Basics of China Business Law

China VAT TaxesConsider the following situation. Your company is a service provider. Let’s say your business assists domestic and foreign entities register drugs with the FDA. You are contacted by a Chinese entity to do a registration. Having read China Law Blog (See Getting Money out of China: It’s Complicated), you submit a written, signed invoice to the Chinese entity and you require payment in advance. Within five days, you receive payment.

But, you are surprised to see your payment amount has been reduced by 6 percent. You complain to your Chinese client, and your Chinese client explains that the 6% was deducted as VAT tax on the payment, upon the demand of the local tax authority. You explain that all services were performed in the United States. No services were performed in China. For this reason, there is no basis for the Chinese tax authorities to impose any tax of any kind. The Chinese side explains: we agree, but if we had complained, our payment to you would have been denied and you would not have received any payment at all.

This has become a standard scenario for service providers that provide services to Chinese entities. It applies to all types of services:

  • Legal services
  • IP registration services
  • Product and advertising design services
  • Software development services
  • Environmental consulting services
  • Architectural services, both structural and landscape.

In all these areas, the Chinese foreign exchange banks will refuse to make any payment without documentation. Often the request for documentation is onerous and can cause considerable delay. Finally, when approval for payment is received, the foreign exchange bank then requires a deduction from the payment be made.

Now get this: the amount of the deduction varies from bank to bank and from region to region. We have seen deductions range from 5% to 40%. What is the reason for this wide variation? Since there is no legal basis for the deduction, its amount and its supposed basis vary. This variation means there is no way to predict in advance the amount of the deduction. Even within the same bank for the same services we have seen the amount of the deduction vary from payment to payment, depending on the attitude of the bank at the time and the identity of the bank officer and the local tax office personnel involved in the transaction. Of course, the status of the payer in the local economy is a factor. An SOE that is the sole employer in a small town is treated differently than a small privately owned business in Shanghai.

Our China lawyers constantly get calls seeking help from American and European service providers whose payments have been held up by China’s banks. We tell them the following: “we can help you get the money out, but it will be net of taxes and we do not know what that amount will be.” A classic good news/bad news scenario.

What though can you as the foreign service provider do to eliminate this tax deduction risk? The only solution is to put all of the payment risks onto your Chinese customer by providing in your service contract that all payments must be made net of taxes and fees. If the amount of the invoice is $60,000, the service provider must receive $60,000. All taxes and fees are paid by the Chinese customer on behalf of the foreign service provider. This approach places the risk where it belongs: on the Chinese side. The Chinese government/foreign exchange bank is imposing the fee. The Chinese payer is the only party that can object to the fee and argue it should not be imposed or should be reduced. You as a foreign entity receiving payment have no standing and no power to impact the decision of the Chinese authorities, but your Chinese customer does. Placing the risk on the Chinese payer is, therefore, the only practical way to deal with this issue.

It is essential to deal with this issue in advance in the written service contract and in the written invoice for services. If the written documents are silent, the Chinese side will fall back to the basic rule that VAT and income tax is the liability of the foreign party and make little to no effort to prevent or reduce it. Though this rule has no application to arbitrary and illegal exactions imposed by foreign governments, the foreign service provider will always lose on this kind of claim.

So this then leads to the following rules for performing services for Chinese entities:

1. Execute a written service agreement.

2. Provide a written, signed invoice for every payment.

3. Provide in the agreement and invoice that payments are net of taxes and fees.

4. Do no work until after full payment is received.

Service providers outside China normally operate with a relaxed contracting and billing system. The rules for China are very different and contrary to service provider culture. Moreover, many Chinese entities will resist following the rules. My response to all this is: So what? As my first law firm boss explained to me: there is only one thing worse than working. That is working and not getting paid. If you want to get paid by a Chinese customer, you need to follow the rules.

China employee terminationsTerminating a China-based employee without severance is generally a difficult thing to do. Even terminating a probationary employee can be tricky. See China Employee Probation: All is NOT What it Seems. Mutual terminations with settlement agreements and claim releases are usually the safest route for employers to take.

For a mutual termination to work well you should put the terms and conditions surrounding such termination to writing even if both parties (employer and employee) have reached a mutual understanding through friendly consultation. Without a written agreement, the employer is at great risk of later legal action by the employee for the exact same issues you settled verbally.

