the filing and prosecution of all such applications and other proceedings. The Borrower shall not abandon any right to file a trademark application in the United States or any pending trademark application in any country without the prior written consent of the Administrative Agent except as would not have or be reasonably expected to have a Material Adverse Effect. If the Borrower fails to comply with any of the foregoing duties, the Administrative Agent shall have the right (but shall not be obligated) to do so in the Borrower’s name to the extent permitted by law, but at the Borrower’s expense, and the Borrower hereby agrees to reimburse the Administrative Agent in full for all expenses, including the fees and disbursements of counsel incurred by the Administrative Agent in protecting, defending and maintaining the Collateral. In the event that the Borrower shall fail to pay when due any fees required to be paid by it hereunder, or shall fail to discharge any Lien prohibited hereby, or shall fail to comply with any other duty hereunder, the Administrative Agent may, but shall not be required to, pay, satisfy, discharge or bond the same for the account of the Borrower, and all monies so paid out shall be Obligations of the Borrower repayable on demand, together with interest at the fluctuating rate applicable to Base Rate Loans under the Credit Agreement.

10. The Administrative Agent’s Right to Sue.

From and after the occurrence and during continuance of an Event of Default, the Administrative Agent shall have the right, but shall in no way be obligated, to bring suit in its own name for its own benefit and for the benefit of the Lenders and the Issuing Banks to enforce the Trademarks and Licenses, and if the Administrative Agent shall commence any such suit, the Borrower shall, at the request of the Administrative Agent, do any and all lawful acts and execute any and all proper documents required by the Administrative Agent in aid of such enforcement. The Borrower shall, upon demand, promptly reimburse the Administrative Agent for all costs and expenses incurred by Administrative Agent pursuant to the terms of the Credit Agreement.

11. Waivers.

No course of dealing among the Borrower, the Administrative Agent, the Lenders, the Issuing Banks, the Arranger, the Syndication Agents or any of them, and no failure to exercise, nor any delay in exercising, on the part of the Administrative Agent, the Lenders, the Issuing Banks, the Arranger, the Syndication Agents, any right, power or privilege hereunder or under the Credit Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof the exercise of any other right, power or privilege.

12. Cumulative Remedies; Power of Attorney; Effect On Other Agreements.

All of the Administrative Agent’s rights and remedies with respect to the Collateral, whether established hereby, by the Credit Agreement, by the Collateral Documents, by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Upon the occurrence and during the continuance of an Event of Default and the giving by the Administrative Agent of written notice to the Borrower of the Administrative Agent’s intention to enforce its right and claims against the Borrower, the Borrower hereby authorizes the Administrative Agent to make, constitute and appoint any officer or agent of the Administrative Agent as the Administrative Agent may select, in its sole discretion, as the Borrower’s true and lawful attorney-in-fact, with power (but not the obligation) to (i) endorse the Borrower’s name on all applications, documents, papers and instruments necessary or desirable for the Administrative Agent in the use of the Collateral, or (ii) take any other actions with respect to the Collateral as the Administrative Agent deems in the best interest of the Administrative Agent, the Lenders and the Issuing Banks or (iii) grant or issue any exclusive or non-exclusive license under the Collateral to anyone, or (iv) assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to anyone free and clear of any encumbrance upon title thereof (other than any encumbrance created hereby). The Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable until the Obligations have been paid in full, the commitments of the Lenders to extend credit under the Credit Agreement have been terminated, no Letters of Credit are outstanding and the Credit Agreement has been terminated. The Borrower acknowledges and agrees that this Trademark Security Agreement is not intended to limit or restrict in any way the rights and remedies of the Administrative Agent and the Lender under the Loan Documents but rather is intended to facilitate the exercise of such rights and remedies. The Administrative Agent, the Lenders, the Issuing Banks, the Arranger and the Syndication Agents shall have, in addition to all other rights and remedies given it by the terms of this Trademark Security Agreement, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction in which the Collateral may be located. Recourse to security will not be required at any time.

13. Binding Effect; Benefits.

This Trademark Security Agreement shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Administrative Agent, the Lenders, the Issuing Banks, the Arranger and the Syndication Agents. The Borrower’s successors and assigns shall include, without limitation, a receiver, trustee or debtor-in-possession of or for the Borrower.

14. Expenses.

The Borrower shall upon written demand pay to the Administrative Agent the amount of any and all expenses, including the fees and disbursements of its counsel and of any experts and agents, as provided in Section 12.03 of the Credit Agreement.

15. Amendments, Etc.

No amendment or waiver of any provision of this Trademark Security Agreement nor consent to any departure by the Borrower herefrom shall in any event be effective unless the same shall be in writing and signed by the party to be charged therewith, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

16. Notices.

All notices and other communications provided for hereunder shall be given in the manner set forth in the Credit Agreement and to the addresses first above written or, as to each party, at such other address as may be designated by such party in a written notice to the other party.

17. Applicable Law; Severability.

This Trademark Security Agreement shall be construed in all respects in accordance with, and governed by, the laws of the State of New York. Whenever possible, each provision of this Trademark Security Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Trademark Security Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Trademark Security Agreement.

