Yum China Franchise Agreement
Internal costs we incur to provide support services to our franchisees will be charged to the general and administrative (“S&A”) expenses incurred. Certain direct costs of our franchise operations will be charged to franchise expenses. These costs include provisions for estimated costs, rental or depreciation costs related to restaurants we sublease to franchisees, and certain other additional direct support costs to the franchise. The 3% royalty we pay to YUM for the right to sublicense the intellectual property of KFC and Pizza Hut is also included in the franchise fee. In addition to the measures expressly provided for in the Separation and Distribution Agreement, the Company and YUM will agree in the Separation and Distribution Agreement to make reasonable efforts before, from the Distribution Date to take or cause all actions and things required by applicable laws, regulations and agreements, are duly or advised to carry out and make effective the operations provided for in the separation and distribution agreement and the ancillary agreements. Potential indemnification liabilities arising from YUM under the separation and distribution agreement could have a material and negative impact on our business, financial condition and results of operations. The following is a summary of the material consequences of the Chinese income tax of YUM`s distribution of the outstanding common shares of the Company that YUM holds to holders of YUM common shares on the date of distribution and the treatment of such holders of ownership and sale of such common shares of the Company. This summary is based on China`s Enterprise Income Tax Law (“EIT Law”), Regulations Implementing China`s Enterprise Income Tax Law, China`s Personal Income Tax Law, Regulations Implementing China`s Personal Income Tax Law, Bulletin on Several Issues Relating to Corporate Income Tax on Income Resulting from Indirect Transfers of Property by Non-Resident Enterprises (“Bulletin 7”), Bulletin of Administrative Measures Relating to Personal Income Tax on Income from Capital Transfers, Provisions and Other Administrative Declarations of SAT, as well as Court Decisions, all of which are in effect at the time of this information statement and are all subject to different interpretations and modifications at any time, possibly retroactively. This summary applies only to holders of common shares of the Company who are not residents of China. This summary does not address the tax impact on income in China for holders who receive our shares other than at the time we were distributed, and does not refer to the common shares of the Company that employees of YUM and the Company received as compensation. This summary is based on the assumption that the distribution, as well as certain related transactions, will be carried out in accordance with the Separation and Distribution Agreement and other applicable agreements and as described in this Information Statement. This summary is provided for general information purposes only and does not constitute tax advice.
This summary does not address tax considerations under laws other than China`s income tax laws. The distribution, ownership and sale of common shares of the Company may be taxable under these other tax laws, and all holders should consult with their own tax advisors regarding the applicability and effect of these tax laws. Historically, we have financed our operations through cash generated from the operation of our own businesses and franchise activities, as well as through the payment of dividends by our unconsolidated affiliates. Excess cash has been repatriated to YUM in the past through intra-group loans or dividends. In connection with the distribution, the Company and YUM will enter into a tax business agreement under which the Company agrees to be liable for certain tax obligations after the distribution. For a description of the tax treaty, see “Certain Relationships and Transactions with Related PersonsTax Importers”. The combined income statements include fees paid to YUM in the past, consisting of upfront and ongoing fees equivalent to 3% of our business and franchise revenues. Royalties due under YUM for our proprietary businesses are included in the restaurant occupancy margin and other operating costs in the combined income statement. YUM Royalties for Franchise The company was established in Delaware on April 1, 2016 to own YUM`s business in China. YUM`s operations in China are currently operated primarily through two indirect subsidiaries of YUM, Yum Restaurants Consulting (Shanghai) Company Limited and Yum Restaurants (China) Investment Company Limited (collectively, the “Chinese Subsidiaries”). As part of the plan to separate the China business from the rest of YUM`s business, and as provided for in the separation and distribution agreement, YUM plans to transfer to the company the holdings of the holding companies through which YUM owns the Chinese subsidiaries, as well as all related assets and liabilities of the Chinese business, before distribution. The Company owns or has the right to use the trademarks, service marks and trade names it uses in the course of carrying on its business.
Some of the most important trademarks owned or used by the Company in this information statement are: “KFC, Pizza Hut Casual Dining, Pizza Hut Home Service, Taco Bell, Little Sheep and East Dawning”, which may be registered or registered in the United States or other jurisdictions. . . .