China Lawyers
http://bit.ly/29510fC by Psyche-Clops

I alone must get some version of the following email (the below is a quick conglomeration of two that I received just this morning!) at least once a week, not to mention the other China lawyers in my firm:

My name is Norberto and I am from Spain. I have a question regarding China tax law because I am planning to start a company that will target the Chinese market.

We will be starting an online platform that targets learners and teachers in China. The platform will facilitate classes (language, math, etc.) between Chinese teachers and students and our company will take a fee for the intermediary services we provide. Students will pay our company and we keep a commission from that and remit the rest to the teacher.

What regulations apply to us paying these teachers? Will we be classified as paying “salaries” and therefore have tax liability or will all the tax responsibility be on the teachers themselves? Is there a minimum sum people can earn in China without our having to provide any information to the Chinese tax authorities?

Our plan is to have our company based outside of China initially, but then move into China once things start rolling.

My response (which I actually just now set as a one-click signature in my outlook account) is typically something like the following:

If China learns what you are doing (and it no doubt eventually will) its tax authorities will come after your company (and maybe you as well) for both company income taxes on the income you are generating from your doing business within China (probably around 25%) and for employer taxes and employer benefit payments on everyone you are using within China (probably around 40%), plus interest, plus penalties. Your company will also be at risk of being sued by the people it uses in China for various employment violations, including not having written employment contracts, not providing vacation time, etc.

My strongest advice for you if you do what you are planning to do is that you and anybody else identified with your company never go to China because the Chinese authorities like nothing more than to hold people until they pay all taxes, with interest and penalties. I suggest you read this article I wrote last year for Forbes Magazine, entitled, China’s Tax Authorities Want You, It details how China is really stepping up its efforts against companies that hire employees in China and/or do business in China without registering a company in China and paying their China taxes. Since I wrote this article (due in large part to its declining economy) China has only accelerated its efforts to track down and tax and penalize companies that do what you are proposing to do.

Antidumping and countervailing dutiesOver the last several years, many US importers have called me after learning that they are facing liability for antidumping and countervailing duties on a number of different products. These duties can be in the millions of dollars, even though the importers simply did not know that the products they were importing were covered by US antidumping and countervailing duty orders. Far too few companies realize that they can be held liable for duties for importing products into the United States.

This post highlights the breadth of products currently subject to antidumping and countervailing duty orders and it thus should serve as a warning to anyone in the United States who imports those products.

If you were an importer of solar rechargers for RV units are you aware that your product is covered by the US antidumping order on solar cells from China? If you were importing curtain walls/the sides of buildings, auto parts, geodesic domes, and lighting equipment, do you know that all of those products were covered by US antidumping and countervailing duty orders against aluminum extrusions?

The US presently has more than 130 antidumping and countervailing duty orders against China and hundreds of additional such orders against imports from other countries. The orders against Chinese products block more than $30 billion in imports and they can stay in place for 5 to 30 years. The orders can also expand to cover downstream products, such as curtain walls, solar cell consumer products, and gardening equipment.

With regards to China, more than 80 of the antidumping and countervailing duty orders are against raw materials, chemicals, metals and various steel products, used in downstream US production. In the Steel area, there are orders against the following Chinese steel products: carbon steel plate, hot rolled carbon steel flat products, circular welded and seamless carbon quality steel pipe, rectangular pipe and tube, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, steel wire strand and wire, high pressure steel cylinders, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

There are ongoing investigations against cold-rolled steel and corrosion resistant/galvanized steel so almost all Chinese steel products from China are blocked by US antidumping and countervailing duty orders.

In addition to steel, other metal products, such as silicomanganese, metallurgical coke, magnesium, silicon metal, and graphite electrodes, which are used in downstream steel production, are also blocked by antidumping orders. Electrolytic Manganese Dioxide used to produce batteries is also covered, which led Panasonic to close its US battery factory and move to China. The Magnesium orders have led to the destruction of the US Magnesium Dye Casting industry and to the movement of light weight auto parts production to Canada.