18. Consent to Jurisdiction and Service of Process; Waiver of Jury Trial.

ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST EACH PARTY HERETO WITH RESPECT TO THIS TRADEMARK SECURITY AGREEMENT OR ANY NOTE OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS TRADEMARK SECURITY AGREEMENT, EACH PARTY HERETO ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS TRADEMARK SECURITY AGREEMENT OR ANY NOTE OR ANY OF THE OTHER LOAN DOCUMENTS FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. EACH PARTY HERETO IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS NOTICE ADDRESS SPECIFIED ON THE FIRST PAGE HEREOF, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH OF BORROWER, THE ADMINISTRATIVE AGENT, THE ARRANGER, THE SYNDICATION AGENT AND THE LENDERS IRREVOCABLY WAIVES (A) TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS TRADEMARK SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT, AND (B) ANY OBJECTION (INCLUDING WITHOUT LIMITATION, ANY OBJECTION OF THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS) WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING WITH RESPECT TO THIS TRADEMARK SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY JURISDICTION SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF ANY LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.

19. Waiver of Notice, Hearing and Bond.

THE BORROWER WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE ADMINISTRATIVE AGENT OR THE LENDERS OF ITS RIGHTS, FROM AND AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT, TO REPOSSESS THE COLLATERAL WITH JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL. THE BORROWER WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE ADMINISTRATIVE AGENT OR THE LENDERS IN CONNECTION WITH THE JUDICIAL PROCESS OR PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE ADMINISTRATIVE AGENT OR THE LENDER OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER PRELIMINARY OR PERMANENT INJUNCTION, THIS TRADEMARK SECURITY AGREEMENT.

20. Advice of Counsel.

THE BORROWER REPRESENTS TO THE ADMINISTRATIVE AGENT THAT IT HAS DISCUSSED THIS TRADEMARK SECURITY AGREEMENT WITH ITS ATTORNEYS.

21. Governing Provisions.

To the extent any provisions of this Trademark Security Agreement are inconsistent with any provisions in the Borrower Security Agreement, the provisions of this Trademark Security Agreement shall govern.

22. Section Titles.

The section titles herein are for convenience and reference only and shall not affect in any way the interpretation of any of the provisions hereof.

IN WITNESS WHEREOF, the Borrower has caused this Trademark Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the day first above written.

AAA, INC.

By: /s/_________

Name: _________

Title: _________

Attest: _________

Agreed and accepted to as of the date first above written: BBB, as Administrative Agent

By: /s/ _________

Name: _________

Title: _________

STATE OF _________ )
) ss.:
COUNTY OF _________ )

The foregoing Trademark Security Agreement was executed and acknowledged before me this _________,_________,_________(M/D/Y), by _________(NAME) personally known to me to be the SVP-CFO of AAA, Inc., a _________(address) corporation, on behalf of such corporation.

(SEAL)
/s/_________

Notary Public
New York County, New York
My Commission Expires:
_________,_________,_________(M/D/Y)

Legally there are several differences between the two. An enterprise means foreign investment enterprises (FIE) in China. There are state owned enterprises in China but we do not include them into the comparison here.
A PRC company is incorporated under the PRC company law, or the “Tentative Provision for the Establishment of the Foreign Investment Joint Stock Limited Liability Company”. There are two types of companies: one is limited liability company;the other is joint stock limited liability company; An enterprise is incorporated under one of the following laws:-

1. The PRC Law for Sino-foreign Equity Joint Venture Enterprises;
2. The PRC Law for Sino-foreign Cooperative Joint Venture Enterprises;
3. The PRC Law for Wholly Foreign Owned Enterprises.
The three types of enterprises are called foreign investment enterprises.

A company may have perpetual continuity while an enterprise must have a definite period of operating life in years, as stated in the Articles of Association.

A PRC company must have at least 2 shareholders (5 in the case of a joint stock limited liability company) with the exception of a wholly state owned company. A wholly foreign owned enterprise can have one shareholder.

A company has a status of a legal person while a Sino-foreign cooperative joint venture may not possess the status of a legal person if the joint venture parties agree to have such arrangement. Each party assumes its own legal responsibility independently.

A company is not required to have a shareholder agreement while the law requires that an equity joint venture or a cooperative joint venture must have a shareholder (or JV) agreement, as a pre-requisite for incorporation.

Except in certain cities, the FIE laws do not allow Chinese citizens to become the shareholder of an FIE in the capacity of natural persons. Chinese citizens are allowed to be shareholders of a company. In contrast, foreign nationals can act as the shareholders in an FIE.

The highest authority is the board of director for a foreign investment enterprise. For a company the highest authority is the general meeting of the shareholders, who make the decision on the appointment of directors.

What is something in common between a company and an enterprise?

1. Both of them must have a legal representative.
2. The PRC Company law shall apply to a foreign investment enterprise in the absence of any provision in the applicable FIE laws.
3. Both the company and an FIE have share capital, except that for Sino-foreign cooperative joint venture enterprises in certain cases.
4. Both a foreign investment enterprise and a company can be converted into a joint stock company under the PRC Company Law.

