China: First Let's Clear Out The Long Time Foreigners.

I'd be wary of making a call like this just off of one incident and a bit of hearsay, but tightening up on visas has been a progressive thing. I've been telling every expat I know in China working on those stupid 'agency' arranged visas to get fully legal for a while now. Usually it goes something like this:

Me: So what kind of visa are you working on anyway?

Friend: Oh, I got one of those agencies to arrange it, no problem.

Me: Oh really? What kind of visa is it?

Friend: A student visa.

Me: And what if they decide to check up on it? Aren't you worried that you might get rumbled?

Friend: Nah. The agency said it was all covered, I pay them 5000 RMB and they arrange it.

Me: But I've been hearing about them doing door-to-door checks up in Beijing, can I have a look at what it says?

Friend: Sure

(I look at it)

Me: But this says you are a student up in Qingdao, how is that even legal?

Friend: I pay 5000 and they process it.

Me: But this is a fake document.

Friend: No it isn't, the agency arranged it.

Me: But this visa is for you to study Chinese up in Qingdao, not run a business in Shanghai. If they find out . . .

Friend: But it's all above board, the agency said . . .

And so on, ad nauseam. To quote Star Trek: The Search For Spock "How can you buy a permit to do a damned illegal thing?" Obviously my friend thinks you can, I think it's going to come back on him one of these days, but I could be wrong.

Dan,

This just happened to a good friend of mine last month. He had a technology company with 6 employees in a Tier 1 city and the authorities came in and gave him a couple days to leave the country. He had been here for 8 years but had never registered his company because he did not want to spend the money to do so and he did not want to have to pay employer taxes.

His business had become very profitable and he told me that even though his employees had always encouraged him to stay off the grid so that his business would be more competitive and so that his employees could avoid taxes, he is now absolutely convinced that his employees were the ones who ratted him out. His employees have now taken over the business and this guy is back in the United States figuring out what to do next. He is at least smart enough to know that his business is dead in China and that he has become persona non grata there. He was told never to come back.

I would never have bought into your post had this not just happened, but I have been issuing the same warning ever since.

China has changed and the biggest change is that the government does not believe it needs foreigners any more and it knows it does not need foreigners who are going to try to operate off the grid.

This is happening and it totally blows.

I had a creative business in China for seven years and when I refused to double the salary of my only employee, she threatened to have my business closed and said she would end up with it. I fired her and then set in action my plan. A few months later, the government bureaucrats came by my flat, but I was gone.

A few days later, I was on an airplane to Bangkok with all of my equipment and I have been here ever since. That was about six months ago. Bangkok is not a permanent answer, but at least the government here is too concerned with other issues right now to focus on clearing out an operating business just because it cannot afford to register and pay employer taxes.

I will never return to China.

Interesting. I wonder if the new visa regulations are motivated by a desire to get rid of teachers or those who have small businesses who are mainly in China as missionaries.

Most of the posts give a clue as to how many dodgy, fly by night, so called business people with a used car/snake oil salesman mentality are out there.

Oh, western countries by policy do not accept immigrants any where near the retirement age. Why? Once they get residency, they are eligible for that country's social safety net. They could probably get on that country's social welfare rolls before that time. China has no interest in having foreign elderly people on its welfare rolls as it tries to build up the economy and create a national social safety net.

Also, many of these foreigners who have been busted are lucky that they have only been expelled and not charged with a variety of fraudulent activities.

I'm sure Dan can run down a list of a variety of federal laws in China about engaging in activities that unregistered businesses break.

Not to mention federal tax evasion each year that the business is in operation as well as tax evasion by each employee each year, as well as the foriegner(s) who fail to pay/file each year.

Do that in the US and you do real jail time, not to mention asset seizures.

The EU, US and Japan have had federal tax authorities in China as well as social security people advising China on how to turn ancient or useless communism based institutions into modern ones.

Dan, from what you can tell, is this coming from the tax bureaus or from the chu ru jing?