In addition to steel and metal products, chemicals products, such as sulfanilic acid, polyvinyl alcohol, barium carbonate, potassium permanganate, activated carbon, glycine, isocyanurates/swimming pool chemicals, xanthan gum, citric acid, and calcium hypochlorite, are covered by orders. The antidumping order on sulfanilic acid led to the injury of the US optical brightening industry, which brought its own antidumping case against China.

In addition to raw materials, many household products are covered by antidumping and countervailing duty orders as well, including ironing tables, steel sinks, wood flooring, wooden bedroom furniture, steel shelving, and steel cooking ware. Other consumer products covered are: tires, hand trucks, lawn groomers, steel nails, paper clips, pencils, ribbons, paper products, gift wrap and heavy forged hand tools.

Food products, such as shrimp, honey, crawfish and garlic, are also covered by antidumping orders against China and other countries.

At this point, any product being imported from China is at least somewhat import sensitive and thus is at some risk of being attacked by US trade actions. This means that you as an importer should monitor the products you import for any potential trade sanctions. And if you should be hit with sanctions, know that you can request an antidumping or countervailing duty review investigation to get the rates reduced and with that your own liability for past imports.

China negotiatingI have recently been communicating via email with a good friend of mine who has lived in Shanghai for around 20 years. He had written me about our recent series on negotiating with Chinese companies. In particular, we talked about when we push back against the Chinese companies, they are completely unprepared and assume a deer in headlights look. He then emailed me the following regarding the health care his pregnant wife has been receiving. I thought it interesting and relevant to our readers and so I secured his permission to run it here, after stripping it of all identifiers.

Enjoy.

 

Speaking of China and deer in headlights get this:

My wife receives prenatal care at a privately run maternity hospital in China. Since we have no insurance we paid 20,000RMB (3,500USD) for the prenatal package in cash. It’s been ok, getting this means she doesn’t have to take a number and wait for the 100 people ahead of her to go first as in many local hospitals. They did “fear monger” her into a useless test (because we have a pet cat) for an extra 500RMB (which I forewarned her about but she fell for it anyway). no big deal.

EVERY time since our second check up though the first thing out of the nurse’s mouths is: “have you paid for your birth package?” And it’s from 3-4 nurses each time. This has gotten annoying. Acting as a collection agency shouldn’t really fall to the “care giver”. Many people opt to have prenatal here and then go to the USA for the birth, I understand it’s a business but let’s have a little bit of professional decorum shall we?

For a basic natural childbirth package it’s 30,000RMB. But come to find out, they outsource it down the road to a local hospital. We were shown the fancy private room they rent out but if you read between the lines it’s easy to see the private hospital flips the local hospital 5,000RMB and pockets the rest. To have our “doctor” (who’s not impressive in any way) it’s a cool 45,000RMB. This doctor asks my wife’s age every visit. She’s 34 and since over 35 is considered high risk pregnancy in China and therefore more expensive, I almost get the sense he is asking each time to try to make more.

They have a shiny new center that is their showcase hospital, one nurse says that’s where we are to go and the next one contradicts her. No one is on the same page. When we pressed the customer service manager on which hospital we should go to when labor begins her answer was “you should call us to let you know what hospital to go to,” with a vague explanation about room availability as the logic behind her answer. How can you book a room for giving birth? it’s not a sure thing when the baby will come.

At our most recent ultrasound, the nurse, as always, led with “have you paid for the delivery package yet?” . She even came into the ultrasound room and was literally trying to force the document into my wife’s hands  while her dress was up, legs in stirrups and belly exposed. I had visions of her signing the document on her bare belly. My wife told her we hadn’t decided (largely because of all the nurses’ greedy behavior). The nurse then turned to me and said “your wife needs to sign this.” I waved her off and said in English we haven’t decided. The room was filled with tension caused by this nurse’s aggressive behavior. She then told my wife we HAD to pay today. We paid for 40 weeks and the customer service rep told us on an earlier visit it wasn’t a problem to wait.