ASSIGMENT OF IP RIGHTS

Non-resident foreign investor receiving income for the Assignment of IP rights in the PRC will be subject to the following type of taxes: -

Type of tax Rate

Income tax 20% on gross sum paid and payable
Business tax 5% on gross sum paid and payable
Stamp tax 0.03% on gross sum paid and payable
Foreign companies and nationals must register their IP rights in accordance with the PRC law in order that these rights are legally protected inside the PRC. Note that under the PRC Trade Mark Law and the PRC Patent Law, agreements for the granting of IP license or the transfer of IP rights shall be registered with the PRC State IP authorities for record filing purposes and notify the public by putting up a public notice in the designated official publications. Otherwise, the agreements are not valid.

Agreements for the transfer of patent application rights or patent rights from PRC legal persons or individuals to foreign nationals and companies must obtain government vetting and approval. Otherwise, the transfer is unlawful.

The 10% withholding income tax shall apply to resident payers located in the Special Economic Zones, coastal Economic Technology Development Zones, and coastal open areas. 20% withholding tax rate shall apply to resident payers in other areas, and residents of a non-PRC treaty country.

Type of tax Rate

Income tax 20% on rental income
Business tax 5% on rental income
City property tax 18% on rental income

The resident tenant has an obligation to withhold taxes upon the payment of rental to the foreign owner. On the other hand, the foreign owner can appoint a domestic tax agent to act for it. The tax agent will apply for a temporary tax registration on behalf of its principle, and obtain the tax invoices at the tax office upon payment of taxes.

Both the foreign owner and the domestic tenant shall also pay stamp tax respectively at a rate of 0.1% on the rental amount. In addition, the tenancy agreement shall be registered at the local administrative organs. Thirdly, the landlord shall ensure that it has got a lease certificate for the rented property.

TRANSFER OF PROPERTY
Non-resident foreign investor receiving consideration for the transfer of landed property located in the PRC will be subject to the following type of taxes: -

Type of tax Rate

Income tax 20% on consideration
Business tax 5% on consideration
Stamp duty 0.05% on consideration
Land value appreciation tax 30% – 60% depending upon the appreciated value
Land value appreciation tax is levied on 4 different brackets of the appreciated value, which is arrived at by reference to the selling price minus the direct cost and the statutory deductions including business and stamp taxes. The income tax rate will be reduced to 10% if the owner is a resident of a PRC treaty country.

The buyer, on the other hand, has to pay a deed tax at the rate of 3% on total consideration irrespective of whether he is a resident or a non-resident.

According to the PRC Income Tax Law for Foreign Investment Enterprise and Foreign Enterprise, its Implementation Regulations, ministerial regulations and rules issued by the State Administration of Taxation, an RO that carries on business activities within the PRC is subject to tax on income derived from sources in the PRC irrespective of whether they are paid by any sources inside the PRC.

In the absence of complete and accurate information relating to the RO’s PRC-source income, the PRC tax authority normally adopts the cost plus method to ascertain the taxable income for practical reasons.

The major category of tax includes business tax and income tax. Business Tax is imposed at a rate of 5% on the total gross amount of monthly overheads incurred by the RO. The business tax is filed at monthly interval. Corporate Income tax is imposed at a rate of 33% on the deemed income. The deemed income is assessed at a rate of 10% on the total gross amount of overheads incurred by the RO during the relevant period. The RO must file income tax at a quarterly interval. For example, if the monthly overhead is RMB80,000, the business tax and income tax will be calculated as follows:-

Gross amount = RMB80,000 / (1-10%-5%) = RMB94,118
Business tax = RMB94118 * 5%
Income tax = RMB 94,118 * 10% (deemed profit) * 33%
The income tax rate of 33% including 3% local income tax will be reduced to 15% if the RO is located within the special economic zones or other designated areas.

The State Administration of Taxation (SAT) lists the following types of taxable activities that a representative office may perform: -

Acting as a merchandise trade agent;
Consulting services relating to business, legal, tax and accounting;
Services performed for a resident fellow subsidiaries of the same non-resident holding company;
Acting as advertising agents;
Providing services relating to visa handling, fee collecting, ticketing, tour operator, and hotel accommodation for non-resident tourist companies;
Consulting services given on behalf of non-resident financial institutions;
Providing services within the business scope of a transport company;
Other taxable activities the RO performs for the clients.
The following activities are not subject to income tax and business tax:-

Resident representative offices performing services of market research, providing business information, liaison, consulting for the non-resident head offices on a free of charge basis;
Resident representative offices taking instructions from resident companies to act for them as agent, and the agency activities are mainly performed outside the PRC.

Business Activities
In defining the business activities, the State Administration of Taxation, the State Administration of Industry and Commerce, and the Ministry of Foreign Trade and Economic Cooperation (The MOFTEC is now called the Ministry of Commerce) have different provisions. The SAT prescribes what constitutes a taxable activity while the SAIC stipulates that the RO should be engaged in non-direct business activities, subject to provisions in the international agreement. (Specifically, the restrictions on income-earning business activities undertaken by RO’s in respect of legal, accounting, taxation, and management consulting are lifted in the WTO agreements China has acceded to.) The MOFTC also provides that the RO’s may only be engaged in non-direct business activities in respect of business liaison, product introduction, market research, and technical exchange on behalf of their heading office.