How should you as the employer proceed to effectuate a mutual termination? You initiate the process by coming up with an initial severance amount and a list of any additional matters that need to be resolved with the employee. You then approach the employee and ask him or her if she would be agreeable to a mutual termination with your proposed terms, which will include among other things, a fair amount of severance. In our experience, Chinese employees usually will agree to a mutual termination as they prefer receiving a quick payout to many months of contentious litigation. We normally suggest our clients talk to the employee themselves during the initial stages (with our employment lawyers coaching them in the background). It can often be a mistake for an employer to bring its lawyers into employee termination negotiations too early as doing so can make things more confrontational and indicate to the employee that the amounts at stake may be higher than he or she initially realized.

As you are nearing the end of your negotiations with your employee, you should inform the employee that you will be providing a written agreement that contains all agreed-upon terms for the employee to review and sign.

You will next want to provide the employee with a hard copy of the mutual termination agreement and give him or her time to review it and ask any questions. We make our employee termination agreements clear, reasonable and concise, and China employees usually sign them with little to no fuss. Make sure your agreement covers all relevant issues regarding your specific employee. Sometimes, your employee may want you to leave out certain things for various reasons or put in something that is not true. For example, your employee may want to make it ambiguous about the mutual nature of the termination. You need to say no and inform him or her that the agreement must be clear about the termination being mutual. You need to proceed with extreme care. It is not uncommon for foreign companies to call our law firm after they have been sued by an employee a month or two after believing they just settled with that very same employee.

Do not issue the mutual termination agreement to your employee before you have communicated with the employee regarding the termination and have agreed on the issues. Nor should you make the employee sign an agreement on the spot that he or she has not previously reviewed; the mutual termination agreement should not come to the employee as a total surprise.

Finally, make sure both parties fully execute the agreement and then you should be sure to fulfill your obligations under the agreement, such as wiring the employee his or her full severance payment. Retain one original copy of the fully executed agreement for your records. You must also meet all your other obligations with respect to the employee departure, such as transferring the employee’s social insurance.

Do not treat the mutual termination agreement as a “mere formality” as this document is key to your protection. It should be in Chinese as the official language (preferably with English as well for you) and you as the employer need to know exactly what it says and agree with all of its terms. It is common for Chinese employees to draft Chinese-only agreements “merely as a formality” and try to get you to sign off on that. These employee-drafted termination agreements virtually never protect the employer and they often lead result in the employee coming back to the employer for more money a few weeks later.

Don’t skip the formal mutual termination agreement just because the employee you are terminating is in a “special” status. For example, even if the employee is on probation, so long as it’s a mutual termination, you should enter into a written mutual termination agreement with that employee. Just because the probation/employment period is short does not mean you should not handle the termination properly. You should document ALL employee terminations in writing

Did you handle your employee terminations properly? Now is the time to check to make sure.

 

China Law: Don't fight the trend
China Law: Don’t fight the trend

China Bystander (a very thoughtful deep-dive type China blog that has been churning out truly excellent posts since 2007) just did a story, entitled, China Cracks Down On Cryptocurrencies. The story begins with what I see as its money quote:

The default position of Chinese authorities is that if it exists, it should be regulated. Cryptocurrencies are a prime example.

Exactly.

I was a big fan of uber-investor Martin Zweig who would often talk about how the “trend is your friend” and how “you don’t fight against the trend.” That advice applies to Chinese law and business. A CEO I know will every five years put the basics of China’s Five Year Plans on a small card, get the card laminated and then keep that card in his wallet at all times. He does this so that he can easily check all of his iany’s proposed actions against the Five-Year plan to make sure it coincides with it or at least does not contradict it. In other words, he makes sure his company acts in harmony with China’s plans, not against them. Smart. Very Smart.

Our China lawyers constantly get phone calls/emails from potential clients (it is almost always potential clients and not actual clients) convinced they have found a “workaround” for some Chinese law and they want us to confirm their workaround will work. When we immediately express our serious doubts, they express their serious doubts about hiring us. This indicates to us they do not really want an objective answer to their question regarding the viability of their workaround, they just want confirmation of it, preferably in writing and they move on.