Even if you have a properly registered company or rep office, if you're not paying your taxes exactly right, you can run afoul of your annual audit. The tax bureaus exercise discretion in how carefully they scrutinize your taxes. In the past, they seem to have just been concerned whether you're paying a reasonable amount. You can't even play it safe by overpaying your taxes, unless you have sufficient fapiao to exactly match your taxable income/expenses. I don't think any business in China could comply 100% with China's accounting and tax law; at least it would be very difficult to do so. The next step in this development would be to start using accounting and tax regulations to push virtually any foreign business out of the country.

I don't understand all the whining. In the U.S. you'd be lucky not to be jailed before being deported if you'd been found living and working there illegally.

I have a friend who had his unregistered businesses taken away from him twice by his employees. The first time was in Shanghai a long time ago. He left China for years and then returned and set up a similar business in Tianjin, convinced things would be safer there, but just this year, he was shut down and his employees jumped in. He has left China once again, but he is now convinced the Chinese have an innate ability to know exactly when a foreign company has reached its most profitable point and then they will take you out at that very moment. I fear he may be right.

@ anon:

"He has left China once again, but he is now convinced the Chinese have an innate ability to know exactly when a foreign company has reached its most profitable point and then they will take you out at that very moment. I fear he may be right."

They also have an innate ability to know that the company is illegal and wait for that moment to pounce, knowing that foreigner has broken a buffet of laws.

FOARP,

Tightening up on unregistered businesses and improper visas has been a progressive thing, but there was definitely a let up when China's economy started turning South. But I think the tightening this time is going to beat anything in the past because I think the Chinese government is still very afraid of the economy declining on the one hand and yet, on the other hand, government officials are of the view now more than ever that they don't need foreigners so much any more. So they want to clear them out both to open up jobs for the Chinese and because they view them as less important. The government is, at the same time, cracking down on taxing foreign companies and I see that as part and parcel of the same package.

xxx,

One of the things nobody ever wants to believe is that it will be those closest to them who will do them in (et tu Brutus). I have never been able to prove it, but my "sense" (and that is really all it is) is that 90% of the time a business gets closed down, it is because an employee called for it and 90% of the time that a foreign company (who has failed to register its own IP) has its IP registered by someone else in China it is an employee who is behind it. I say this because virtually every time either of these two things happen, they happen at exactly the perfect time for making money.

My firm has been called four times by foreign companies who had just been contacted by Chinese companies for using the Chinese company's registered trademark (but which was really the trademark of the foreign company that the foreign company failed to register) and every single time this call came right when the foreign company had its largest shipment ever waiting to leave China. Coincidence? I think not. And is it a coincidence that virtually every time someone calls us to complain about their illegal business getting shut down in China they always say something about how they were finally starting to make good money from it? Again, I think not.

Frank,

You will never return to China because you have been told to never return or because you have no desire to do so?

Marlow,

This is the first I have heard of the missionary angle. I think the motivation is to please its citizenry and what better/easier way to do so than to kick out a foreigner who is in the country illegally and effectively turn over that foreigner's business to the Chinese employees? Countries have always been tempted to nationalize foreign industries and what China is doing is along those lines, though still completely above reproach.

Greg,

You have once again nailed it. I too do not understand what people expect China to do. Is China really doing such a terrible thing by protecting its citizens from fairly wealthy people who are in China illegally and who have chosen not to get legal and have chosen not to pay their taxes.

As you note,

"Also, many of these foreigners who have been busted are lucky that they have only been expelled and not charged with a variety of fraudulent activities.

Do that in the US and you do real jail time, not to mention asset seizures."

You are also right to note that all China is doing here is getting its law enforcement more in line with places like the US and the EU and Japan.

The EU, US and Japan have had federal tax authorities in China as well as social security people advising China on how to turn ancient or useless communism based institutions into modern ones.

robertb,

Great question and I don't know, but I suspect it is not the tax people, who seem more concerned with getting money than with kicking people out. I really believe this is coming from the local governments who view the kicking out of illegal foreigners as a great way to make their populace happy. It's the equivalent of the US politician bad-mouthing China and illegal aliens from Mexico.

Rob Watson,

I too do not understand the whining. All China is doing here is enforcing its own immigration laws, which it has every right to do and which every other country does as well. Do those who whine think they are above the laws or that they should be making China's laws for it?