To determine whether certain activities are taxable, one has to consider the income tax rules rather than the types of activities an RO is allowed to do as stated in the scope of activities in the business licence . If the RO performs those non-direct activities for the client of its non-resident head office or other non-resident foreign companies on a fee basis, then the income derived from those activities is taxable under the PRC income tax rules .

The representative offices that do not carry on business activities or the RO’s that carry on non-taxable activities, can submit applications to the tax authority for the granting of a tax exemption certificate.

The table below may help analyze the issue:

Taxation on Employees
The RO has the legal obligation to deduct from its payroll the income tax and pay them to the local tax office. In addition, the RO and the staff have to bear certain social security contributions respectively including pension fund, hospitalization, unemployment, injury, and birth planning insurances. Please see the Individual Income Tax that follows on the income tax issue for foreign nationals and employees from Hong Kong , Macau and Taiwan .

It has been a 13-year journey from the preliminary work in 1994 to the passing of thePRC Enterprise Income Tax Law (referred to as “the EIT Law” hereafter) on 16th March 2007, which marked the completion of the unification of two tax systems for  domestically funded and foreign funded enterprises in China. It is a system innovation in the process of building socialism and a harmonized society within the country. To reap the benefits of the new tax system depends very much on its implementation in an effective manner. A few days ago, the State Council announced the long-awaited  Implementation Regulations of the PRC EIT Law (referred to as “the Implementation Regulations” hereafter), which is to come into play with the implementation of the  EIT Law.

To enable the taxpayers and the tax administrators to better understand and  follow the spirit inside the Implementation Regulations, the reporter interviewed theofficials in charge of the State Administration of Taxation on certain questions about  the Implementation Regulations. The officials in charge made the remarks that the drafting of the Implementation  Regulations followed the principles of legality, practicality, global convergence,conservatism, and easy operability. The drafts have brought the existing tax policyinto the contents of the Implementation Regulations and demonstrated the continuity  of the tax policies, without stepping outside the scope of the EIT Law. The Implementation Regulations give details to the EIT Law taking into account the economic activities and the latest development of the economic systems, and this hasdemonstrated the scientific properties of the current policies. In addition, the drafting  committee borrowed the prevailing international income tax policies and learned from  the experiences of international tax reforms. The Implementation Regulations have  embodied international custom and shows the forward-lookingness of the tax policies.According to the officials in charge, the Implementation Regulations contain 8 chapters with 133 clauses, mainly giving details to the provisions in the EIT Law. The  officials in charge gave detailed elaborations on certain key policies and designs in  the EIT Law.

The definition of actual management organization is to protect tax sovereignty.

To share the international experiences, the EIT Law expressly lays down the legal person income tax system, adopting the defined concept of resident and non-resident   enterprises.

The key to define the taxpayer under the legal person income tax system is the  criteria for resident enterprises and non-resident enterprises. The EIT Law uses the  place of incorporation and actual management organization as the criteria todetermine the resident and non-resident enterprises. It is easier to understand and  apprehend place of incorporation but it is difficult to understand the criteria for placeof actual management. How is the place of actual management determined in theImplementation Regulations and what are the relevant considerations?

The officials in charge made the remarks that from the experiences of international practices in recent decades, the place of actual management is in general the place where the enterprise carries on its daily production and business activities. From a legal perspective, it also includes the place where important business decisions are made. From an administrative perspective, the tax law only lays down the principle or

does not lay down anything, leaving the detailed rules to be developed from decided tax cases. To protect tax sovereignty and the willful tax evasion, the Implementation Regulations have expanded the scope for place of actual management and provide that it is the place where the enterprise exercises actual and overall management and control over its production, staff, books of accounts and assets. That helps the issue of administrative decisions later with reference to the actual situations of the enterprises, better protect the tax sovereignty of our country. Detailed criteria can be developed by issuing ministerial rules from the practices in tax collections and administrations.

Budgeted fiscal appropriation is non-taxable income

The EIT Law introduces the concept of non-taxable income. Fiscal appropriation is one of the three items of non-taxable income. What about the various types of subsidies enterprises receive from local governments at the provincial levels or below? How is it provided under the Implementation Regulations?

The officials in charge remarked that the fiscal appropriation, defined as non-taxable income under the Implementation Regulations, is the funds appropriated to the institutions, social bodies and organizations administered under the budget of the local governments, with the exceptions that the State Council, the Ministry of Finance and the State Administration of Taxation provide otherwise. That in general excludes the subsidies and the rebates of local taxes that the enterprise receives from various local governments, and narrows down the scope for fiscal appropriations as an item of nontaxable income. The main considerations for these are (i) the various types of subsidies that the enterprise receives not only include exemption and reduction of turnover taxes, but also include special subsidies for the enterprises to carry on designated activities, both resulting in the increase in net assets and economic benefits flowing in, thus the imposition of income tax being lawful; (ii) the imposition of income tax on the enterprises that receive subsidies from local governments strength the dministration of tax exemption and reduction since the local governments offer various types of tax exemption and reduction in disguise in luring inbound investments, resulting in the erosion of the tax base at the national level; and (iii) the existing legal rules on accounting for government subsidies classify government subsidies as non-operating revenue. That tax rules should be consistent with the accounting rules on government subsidies.