Anyway, this sort of interaction happens quite often and the following are the most common instances:

1. Getting more than $50,000 out of China. We get at least 2-3 emails every week from someone wanting to know if we can help their Chinese counter-party get x millions of dollars out of China, usually to buy real property or to invest in an American or European business. See Getting Money out of China: It’s Complicated and while you are at it, you might as well check out parts 2, 34, 5 and  6 of that series.

About half of those emails include some “new” idea for getting the money out and about half of those involve a long explanation as to why that idea is legal under Chinese law. Our response is essentially to point out that if it were easy to get money out of China legally, people would be doing it AND their Chinese counter-party would be contacting a Chinese lawyer to do it, not having the American/European side do the contacting. About half the new ideas involved cryptocurrencies, usually Bitcoin. Our position on all of these ideas, especially the Bitcoin ones, has always been that if China is not now blocking them, it will soon and those who facilitated such transfers when the facilitating was perceived as relatively good could face serious consequences.

Starting a few months ago we started getting communications from frantic foreigners whose bitcoin accounts had been frozen in China asking our help to unfreeze them. Starting about a month ago, we started getting communications from people who were having their associates arrested for actions tied in with Bitcoin (but not for using Bitcoin directly). Things like conducting business in China without an entity and without paying taxes. More than one caller who had millions of dollars in Bitcoin frozen AND one or more associates on the ground in China would insist that they were not conducting business in China because all they were doing was sending money out of China and that is not conducting business.

What people need to realize about China law is that when it comes to something like this, China is just not a particularly big fan of these sorts of arguments. In other words, don’t fight the trend.

2. Using Third-Party Hiring Agencies to Avoid Having to Form a China WFOE. Nope, not going to recommend this. No way, no how. Way back in 2015, I wrote an article for Forbes Magazine, entitled, China’s Tax Authorities Want You. In this article, I talked about the illegality of foreign companies hiring Chinese “independent contractors” directly, rather than by forming a WFOE and having their WFOE do the hiring. This is illegal 999 times out of 1000 and China hates hates hates companies that do this. China hates this because it means it does not collect the approximately 40% of salaries employers are supposed to pay in taxes and social benefits nor does it collect the approximately 25% of salaries that is to be paid by China employees.

Couple the hate with the opportunity to collect large amounts of money and you can see why China is hyper-zealous about hunting down companies engaged in these arrangements. Far be it though for foreign companies to simply comply by forming a China WFOE and using their WFOE to hire employees in China legally. No, they want us to tell them whether it is legal for such and such third-party hiring agency to hire employees for them in China.

The answer is really complicated because it depends on so many factors, including the third party hiring agency (a whole boatload of companies (mostly foreign companies operating outside China) have jumped into this business without being licensed to engage in it and much depends on who you which to see hired, their position, the number of people you wish to see hired, the length of time you intend for your third-party hiring agency to employ someone and then on top of all this, the city and perhaps even the district. In the end, it would almost certainly cost more to 1) conduct due diligence on the hiring agency 2) figure out the legality of the specific situation, 3) pay the 10 to 15% premium/commission these third-party hiring agencies typically require, and 4) deal with the contracts between you and the third-party hiring agency and the contracts between the third-party hiring agencies and the employees you want to be hired (because the third-party hiring agency drafts these contracts to protect itself, not your company).

Most importantly, the odds are overwhelming that what is being proposed is illegal in any event and if it isn’t clearly illegal, it will be so disfavored that you could end up getting in trouble anyway. And again, that’s the point. Don’t fight the trend.

3. China Representative Offices. China does not like them and way back in 2010, I wrote a post, entitled, The Slow Death Of The China Rep Office. They are still alive and China still does not like them and they almost never make sense for a foreign company looking to go into China. China does not like them and our China lawyers do not like them because they are legal only under very limited circumstances. Since the Chinese government does not like them, you are at some risk even if you are just on the legal side of the legality/illegality line and you are also always at risk of China’s tightening its Rep Office laws and shutting you down. The trend says don’t do it.