My wife started to worry and I argued with her a bit outside the office (we never argue). I had a sit down with the customer service manager and told her that each time we came, the nurses’ unprofessionalism has caused us to check another local hospital recommended by an acquaintance with an “in” there.

70% of birth’s in China are C-sections largely because the doctors don’t want to wait for the birth. The whole point is we are trying to avoid a C-section (my wife has had not one problem with her pregnancy). This high pressure for the money makes me feel that we are being set up for a money grab. If it’s a C-section, the cost doubles, even to have an epidural or induce labor would tack on an additional 13,500RMB and when the pressure is on, I’m sure many couples agree out of fear. The nursing staff’s behavior is akin to a boxer telegraphing his next punch, and I’ve ducked many here.

I then pressed the manager about the percentage of people who paid for a 30,000RMB natural childbirth package and then actually had a natural birth. The deer was in the headlights my friend and I put the high beams on. She said 60%, so that’s about 50/50. We were previously told that the percentage of people who paid 45,000RMB that had a natural birth was 85%.

I told her we would check the local hospital to see (it will be a third of the price) how we felt and I asked if we still wanted to use our current hospital would that be ok. Answer: Yes, of course, and a big apology for the nurses repeatedly trying to strong arm us.

Typical China experience, the more you pay the more legal/better it is.

China trademarkWhen I was a kid, I entertained myself by writing advertisements for products that didn’t exist. Like the wildly popular household cleaner “Kwik-Kleen.” (I know – it’s shocking that Madison Avenue never came calling.) Whenever I would write my fake ad copy, I would include the ™ designation after my brand name. I didn’t really understand what ® meant, but I knew that ™ was short for trademark and that was enough for me.

Now that I have a law degree and deal with trademarks on a daily basis, I understand that ® is used after a registered trademark, and that using this symbol on an unregistered mark (as I would happily have done for Kwik-Kleen) is illegal. I also understand that ™ does not have strict legal significance and can be used by anyone; it is merely an indication of the source of the goods in question. In other words, ™ is used to put people on notice of common law trademark use.

The above summary applies to trademark use in both the US and China, but with one key difference.

I have seen a number of brand names in China identified with the ™ mark. Unless these marks are the subject of pending trademark applications, such usage is incredibly foolhardy. China is a civil law country and does not recognize common law rights. Designating a brand name with ™ doesn’t put people on notice of your common law rights. Rather, it puts trademark squatters on notice that you have a brand name that you consider valuable and haven’t protected yet.

Is that really the message you want to be sending?

China taxes

This is the second in a series of posts about problems encountered when attempting to get paid by a Chinese company. In Chinese Company Won’t Wire You Money. Have the Rules Changed? I looked briefly at the underlying framework of rules applying to foreign conversions and remittances. In this post I consider tax-related issues that can often cause payment delays or defaults. These issues vary depending on the nature of the payment. Let’s look at the three areas of payment encountered most by our China lawyers.

Payments to foreign service providers. These days the Chinese tax authorities routinely impose a tax on all payments from Chinese companies to foreign service providers. The problem is identifying the appropriate tax. Is it withholding, VAT, business tax, income tax or some combination? Even when the appropriate kind of tax, or combination of taxes, has been determined there is little consistency on the percentage amount of tax withheld.

Royalties. Where there is a royalty payment for a technology or an IP transfer, the underlying contract is supposed to be registered, which can be a time-consuming procedure in certain districts. For example, where the royalty is for a license to publish, the license must be approved by the Beijing authorities in charge of that area of publication. Where the license is for a trademark, the license must be registered with the trademark office. If there is no registration, no payment can be made. For royalty payments, the liability to withholding and VAT is clearer but there is still little consistency on the rates of tax and how they are combined.