Deduction of reasonable wages and salaries before tax

The EIT Law unifies the deduction of actual payments for various items of expenses,and provides that enterprises can claim deductions of actual and reasonable cost and expense before tax. The Implementation Regulations make specific provisions for the items to be deducted and the criteria for deduction before taxes.

According to the officials, in respect of deduction of wages and salaries, the Implementation Regulations provide that actual and reasonable wages and salaries can be deducted from income. It means that scrapping the limited deduction of wages and salaries for domestically funded enterprises in the past years relieve them of the tax burden. The amount of deducted wages and salaries must be reasonable. Obviously unreasonable amount is not deductible. To the employees in general, the remunerations that the enterprise pays should be considered to be reasonable. There

may be exceptions. Where the shareholders and their close relatives work as the employees in the company, the payment of excessive wages and salaries is thedistribution of dividends in disguise. Alternatively the wages and salaries of the management working for the state owned enterprises are raised in breach of the rules of the departments for the supervision and administration of state owned assets. All

these complicated cases relating to wages and salaries will erode the tax base of the enterprise income tax. To strengthen the administration over tax bases, the Implementation Regulations add the qualification “reasonable” to wages and salaries.The official revealed that the State Administration of Taxation shall issue the 5 “Administrative Measures for the Deduction of Wages” to clarify what is considered

to be “reasonable” wages and salaries in the Implementation Regulations.

60% of the incurred business entertainment expenses are deductible, not exceeding 0.5% on the sales (business) turnover for current year

The Implementation Regulations provide that 60% of the business entertainment expenses incurred in connection with production and business activities shall be deductible from income, but the maximum amount shall not exceed 0.5% of the sales (business) turnover for the current year. What are the policy considerations lying behind this rule?

The official said that the amount of business entertainment expenses is a mix of corporate entertainment and personal consumption. Among them, the personal consumption falls under non-business expenses that should not be deducted before tax. Therefore, there is a requirement to limit the amount of business entertainment to a certain percentage. However, it is difficult to distinguish between business entertainment and personal consumption. The international practice is to arbitrarily set

a relative percentage between the two. In Italy 30% of the business entertainment expenses is deductible before tax. In Canada, the amount is 80%. In the US and New Zealand, the amount is 50%. Taking into consideration of international practices and the existing practice of limiting the deduction of business entertainment to a percentage of the sales amount, we combine the two practices as per experts’ recommendations on the adoption of a strict policy: business entertainment is subject to a 60% deduction and not exceeding 0.5% of the sales amount (business turnover) for the current year.

Limiting the deduction of advising expenses to 15% on sales revenue, and remaining amount being carried over for deduction in future years

The Implementation Regulations consider the combined amount of advertising expenses and business promotion expenses, and provide that the amount of deductible advertising and promotion expenses shall not exceed 15% of the sales amount (business turnover), except for the provisions of the Ministry of Finance and the State Administration of Taxation to the contrary. The amount exceeding the prescribed 15%

can be carried over to future tax years for deduction.

The officials in charge explained that advertising expenses that possess the properties of one-off payment of a large sum and benefit the enterprise for a long period of time should be regarded as a capitalized payment and cannot be deducted in whole in the current tax year. Business promotion has similar properties and should be subject to limits on deduction. The Implementation Regulations permit the deduction of advertising and promotion expenses up to 15% of the sales amount (business turnover), and that the portion in excess of the 15% can be carried over to future tax

years for deduction. The administration has given due consideration to the advertising and business promotion expenses in some industry sectors that require specific

measures to be adopted. In the light of expert opinions and views from relevant departments, the qualification “except for the provisions of the Ministry of Finance and the State Administration of Taxation to the contrary” has been included in the Implementation Regulations with a view to making ministerial rules on the deduction of advertising and business promotion expenses for different industry sectors, in accordance with the provision for the delegation of rule making power in the EIT Law.

Indirect credit helps Chinese enterprises “go abroad”

In accordance with the EIT Law, the corporate income tax the resident enterprises bear indirectly on the dividend and bonus issues from equity investment outside China is eligible for indirect credit. The Implementation Regulations provide that the resident enterprise should hold 20% controlling interest in the equity of the foreign company. What are the policy considerations on this?