4. Variable Interest Entities/VIEs. Way back in 2011, in VIEs In China. The End Of A Flawed Strategy, we made clear our distaste for VIEs and why our law firm refused to handle that sort of work. This position angered many (especially those who were profiting off VIEs) but our position was based on the strong belief that China would eventually make clear its prohibition against them and at that time those who had gone into China as VIEs would suffer. It took longer than we expected, but it did happen in 2015 and we wrote about that in China VIEs Are Dead. Done. Over. Stick A Fork In Them and as we had predicted, the consequences were dire for many companies. Again, the trend.

As China attorneys, we see our job as more than just knowing what the law says now. Our job also encompasses our knowing how the Chinese government is likely to view what our clients are proposing to do (both now and in the future) and counseling our clients on that as well.

Our job is to help our clients stay on trend.

Your thoughts?

China employment lawyer
Buy the paperback version. NOW.

China employment law is technical and getting technicaler (yes, I made up that last word but you know what I mean). See China Employment Law: Local and Not So Simple. It is one of the most consistent problem areas for foreign companies doing business in China and it has become a massive growth area for our law firm.

Our typical attorney-client interaction usually goes something like this:

  1. Foreign employer company contacts my law firm because it has terminated an employee and that employee has either sued or threatened to sue, oftentimes over a technical violation by the foreign employer.
  2. One of our China employment lawyers looks at the case and determines that the foreign company employer did in fact violate Chinese law in the termination and in that investigation learns that the foreign company employer committed multiple violations and if the employee were to pursue litigation or his or her administrative remedies, he or she would no doubt prevail.
  3. We explain the above to the foreign company employer and learn that the problems we enumerated hold true for all employees.
  4. The foreign company employer asks our law firm to remedy its problems and we explain that before we start remedying just the problems that came to the forefront from this one termination, we should conduct an employer audit to determine what other employment problems need fixing. See China Employment Compliance and Audits: THE New Big Thing.
  5. We conduct an employer audit and that invariably (like every single time) generates a laundry list of problems and then we fix them, one by one.

Why do foreign company employers have so many employment problems in China? Think about how the typical small to mid-sized companies starts in China. They go into China with maybe one or two foreign employees and one or two Chinese employees, none of whom is remotely knowledgeable about Chinese employment laws (on the local, regional or national level) and all of whom are — naturally — more focused on getting the business off the ground than on complying to the letter of the multiple sets of employment laws. And anyway, at this point they are usually a tight-knit group of founding employees who view themselves as much as founders as they do employees. But when the company grows, little changes on the China employment compliance front, mostly because nobody realizes how important it is to make the changes and because even if they did, there is nobody in-house who knows how to do it. So it gets kicked down the road until there is an expensive and embarrassing employment problem.

Our firm is then called more often by someone high up in the U.S. or the Europe or the Australia office than by someone on the ground in China. The person who calls us (might be the head of HR, the CFO or the CEO) has started to look at what is going on in China and sought answers from China and received inadequate responses and has now started to worry, rightfully so.

All of the above is my incredibly long-winded way of saying that foreign companies need to get on top of their China employment situations and stay there. Employer audits are the way to go in most situations, but in the meantime and as a supplement, it is critical that someone at your company understand China employment law basics. Someone at your company needs to know enough not to be able to solve every issue, but to spot the issues before they blow sky-high.

And we have just the book for that and I am writing about it today because it just came out in paperback (the Kindle version came out a few weeks ago).

Our lead China employment lawyer, Grace Yang recently had published The China Employment Law Guide and you really really really should buy it and put it on your shelf. And when I say put it on your shelf, I mean you should buy the softcover version (not the Kindle version) so you can literally put it on your shelf. Heck, get more than one copy and give it to everyone in your company who manages your employees or plays any role in their hiring or their firing. This is a book that is meant to be used for background and for reference and as a decision-making guide. Get it now!

Just a little bit about Grace Yang, its author. Grace grew up in Beijing and excelled at and graduated from China’s best law school there — Beijing University. She then came to the United States to attend the University of Washington law school where she again excelled and graduated. Grace is my firm’s lead China employment and labor lawyer and she is the lawyer at our firm to whom everyone else goes for China employment and labor law questions. Grace is a licensed U.S. lawyer (she is licensed in both Washington and New York) and she splits her time between Seattle and Beijing.