FDI or M&A. Such payments from China require approval and usually this approval must come from Beijing. Approval is uncertain and the authorities may change their minds. Thus, a transaction that the Chinese side in good faith assumed was approved can be denied at the last minute, due to a sudden and unexplained denial of permission to remit.

There are two difficulties common to all three kinds of remittances.

First, tax authorities in many districts now require proof of the existence of the foreign payment recipient. Compliance with this additional requirement often involves production of a certificate of good standing authenticated by the Chinese embassy or consulate in the foreign country concerned. This is expensive and time-consuming.

Second, the procedures are often interpreted and applied differently from bank-to-bank, branch-to-branch and district-to-district. The tax rates, too, are not always consistent from district-to-district and even within districts from officer-to-officer. The whole situation is in flux.

The result is that there is really no way that any side of a China deal can be completely certain that a payment will go through until after the payment is received.

In my next post I will look at the due diligence you can do to identify or avoid defaults or delays in money transfers out of China.

Negotiating with Chinese Companies
This is Mars. Not China.

This is the fourth in a series of posts in response to emails and comments asking us to expound upon how Western companies can better negotiate with Chinese companies on technology deals.

In part one, Negotiating With Chinese Companies: Be The Rabbit, we talked about using the Zen technique of “being the rabbit,” which in Western terms translates mostly into just being patient, hanging back and letting the Chinese side start negotiating with itself. In part two, Negotiating With Chinese Companies: Walk, Don’t Look Back, we talked about how Western companies must 1) convey a willingness to walk away from the deal and 2) actually be willing to walk away from the deal. In part three, Negotiating With Chinese Companies: Death By a Thousand Cuts, we again emphasized the need to be patient, this time when facing the common Chinese company negotiating “death by a thousand cuts” tactic, which is where the Chinese company endlessly negotiates by raising new and minor points with each go-round. In this part four, we talk about the “China is different” negotiating tactic, which is quite common on all China deals and even more common with tech deals.

Chinese companies will often seek to justify a contract demand by stating that “China is different.” It is shocking how often Western companies fall for this tactic and accept the China-side proposed terms.

It goes without saying that every country is different from every other country. But in terms of laws and regulations — and this is especially true of basic contract law — China is really quite similar to other countries. China’s contracts laws derive mostly from foreign models and they are also further constrained by China’s participation in the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), the Convention on the International Sale of Goods (CISG), and other international standards-setting bodies and conventions. In many respects, China’s laws hew closer to international standards than those of the United States, which has a reputation for “going it alone.” China’s laws are based on the civil law standard, while ours are based on the common law. So what often seems to a U.S. investor as an unusual legal provision is often nothing more than the difference between a common law approach and a civil law approach. China’s contract laws are in many respects similar to the contract laws in most Western European countries.

Our China lawyers deal with the “China is different,” tactic by putting the Chinese side to its proof. When the Chinese side claims China is different legally, we request that it direct us to the Chinese statute or regulation setting out the purported difference. When the Chinese side claims some government agency is requiring our client do something that makes no sense for our client, we either ask to speak directly with the government official with the purported requirement or we make clear that requirement necessitates a restructuring of the deal or our client will walk.

A couple years ago, we represented a U.S. magazine publisher that was seeking to license a magazine title and some of its content to a China publishing house. Our client owned the China trademark for its magazine title and its plan was to grant the China publishing house a limited license to use the China trademark within China. The Chinese publishing company insisted our client would instead need to transfer ownership of the trademark to the China publishing house and then when the contract terminated, the China publishing house would transfer the trademark back to our client.