The officials said that the PRC EIT law retains the direct credit for tax paid on dividends and bonus issues at the shareholder level and it also introduces the indirect credit for tax on profits earned at the company level out of which the dividends and bonus issued are paid. The adoption of direct and indirect credits gives a helping hand to Chinese resident enterprises going international and increases their competitiveness

in international market. From the perspective of international practices, indirect credit are given on condition that resident enterprises should have actual equity investments in foreign companies. In accordance with the tax laws in the US, Canada, the UK, Australia, and Mexico, resident enterprises holding 10% or more voting rights in the equity investment in foreign companies are eligible for indirect credit. The tax law

requires the equity interest in foreign companies to be 25% for Japanese and Spain investors. It is the first time the PRC EIT law adopts the indirect credit method. The Implementation Regulations provide that the equity interest in foreign companies is 20% for resident enterprises to receive the indirect credit.

New and high technology enterprises by industry sectors

In the light of the requirement for national economic and social development,successful international experiences and the requirement for simple tax system, broad tax bases, low tax rates, and stringent tax collections and administration, the PRC EIT Law adjusts and integrates the tax preferential policies for both domestically and foreign funded enterprises, and gives effect to changes in two dimensions: the tax

policy changes from region-specific preferences to industry-specific preferences,which is to be supplemented by regional tax preferences; the form of tax preferential treatment changes from direct tax exemption and reduction to direct tax exemption and reduction, which is to be combined with reduction in tax bases for indirect taxes.The Implementation Regulations make clarifications on the scope, the conditions, and

the recognition criteria for tax preferential treatments as laid down in the EIT Law.

The officials in charge said that there are three important issues in the recognition of new and hi-tech enterprises. The first is the scope of new and hi-technology enterprises. The Implementation Regulations change the classification of new and high technology by products to classification of the new and high technology by sectors. The Implementation Regulations provide that the products (services) of new and hi-tech enterprises should fall under the scope of <the new and hi-technology industry sectors that receive prior supports from the State> so that it can avoid the problems that product listing and coverage under existing policies are too narrow and that the existing policy is not forward looking. The second issue is the recognition criteria. The Implementation Regulations provide those criteria in principle: the amount of research and development as a percentage to sales; the sales revenue of new and hi-tech products (or services) as a percentage of total revenue; the ratio of employees who possess technical qualifications to the total number of employees in

the company, and other conditions to be met. The Ministry of Science and

Technology, the Ministry of Finance, and the State Administration of Taxation shall formulate policies on this and give the detailed benchmarks with the flexibility to make adjustments for later development.

The third issue is the core proprietary IP rights. The Implementation Regulations lay down the primary requirement for getting recognized as new and high technology enterprises is the ownership in “proprietary IP rights”. In view of the fact that there is no official definition of “proprietary IP rights”, the inclusion of trademark rights, exterior design, copyright that may not have bearing on the core technological

competitiveness of the enterprise into the “proprietary IP rights” will make the scope too wide. The Implementation Regulations finally adopt the “core proprietary IP rights” as one of the criteria for getting recognized to be new and hi-tech enterprises. It is relatively easy to operate and has pointed out the direction for technological innovation. The key point is the IP rights that the enterprise owns and that give core

technical support to the main products and services of the enterprise.

Annual taxable income of small and low profit-making enterprise not exceeding

RMB300,000

The Implementation Regulations give the amount of annual taxable income, the number of employees and the amount of total assets as the benchmark for small profit-making enterprises. Specifically for production enterprises, the annual taxable income shall not exceed RMB300,000, total number of employees shall not exceed 100, and the total asset amount shall not exceed RMB 30 million; for non-production enterprises, the annual taxable income shall not exceed RMB300,000, the number of employees shall not exceed 80, and the total amount of assets shall not exceed RMB 10 million. The scope of the tax concession is larger and the magnitude of tax concession is higher than that as given under the old tax law for domestically funded enterprises.

The officials said that the dividing line that the annual taxable income is RMB300,000 drawn under the Implementation Regulations results from careful testing. About 40% of the enterprises shall be taxed at 20% given that this benchmark is adopted.

The business profits that non-profit making organizations earn are taxable

The PRC EIT Law provides that the income of qualified non-profit making

organizations is exempted from tax. Article 85 of the Implementation Regulations provides that the income of the qualified non-profit making organizations excludes the income derived from profit-making activities of the non-profit making organization. Why is it?

The officials in charge said countries all over the world make a distinction between profit-making and non-profit making activities and give tax preference to non-profit making activities. The relevant legal rules in China provide that non-profit making organizations cannot carry out profit-making activities. To regulate these organizations and plug the loophole that may arise from the profit making activities

carried out by these tax-exempt organizations, the Implementation Regulations expressly provide that the income derived from the profit-making activities would not be exempted from tax. Where some non-profit making organizations derive income from profit-making activities and use them in whole for charitable events, that should

be primarily encouraged under the national policies. Therefore, the Implementation Regulations include the qualification “except for the provision of the Ministry of Finance and the State Administration of Taxation to the contrary”.

Dividend and bonus issue derived from investment over 12 months being exempted from tax

The PRC EIT Law provides that dividends, bonus issues and income from equity investment are tax-exempt income if they are distributed by resident enterprises that satisfy prescribed conditions. What are differences between the conditions to be met by the resident enterprises and the provisions on the taxation of dividends and bonus issues in the old tax law for domestically funded enterprises? What are the policy

considerations?