Dan
"I too do not understand the whining. All China is doing here is enforcing its own immigration laws, which it has every right to do and which every other country does as well. Do those who whine think they are above the laws or that they should be making China's laws for it"

This being true, there is one issue that is not being adressed here. The fact that everything is illegal in China, just not always enforced. Even if you set up a WOFE and play it by the book, there is a fair chance that you will still get kicked out. Just read Article 6 of the constitution. No room for a WOFE there.

"The basis of the socialist economic system of the People's Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people. The system of socialist public ownership supersedes the system of exploitation of man by man; it applies the principle of 'from each according to his ability, to each according to his work"

Further down it states

　Article 13 The lawful private property of citizens is inviolable. The state protects according to law the right of citizens to own and inherit private property. The state may, in the public interest, appropriate or requisition private property of citizens for its use in accordance with the law, while making compensations.

There may be room for a WOFE here, but if you are not a citizen (is a Z-Visa holder a citizen? there is nothing about citizen in the description of a Z-Visa. "Employment Visa (Z Visa) is issued to an alien who comes to China for a post or employment, and his/her accompanying family members".) then your WOFE can be taken away from you anytime.

Well I might be wrong. Just thinking it looks a lot like rule of man to me. Maybe every non-Chinese passport holder working in PRC is doing so illegally if they own something/private property?

Good for China, it is about time those who are working, living and profiting illegally are forced to pay the consequences. January will mark my 7 year anniversary in Shenzhen and i have been a legal resident and business owner the entire time. I have no respect or need for those foreigners who can't follow the laws, no matter how foolish they may be or seem, and then cry foul when found out or their bribes no longer can get them out of trouble.

@Dyfed

"There's a vast difference between students and bar managers working on F visas and long term expats who contribute taxes, investment dollars and employ hundreds of local Chinese. You might want to differentiate before you make such all encompassing statements in future."

There is also a vast difference between legitimate business operations that enter into JVs or put up the sums needed for a WOFE, go through their country's trade offices, register with the layers of Chinese bureaucracy and the hack old hands who came to do whatever whenever however they want and basically bribe their way through any difficulties. It is also a very accurate all encompassing statement to say that if a party goes to the trouble to avoid all of the necessary legal requirements for residency and setting up a business, they are probably not looking to pay their taxes, declare investments or engage in ethical hiring practices.

The days of the "old hand" are fading fast, not just in China but many other places as well.

Yeahhh. The government is going after illegal foreigners running unregistered businesses in China. And this is supposed to indicate that the government is changing its attitude towards FDI? Are you people serious? After being there for 5 years of not paying taxes?? Ummm, these people should be glad that they're just allowed to leave the country without going to prison because I know for a fact if people pulled this crap in the US, they would owe a buttload of back taxes and would be in prison. It's amazing how many of you morons feel entitled to special treatment and when things go sour and rightfully so, you badmouth China despite the fact you profited handsomely from several years of doing illegal business. Did it occur to any of you that the fact that an insider snitch was involved in almost all, if not all of these cases is the reason the government is going after them? Not sure how this little tidbit indicates a change in overall attitude. Attitude is the same I assure you but China is attempting to get its own house in order and this is just a byproduct. You people should be thanking your lucky stars that you got to live and benefit from China for half a decade without paying taxes or being legal.

Also Chinese laws are nowhere as ambiguous or as conflicting as people seem to think. There has been a huge amount of effort over the last thirty years to remove legal conflict and ambiguity. I don't think that as far as inconsistency and ambiguity, Chinese law is much worse than anywhere else.

Also Article 8 of the Legislation Law requires expropriation of non-state property to be approved by the National People's Congress. There's no *constitutional* guarantee against government expropriation of foreign property, but there are a number of legal guarantees. Whether you invest in China or not depends on how firm you think those legal guarantees are, and most people don't think they are going away soon. WFOE's exist because of a policy decision by the National People's Congress supported by the Politburo of the Communist Party of China. The NPC and Politburo could decide to abolish WFOE's, but a local official can't and neither could Hu Jintao by himself.

Also, it's usually pretty obvious whether someone is *trying* to follow the law as best they can, or if they are just making excuses to make money.