Our response to the Chinese side’s nonsensical proposal was to suggest to our client that it request from the China publishing house a cite to the law requiring such a deal structure. Our client did this and the Chinese side said that because the applicable laws are only in Chinese and because our client was represented by American lawyers, there would be no point in providing the cite. We told our client to tell the other side that our firm has countless lawyers (including native Chinese lawyers) who could read Chinese and to just give us the cite. The Chinese said that would still not work because our client did not have any licensed Chinese lawyers on its legal team. We pointed out that we actually did have a Chinese licensed lawyer on our team (this should never have been relevant in the first place) and suggested our client again insist on getting a cite to the law. At this point, the Chinese publishing house admitted there was “no specific law” on this, but the Chinese government required it.

Our client stuck by its insistence that it would not do the deal if it had to transfer its trademark ownership.  The deal eventually closed with our client giving the China publishing house a limited license to use its trademark in China and not transferring title.

Lately, and again, especially on tech deals, when we respond to a “China is different” argument by pointing out that we have done a dozen such deals without ever once having done one the way China now supposedly requires, the China side comes back and says it is a “new requirement” by the city or the province.

A decade or so ago, foreigners were generally prohibited from buying real estate for personal use in China. When China first changed this law (and before foreigners started catching on to the change) it was not uncommon for Chinese women (every matter involved a Chinese woman) to convince their Western boyfriend to buy a condominium in the girlfriend’s name. The girlfriend would insist that it would still belong to the Westerner, but it had to be done this way because he could not own it in his own name. Then when the couple would break up five or six months after the condo purchase, the boyfriend would contact us to sue the girlfriend to get “his” condo back. Just think for a moment how this case would play in a Chinese court. The girlfriend would explain how the boyfriend had gifted her the condo but now wanted it back after the break-up and all of the official documents would reflect the girlfriend’s full ownership. The boyfriend would then need to explain that his buying the condo for his girlfriend was actually all part of an elaborate scam to circumvent a Chinese law that did not even exist at the time of the scam. Really?

When a Chinese company argues that “China is different,” it typically means it wants the foreign side to accede to its unreasonable request. Your response to the “China is different” tactic should be to demand to see the law requiring the unreasonable condition. And when the Chinese side starts claiming that the government will not allow something, you should be clear that “if your government will not approve the deal as we wish it to be done, we will not do the deal.”

The next time your Chinese negotiating counterpart tells you that “China is different,” seek verification before you move forward.

China Lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a super fast general answer and, when it is easy to do so, a link or two to a blog post that may provide some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

China’s biggest companies, both private (like Alibaba and JD.com) and State Owned (SOE) or quasi-government owned (like Shanghai Auto and CNOOC) are on buying sprees, be it for other companies or for technology. Our firm has represented a number of foreign companies (so far, mostly U.S. and European) on some of these deals and one of the things we are finding that our clients often believe is that because they are doing these deals with such big and well-known Chinese companies, certain rules for avoiding risk do not apply.

Those rules do apply and here’s the kicker: these deals are virtually never with the big and well known company and oftentimes this is not clear until the first contract draft is written. Instead, these deals are with newly formed entities that these big companies form just for this one deal. These newly formed companies usually have virtually no history and, most importantly little to nothing in the way of assets. Sometimes we can get these China mega companies to guarantee the deal but most of the time we cannot. So most of the time the reality is that — technically — our client’s deal does not have big company type safety, just big company prestige.

So the answer to the quasi-question is that these deals with big companies are really all over the map in terms of risk and nothing should be assumed.

Negotiating with Chinese companiesThis is the third in a series of posts in response to emails and comments asking us to expound upon how Western companies can better negotiate with Chinese companies on technology deals.

In part one, Negotiating With Chinese Companies: Be The Rabbit, we talked about using the Zen technique of “being the rabbit,” which in Western terms translates mostly into just being patient, hanging back and letting the Chinese side start negotiating with itself. In part two, Negotiating With Chinese Companies: Walk, Don’t Look Back, we talked about how Western companies must 1) convey a willingness to walk away from the deal and 2) actually be willing to walk away from the deal. In this third part, we again emphasize the need to patient, this time when facing the common Chinese company negotiating “death by a thousand cuts” tactic.