The officials in charge said that the exemption of income tax on dividend and bonus issues that are distributed among resident enterprises is to eliminate double taxation. Under the old tax regulations for domestically funded enterprises, the distribution of dividends from an enterprise that pays tax at a lower rate to an enterprise that pays tax at a higher rate attracts additional taxes for the high-tax enterprise on the rate

differences. In order to make the tax preferential treatment available to enterprises created in the development of the Western region, the new and high technology enterprises, and the small and low profit-making enterprises, the new EIT Law scraps the practice of imposing additional tax on the rate difference and exempts the income tax on dividend and bonus issues that are distributed by unlisted companies and listed companies, of which the ownership in the investment in the listed companies is over

12 months. To encourage direct investment in production and business activities, the stock speculations in the secondary capital market that is characterized by short-term ownership (less than 12 months) without the primary objective of receiving dividends and bonus issues should not become targets for tax preferential treatments.

The tax exemption and reduction commencing in the year the first sales transaction is reported

The Implementation Regulations provide that enterprises deriving income from the investment in projects of public basic infrastructure that receive primary support from the state shall enjoy tax preferential treatment in the form of “three years’ tax exemption and three years’ tax reduction”, commencing from the tax year in which the first sales transaction for the project is reported. The old tax law for foreign

invested enterprises provided that the year for tax exemption and reduction commences from the first profit-making year. The EIT Law has changed the previous practice from the first profit-making year to the year the first sales transaction occurs. What is the reason for this?

The officials in charge said that the old tax law for foreign invested enterprises adopted the first profit-making year as the year in which the tax exemption and reduction period commenced. That would in practice encourage the postponement of the first profit-making year to avoid paying taxes and made the tax collection and administration a difficult job. The Implementation Regulations adopt a new method under which the tax exemption and reduction commence from the year in which the first sales transaction is recorded. On one hand, this policy change can avoid the

practices by the foreign invested enterprises of putting off the first profit-making year to later years. On the other hand, this policy change can address the issue that the investment scale is big with long period of construction. It is more realistic to the situation under which the domestically funded enterprises receive tax preferences from the date of incorporation. It also encourages the enterprises to shorten the construction period, make the project profitable at the earliest possible moment and improve the return on investment.

Tax adjustment to strengthen the anti-tax avoidance measures

To comply with the relevant provisions on special tax adjustments in the EIT Law and learn from international experiences, the Implementation Regulations expressly lay down provisions for the related parties or associated enterprises in the transactions

with related parties, the adjustment methods for related party transactions, the principle of arm’s length transactions, advanced pricing agreements, the obligations for providing information, collecting taxes as per prescribed profit margins, preventing the use of controlled foreign corporations, prevention on thin capitalization,

general anti-tax avoidance, and the imposition of additional interest on overdue taxes.

The officials in charge said that these provisions strengthen the measures to combat tax avoidance, help prevent and stop acts of tax avoidance and safeguard the interests of the nation. He specially emphasized that after tax adjustments taking effects, the taxpayer, in addition to the payment of additional tax, is liable to a penalty interest that is computed with reference to the bank’s lending rate plus 5% in the period for which additional tax is collected. Where the taxpayer can submit the information to

the tax authority on time, it can be exempted from the payment of additional interest on tax.

Separate rules to be made for filing consolidated tax returns

The EIT Law follows model of the income tax on legal persons. Organizations that are not legal persons should file income tax returns that forms part of the consolidated tax turn for the head office. The filing of consolidated tax returns by head offices would relocate the tax revenues between different regions in the country. Both the taxpayers and local governments are very much concerned about this issue. The Implementation Regulations only lay down one provision in principle. What are the

policy considerations for this?

The officials in charge told us that in accordance with the EIT Law, business organizations that are not legal persons should file tax returns to the tax bureau in the city where the head office is located. That will cause relocation of tax revenue among different regions in the country, and should be dealt with in a reasonable way. We have performed many studies in order to solve the problem of relocation of tax revenues among different regions in a reasonable and proper way and balance the

interests among them after the implementation of the EIT Law and the

Implementation Regulations. The detailed measures shall be formulated by the Ministry of Finance and the State Administration of Taxation, and submitted to the State Council for approval before taking effect. Therefore, the Implementation Regulations only state the principles in general.

Parent and subsidiary companies no longer file group tax returns

The EIT Law provides that except for the provisions by the State Council to the contrary, enterprises should not file group income tax returns. However, the Implementation Regulations do not make relevant provisions for group of companies to file tax returns on a group basis. How will this problem be solved in future?

The official in charge said that as from 1994, the State Council has given approval to 120 large groups of corporations/enterprises to file group tax returns on a trial basis. The policy objective at that period of time is to relieve the enterprises of tax burden and support the development for the groups of enterprises because the operating results of the parent and individual subsidiaries did not present the true information

and it is difficult to distinguish between the enterprises that are operated in accordance with commercial principle and the enterprises that form part of the governmental organizations. With the implementation of the EIT Law, the parent and subsidiary corporations that are legal persons shall file tax returns and pay tax separately. Where there is a requirement to file group tax returns, the State Council shall make separate regulations. Implementation Regulations need not deal with this again since the EIT Law has already made the provisions and delegated the authority on this.