I’ve been watching the visa situation in my neck of the woods recently and I have certainly seen a change.
Here’s the situation, an English speaker comes to China accepting a job where a primary qualification is the ability to speak English. Now, I know a lot of teachers in China (as I’m sure most of you do) and very few of them hold down only one job. I’ve heard of much sniffing around of Chinese run businesses employing foreigners that they are not allowed too. The approach seems to be a government official approaching a legitimate enterprise and seeing what other jobs the foreigners there have. I think this situation is different from other postings here as the results (only one to date) have been very different. At the end of the day the Chinese company was shut down, leaving Chinese citizens without jobs and the foreigners were simply sent back to their legitimate jobs were they had appropriate visas.
To me this didn’t show an attempt to remove foreigners, but to shutdown illegal businesses. Albeit, foreigners employed at a company with less connections then the one in question here may experience different results.

anli: Let see then the important word in Paragraph 2, Article 11 is The State protects the LAWFUL rights and interests.

Right, and the law is written by the National People's Congress, its Standing Committee, interpreted by the courts, all under the supervision of the Communist Party.

Now if there was a consensus among the top leadership of these groups to kick foreign business out, that would happen. But it's an oligarchy, not a one man dictatorship, and agreeing to change things that much would take some amount of time.

anli: Hmm not sure about that one if they have the power to approve you, they also have the power to take that approval away. Or are you saying that only the Chinese courts have the power to take that approval away?

To complete end WFOE's would require legislation from the NPCSC. This is unlikely to happen. If Hu Jintao, the entire Politburo, and probably the two hundred or so people that run the PRC came to an agreement that WFOE's would stop, then it would happen, but if Hu Jintao thought that, he couldn't do anything single handedly.

anli: No matter how you look at it, this is still rule of man and not law.

I've found that most people that talk about rule of law in this way of very highly unrealistic ideas of what the law is like.

Also, it's pretty clear to me that China has "rule of law." It is simply impossible for one leader to peacefully retire without rule of law, and China has gone through one peaceful successor.

Dyfed,

I'm sorry, but I do not understand your comment that "There's a vast difference between students and bar managers working on F visas and long term expats who contribute taxes, investment dollars and employ hundreds of local Chinese. You might want to differentiate before you make such all encompassing statements in future."

Of course there is a difference. But what is the relevant difference here? To what "encompassing statements" are you referring?

Anonymous,

You say people are whining about the inconsistent application of the laws, but that is really not true. People are whining about having to follow laws that are clearly written and about laws that if they were to follow would protect them.

TwoFish,

I completely agree with you.

Legitimate registered WFOEs do not and will not just get kicked out.

"If you make a good faith effort at legal compliance and get hammered that's one thing. However, the situation that people get themselves into is that they don't even try to comply. Maybe it is impossible to be 100% in compliance, but there is a big difference between being 98% in compliance and 2% in compliance.

Also, let's not get too moralistic about this, The main reason people don't comply is that they think they'll make more money if they don't. Well.... They won't."

James Wu,

You are right that "these people should be glad that they're just allowed to leave the country without going to prison because I know for a fact if people pulled this crap in the US, they would owe a buttload of back taxes and would be in prison."

Many have managed to pull this off, but the screws are tightening.

TwoFish,

I agree with you. Chinese business laws are not terribly ambiguous at all and ambiguity has nothing to do with the issue we are discussing here. The ambiguity excuse comes from those trying to justify not following clear laws or from those who cannot read the laws in the Chinese and are basing their views on "what they have heard."

I'll say it again, the days of the "old hand" are fading fast in many parts of the world.

@ Twofish
Probably the one legitimate complaint about law enforcement in China is lack of consistency, and before you start with any examples in western countries, the degree of inconsistency in China is glaring and a big problem, even among Chinese companies.