Chinese companies, both SOEs and privately held, are in a mad dash to purchase foreign technologies on the cheap. And when I say technologies, I mean just about every technology possible: health care, internet, Internet of Things, computer hardware, software, manufacturing. It is truly endless. I feel like I am in the middle of a gold rush. A severely flawed gold rush.

What are the flaws?

The biggest flaw is that the default option for these Chinese companies is usually to try to get the technology for literally nothing or next to nothing. And far too often, the foreign company goes along with this.

Let me explain.

The media covers the massive China tech deals. Deals like Midea Group’s $5 billion bid for Germany’s robotics specialist Kuka AG. Those are not the deals my firm is seeing. Not at all. The deals we are seeing involve — at least half the time — second and third tier technologies held by foreign companies on an economic precipice. The China company swoops in and offers a lot of money for the technology. The foreign company then retains us and we then explain why what looks like such a good deal is, in reality a terrible deal. The foreign company then tells us (and far too often the Chinese side) how if it doesn’t make this deal it may have to “downsize” or even shut down. Some of these companies are quite large and quite well known, but their ability to secure additional funding is marginal.

And then over the next few months the two sides negotiate and during that time the Western side reveals — either intentionally or unintentionally, its desperation to get the deal done. And during that time, the Chinese side constantly and unremittingly seeks to exploit that desperation, using the following tactics.

Death by a thousand cuts. The Chinese company starts out saying it will pay $20 million for the technology, as though that is the extent of the deal. Then it drafts some vaguely worded MOU that mentions $20 million in passing, but is nothing like a straight up deal and when analyzed either makes no sense, is clearly not achievable under Chinese law, or will almost certainly lead to the Western company never getting paid. When the Western company complains about this, the response of the Chinese company is usually to go silent for a few weeks and then to suggest to the Western company that it modify the  nonsensical/unworkable MOU. Our advice is to seize that moment by presenting a carefully drafted and realistic Chinese and English language contract that actually reflects the parties’ earlier discussions. The Chinese company usually will wait a few weeks and then respond with a reasonable number of objections to the contract. The foreign company and the Chinese company negotiate on these issues and reach resolution. The foreign company quite naturally then assumes that the negotiation process is complete and expects the next steps will be to execute and then implement the contract.

Instead, the Chinese company puts forth a brand new set of contract objections. The parties again negotiate and again reach resolution. The foreign company again assumes that the next steps will be to execute and implement the contract. But the Chinese company returns yet again with a new list of contract objections, including objections to some of the matters already decided on in the previous rounds of negotiation.

If the Chinese side has been forced to concede on important matters, this death by a thousand cuts tactic will likely continue until the Chinese side gets most of what it wanted from the beginning.

In negotiating the initial objections from the Chinese side, the foreign side will usually have made concessions that weakened its position, all as part of the normal negotiating give and take and all done on the assumption that both sides would be making concessions to consummate the deal. However, when the Chinese company comes back with new demands, it has already extracted concessions from the foreign side and it is now seeking additional concessions.

The Chinese company engages in this tactic to wear down the foreign company to that point that it concedes on important points to get the deal done. The Chinese negotiators are often quite clever at mixing important issues together with trivial issues and hiding important changes with seemingly minor changes in wording. Fatigue and changing negotiation staff from the foreign side can allow these matters to slip through at the very end of the negotiation process.

In the last year or so, we are seeing a new tactic, where the Chinese company will send back a revised contract in just badly written English, and without any redlining that would allow us to quickly see the changes that have been made to it. This new tactic has all of a sudden become quite common and it is an ideal way for the Chinese side to throw yet another cog into the negotiations, especially since Chinese is usually the official language of the contract and especially since their written English is almost never clear enough so that we can understand everything and it is virtually never clear enough so that we can use it in a real contract. When this happens, our typical response is to say, “no.” If you don’t have the time or the ability to put it into two languages, send us just the Chinese and send us a redline version showing all of your changes. We are not going to charge our clients lawyer rates trying to parse out what you have given us.