Mrs. Ghazala Waheed w/o Abdul Waheed, Adult, R/o House No.         DHA, Lahore Cantt, (hereinafter to as the LESSOR of the ONE PART).

And

Mr.      ,R/o China, refereed to as the LESSEE of the OTHER PART.(Expression “LESSOR”
and “LESSEE” wherever the context so permit shall always mean and include their respective heirs, successors legal representative and assignees).

WHEREAS the LESSOR is the lawful owner and in lawful possession of House No,          DHA,
Lahore Cantt, consisting of 4 Bedrooms with bath, D/D,TV; Lounge, Kitchen, Store, Servant, Quarter together with fixtures and fitting (hereinafter collectively called the DEMISED PREMISES).

AND WHEREAS the LESSOR has agreed the lease and the LESSEE has agreed to take on lease the DEMISED PREMISES on the terms and condition as given below:-

1. This agreement in only valid if LESSEE is renewed and extended for the lease period.

2. The LESSOR lets LESSEE takes the DEMISSED PREMISES for a period of 12 months
Commencing from 15th January 2004. The Lease is renewable for a further period as may be mutually agreed in writing on expiry of the lease period

3. The rent of the DEMISED PREMISES shall be USD3,300/-(US dollars Three Thousand and Three hundred Only) per month

4. The LESSOR hereby acknowledges receipt of the sum of USD.19,800/-(US dollars Nineteen Thousand and eight Hundred Only) per month.

5. It is hereby agreed between the parties that the LESSEE shall pay the aforesaid monthly rent
USD. 3,300/-(US dollars Three Thousand and Three hundred Only) as the monthly rental advance by 20th of each calendar month for which if is due after completion of advance rent period ending on 15th July 2004.
6. That the LESSOR hereby acknowledges receipt of the sum of Rs.60,000/-(Rupees Sixty Thousand Only) from the LESSEE as FIXED EDPOSIT SECURITY which shall be refunded to the LESSEE on giving back the vacant possession of the DEMISED PREMISES after deduction of damages/shortages outstanding bills for Electricity, Water, Gas and Telephone charges etc, against the DEMISED PREMISES.

THE LESSEE HERBY CONVENANTS WITH LESSOR AS FOLLOWING:

1. To pay to the LESSOR the rent hereby reserved in the manner before mentioned.

2. That the LESSEE shall not at any time during the terms, without the consent in writing of the LESSOR, pull down, damages or make any structure alterations to the DEMISED PREMESES provided always, the LESSEE shall have go write install any fixtures and fittings excluding air-conditioners in the DEMISED PREMESES, to detach and repossess the same subject to the restoration of the DEMISED PREMESES to their original state at his cost (reasonable wear and tear excepted) on the expiry of this lease or any renewal hereof.

3. To use the DEMISES PREMISES for residential purpose and would not be used for a commercial purpose the DEMISES PREMISE would not be used occupied by Mr.
And family.

4. Not to sublet the whole or any part of the premises.

5. To pay regularly the bills for Electricity, Gas, Water and Telephone charges in respect of the DEMISED PREMISES. A copy of all the paid utility bill be forwarded to the LESSOR every three month regularly. In case of disconnection of any facility due to non-payment, LESSEE will be responsible to get them restored and pay the same. All dues must be cleared before the expiry of the LEASE.

6. The LESSEE shall keep and maintain the said premises in good and tenantable conditions during the tenure of the lease.

THE LESSOR HEREBY CONVENANTS WITH THE LESSEE AS FOLLOWING:-

1. To pay all existing and future rate, taxes assessments and other charges of a public nature whether impose by the Municipality, Government or any other authority in respect of DEMISED PREMISES.

2. Not to erect or set up a building or structure on the DEMISES PREMISES nor to add to any existing building or structure during the period of lease or any renewal without the written consent of the LESSEE.

IT IS HEREBY DECLEAR AND MUTURALLY AGREED BETWEEN THE LESSOR AND LESSEE ANS FOLLWING:=

1. The LESSEE and the LESSOR shall have the right and option to terminate this Lease at any time only after the expiry of the lease period i.e., 24 months, provided they give ONE (1) month notice in advance to either of the parties.

2. The meter reading of various utilities are as given below:-
UTILITY METER NUMBER TODAY’S READING
a) ELECRICITY ———————— ————————
b) GAS ———————— ————————
c) TELEPHONE ———————— ————————
d) WATER ———————— ————————

3. That the LESSEE has also agreed with the LESSOR for a mandatory increase in rent by 10% per annum, the rent would be enhanced to Rs.36,300/-( Rupees Thirty Six Thousand and Three Hundred Only), should the LESSOR and I ESSEE mutually to renew the Lease. It can be negotiated between the parties.

WHEREOF THE PARTIES hereto have executed these presents on the and day above written.

LESSSOR:__________________________
Mrs. Ghazala waheed
NIC NO._______________________

LESSEE__________________________
Mr.
Chinese passport no.___________________