(Sorry for butting in, maybe I'm in the wrong place here, but with blurry eyes and my mind spinning after several hours of reading posts, this seems as good a spot as any)
Having been legally in China (Z-visa), paying my taxes and so forth, married to a Chinese, house, kids, learn the language, making substantial contributions to China's dev't and economy, I am in fact glad to see that illegals of any sort being cracked-down on. Good show!
My problem is only partly related. I've been legally employed by a legal Chinese company, who, however, operate as legal as any other average Chinese company, i.e. within the range of mystifying rules such as there are, with loads of blah blah, yes-buts and so on. You know what I mean. I'm not just a token laowei, they need my skills like they need oxygen. This does not mean that they'll want to pay me though. For years they've said that they couldn't pay much because they were only a small company with little cash. Now, however, based on a very large part on my work upto now and even more on my work in the near future, they've been awarded huge amounts of government subsidy, VC capital and monopoly-style contracts, worth tens of millions. This, however, still does not mean that they want to pay me, or that they want to spend even a single RMB on doing some of the work that they got the subsidies for. The reasons are now such vagueries as that the government does not allow the subsidy to be used for hiring staff. Yeah right. Instead, they're handing out big, unlogical contracts to companies with no staff, not even an office. Three guesses who benefits from that cash. Since they did make all these wild promises to the government to get subsidy, they are expecting me to work myself to death, literally, while promising huge riches after a few years. They promised the same thing a few years ago, but this never materialized. Always ming tian. Working myself to death is not an attactive option for me, more so because the health insurance they promised me is just as real as the riches they promised. So, what I want to do is quit, incorporate myself, either as WFOE or let my wife start-up a Chinese company and hire me. Then I can offer the exact same highly desired services after I receive actual payment and not in exchange for promises of the kind you read about daily in the papers (directors and money gone just before pay-day). One of my fears is loosing my Z-visa, at least for a while, although on paper I should be able to get a green-card (because of marriage rules). Daunting is also the paperwork and nonsense regulations, arbitrariness and indifference of local officials when trying to set-up my/our own business. Should I/we even bother? There is also a risk that some of the millions might be used to make my life miserable, although that will not get my employer what they desperately need, which is in my head and can only come out if I want it to... What do y'all think? Should I bother starting up a business, foreign or Chinese, or am I just screwed anyway and should just put up and shut up?

To be honest I think that any assertion that there is a growing trend to remove legitimate foreign invested business' in China is simply not supported by an examination of China's regulatory policies over the past 24 months. Interesting China intends to allow foreign investment in limited partnerships as of 1 March 2010. This is a fairly significant step forward and isnt consistent with an aim to remove foreigners.

So here's my question albeit already bounced around but no solid answer given....

JV or WFOE for a new foreign company launching in China?

I am about to launch my company that I have been planning for 8 years and will do things by the books, no qualms about that, but I dont want to start the thing in a realm of probable employee threats, and local competitor company lordship privileges.

Especially if its capable of being taken away from me over 5 mao (50 cents) missing in a tax audit because someone has decided that my company will look better in the hands of my local competition.

I have seen many situations of law bending to suit local businesspeople to their advantage, and in those situations the victims of such law bending have almost always had little power to protect themselves.

Would not JV be the better option over WFOE?

At least with a local person in a directors chair it would be harder for sharks to pull the company down.

The whole idea of building a company here in China is fearful and daunting but its what I want to do.

Re: Operating illegal biz in China;

I care not that the govt. closes them down. It would be exactly the same in my homeland.

Should that happen, they only have themselves to blame.

Lawbreaking is lawbreaking in any language.

Yet I do agree, Chinese law is ambiguous by nature and isn't self explanatory where it should be.

I certainly understand your position. Why should certain people have to follow the rules and pay the taxes and then others benefit (at least for a time) by not doing so health

This, however, still does not mean that they want to pay me, or that they want to spend even a single RMB on doing some of the work that they got the subsidies for. The reasons are now such vagueries as that the government does not allow the subsidy to be used for hiring staff.

I live in Beijing and I am hearing from friends whose visas need renewing that they are tightening up again. Have you heard this?

Last time we looked at this, one had to be at least 25 to get a Z visa. I do not know if there is an upper age limit, but I think there is.

It's happening again. The police are coming by apartments here in Shenzhen where the foreigners live, including Americans and Europeans.

They are doing it again. China is very mad at the United States right now and the authorities have been increasing their door to door checks on the apartment buildings here in Shanghai where Americans tend to live. I'm completely legal, but a couple of my friends were not and they are now gone.