You can usually avoid the death by a thousand cuts tactic by being firm with the Chinese side. One good counter-tactic is to make clear (preferably in writing and in Chinese) that your Chinese counter-party has only one chance to comment so it should make sure that all of its comments and objections are included in its first communication. The Chinese side typically ignores this rule and will still come up with additional comments even after having been told that they will be ignored. The way to deal with this is to live up to your own commitment by telling the Chinese side to “take it or leave it.”

More to come….

China WFOEMany many years ago, we helped a foreign school “conglomerate” set up a number of schools in China and due to “word of mouth” we have been getting calls and emails regarding China school set-ups ever since.

Many of those communications come from ESL teachers who see a need and want to fill it, but truth be told this is by no means an easy or inexpensive business and so only a tiny percentage of those who kick our tires ever get past that stage.

Because of all the “I want to start a school in China” tire-kickers, we now have a template email to alert them right up front to the difficulties of successfully doing so and I figure that putting it up here could prove useful to at least some of our readers, so here goes:

A School for Children of Foreign Workers is the only type of school that China allows to be 100% foreign controlled and owned. The path for this is sort of school is as follows:

  • Start with extremely strong local government support for the school and an established off-shore education institution.
  • Register a consulting/technology WOFE with USD$500K+ registered capital and the relevant business license.
  • Lease/purchase a facility and fit-out to meet school-level fire and safety regulations.
  • Spend 2+ years working on the provincial education bureau license application process.

Note: This sort of school can hire foreign and local teachers, and all relevant staff needed to run a school.

If you are wanting to run an “English training center” (basically for English tutoring), the path we see foreigners go down is usually the following:

  • Start with local government support for the training center.
  • Lease/purchase relevant commercial space.
  • Register a consulting WOFE with foreigner/foreign company as sole investor, and with a fairly generic business scope (local AIC’s do not like to give scopes that permit education activities).
  • Open the English training center and hope nobody cares to check your business scope carefully. We have heard of centers getting closed within weeks of their opening and we have heard of training centers remaining open for years and years.

Note: With this method, you cannot officially hire teachers, only consultants or other positions relevant to running a consulting company. Work visas for such “consultants” are often held up due to the skepticism of local officials and a typical foreign teacher’s lack of qualifications to be an actual “consultant.”

If you are trying to use this consulting business to run an actual school it won’t last long unless you are seriously protected by local government. Note that if you are doing this with a “Chinese partner,” it will be your partner with this relationship and it is quite common for the Chinese partner to boot out the foreigner once the foreigner is no longer needed. Because the whole enterprise is so sketchy to begin with, you likely will have no recourse once this happens. Note also that government officials in China change and change often and the new officials generally try to wipe this sort of slate clean.

Registering a fairly generic consulting WOFE would be easy but you would be at big risk for being able to maintain it. Registering a consulting WOFE with something educational in the business scope would be very difficult — but we have done this before — and far less risky once registered. Registering an actual school is a long term and very expensive project, but possible if you have the funding and a will to achieve it.

Where do you fit in the above?

Barcelona Law Office
In basketball too, the center has become less important.

During the first years of this blog (mostly from 2006 to 2010) we wrote often about the power dynamic between Beijing and China’s provinces and we also wrote constantly about China’s second tier cities. Since 2010, and especially in the last few years, we barely touch upon these subjects. What has changed? A lot.

In our early days, we were big believers in foreign investment going into China’s second tier cities and we were also witnessing China devolving power to its provinces. Back then, when people would ask us in what cities we did most of our work, we would usually estimate about 30% n Shanghai, 20% in Beijing, and the other half throughout China (but mostly in Shenzhen, Guangzhou, Xi’an, Nanjing, Tianjin, Xiamen, Qingdao, Dalian, Suzhou, Chongqing and Chengdu). Now, our answer would be more like 30% Shenzhen (China’s technology and Internet of Things center), 30% Beijing (China’s software and media center), 30% Shanghai (China’s center for corporate locations) and maybe 10% “other.” When I ask other China lawyers outside my firm about the geography of their China legal work, they report much the same.

So it is now mostly Beijing and Shanghai and Shenzhen, but really only Shanghai and Beijing are true “centers” in the sense that it is almost exclusively in those two cities where one will find the best lawyers and the best accountants and the judges and the best consultants and the best. . . . Shenzhen is mostly for manufacturing, not services. If a client of our firm seeks a recommendation for high level assistance, we virtually always refer them to someone in Shanghai (if they are located there or nearby) or in Beijing (if they are located there or nearby or maybe not so nearby.

And when it comes to government, Beijing is obviously the lead city, and that is truer today than five years ago. There was a period where Beijing was increasing the authority of jurisdictions outside the capital, but in the last few years — at least with respect to the sort of China legal work in which our firm gets involved — we are seeing authority shift back to Beijing. I thought about that today after reading a Guardian article, entitled, China punishes officials over sewage in first environmental case of its kind. This article highlights how Beijing is more strongly enforcing its laws/positions as against the provinces:

Chinese prosecutors have successfully sued a county environmental agency for inadequately punishing a sewage firm that produced dye without appropriate safeguards – the first such public interest case against a government department.

The Supreme People’s Procuratorate, China’s top prosecutor, said prosecutors had successfully proved that an environmental protection department in Shandong province had committed “illegal acts” in its dealings with the Qingshun Chemical Technology Company.

I have little doubt that this lawsuit was driven by Beijing or, at the very minimum, approved from there. It very much reminds me of what we have been seeing on the WFOE front for the last few years. What we are seeing is an increase in WFOEs being shut down after audits from Beijing reveal that they should never have been registered in the first place. We are learning about these via calls and emails from some of the companies that years ago chose not to use our law firm for their WFOE formations because we told them that what they were proposing for their WFOE would not work. In pretty much every one of these cases, the foreign company assured us that the Chinese company which with they were working had the “power” to get their WFOE approved, to which our response was and still is always: “great, then you should use them for the WFOE formation. But just as a warning, just because a WFOE gets formed does not mean it cannot and will not be shut down when Beijing or a new government sees that it should never have been formed in the first place.

A couple months ago, my firm opened an office in Barcelona, headed up by Nadja Vietz, who joined our firm (in Seattle) way back in 2004. Nadja is licensed to practice law in Spain, Germany and the United States (Washington State) and she oversees a Spain lawyer and a Spain business professional. Truth be told, we chose Barcelona as our European beachhead not after having analyzed a slew of other city options, but simply because Nadja had chosen to live there. But ex post facto, I have come to realize that it may just be the perfect city for us. It is well-located as within Europe, it is moderately priced (at least as compared to London or Brussels or Paris or Luxembourg or even Munich) and it is incredibly international.

I mention Barcelona because before we opened an office there and before I started communicating so often with all sorts of professionals there, I failed to realize how seriously Catalonians view their independence. I was under the mistaken impression that Catalonia’s professional class would uniformly oppose independence for economic and business reasons, but whenever I broach the subject of an independent Catalonia, one of the first arguments I hear in favor of it is the economic/business one.

England is obviously facing similar issues right now regarding Brexit. And I have to confess that after having read dozens of articles predicting either financial ruin or a financial renaissance should Britain leave the EU, I am of the view that nobody really knows and that either way the impact will likely be far less than predicted.  I am fairly certain of one thing though and that is that whether Britain stays or goes, Brussels’ power over its provinces (the EU countries) will probably never reach a level greater than today and will almost certainly decline.

So I just find it interesting that just as so much of the world is seeing power in the center being questioned and/or weakened, China seems to be moving in the opposite direction.

What are your thoughts about that?