Anyway, did I tell you that you should buy the book? Of course I did and you should.

 

China employment lawyerOne of the more important things you should know about China employment law is that employees have many rights they CANNOT contract away. An employment contract in China (and pretty much every other country as well) is not a regular commercial contract where the parties have significant freedom to agree on anything. In China employment contracts are not governed by China’s Contract Law; rather, they are governed by the Labor Contract Law (among other numerous employee-friendly labor and employment laws, regulations, rules, directives, etc.). This is a critical distinction often missed to the peril of foreign employers in China.

Because Chinese employees are rarely free to contract away the vast majority of their rights, you as an employer need to think long and hard before trying to contractually (or otherwise) impose an extra burden or penalty on your employee. Generally, employees in China may bear no more obligations beyond those stipulated by law. For example, consider this somewhat classic example: can you have an employment contract that mandates your employees will automatically pay you a certain amount of salary if they fail to give at least 30 days written notice before resigning? Say, you try to be fair by asking each employee to pay you one day’s salary for each day he or she fails to give notice up to 30 days. Will such an employment contract provision be enforceable under Chinese law?

It depends on your locale, but generally speaking, in most locales, unless an exception applies (which I will explain below), this sort of arrangement constitutes a penalty against the employee and is therefore unenforceable under Chinese law. China’s Labor Contract Law says that so long as an employee provides 30 days written notice, he or she can terminate their employment relationship, with or without cause. This is generally interpreted as meaning that an employer cannot legally make it more difficult by essentially imposing a penalty for an employee terminating the employment contract early.

In this situation employers commonly argue that since the law is silent on what happens when an employee fails to provide 30 days written notice the parties should be free to enter into their own agreement on this issue. In most locales, this argument has been stricken down for two reasons: (1) the law does NOT give an employer the right to penalize an employee for failing to give 30 days written notice; and (2) the employer already has the right to pursue the employee if the employer suffers actual damages as a result of the employee’s failure to give adequate notice. The burden is on the employer to show the damages and the causal connection between the employee’s behavior and such damages. So what if the employee gave only 20 days notice? If the employer suffers no harm, it would not be fair to penalize the employee for being 10 days short on giving resignation notice. Such an arrangement, without more, constitutes a penalty under Chinese laws and will not be deemed enforceable.

What are the exceptions? A penalty payable by the employee may be upheld under one of the following two circumstances:

  • Pursuant to an education reimbursement agreement (sometimes called a service period agreement), an employer can require its employees reimburse the company for the education expenses if the employer pays major expenses for an employee’s employment-related education or training, but soon after the training is complete, the employee quits.
  • Pursuant to a non-compete agreement, an employer can require an employee pay a penalty to the employer for violating non-compete terms by joining a competitor after leaving employment.

In jurisdictions that prohibit penalizing employees for shortened termination notice, it does not matter if the employer can prove it was the employee who insisted on this penalty arrangement. It also does not matter if the clause is in bold and in perfect Chinese.

If you have already invested a lot of time and money on one or more of your employees or you are planning to do so, you should consider adding a provision to your employment contract on education reimbursement. If your employee assures you not to worry because he or she will not leave you hanging and as proof of this offers to pay you for leaving without 30 days notice, you should know that what the employee is proposing will almost certainly not be enforceable. It’s just like when you present an unenforceable NDA (as opposed to a China-centric NNN) to your Chinese counterpart, and they are of course happy to sign it, knowing it will carry no legal force in China.

Trust me when I tell you our Chinese lawyers constantly see Chinese individuals and companies willingly and knowing propose and then sign agreements knowing full well they are not enforceable!

Do your China employment contracts pass legal muster? Now is the time to check to make sure.

By the way, my book on China employment law, The China Employment Law Guide: What You Need to Know to Protect Your Company, just came out in paperback and you can buy it for the low low price of only $19.95 on Amazon. I realize this is considerably more than the Kindle price, but my intention with the book is for foreign employers and for expat employees to have this book available to them as a ready reference and that will be much better accomplished on a bookshelf in paperback form than on a Kindle or your computer. 

 

Forming offshore entities for ChinaMany years ago, a client came to us with what it claimed to be and initially looked to be a relatively uncomplicated international dispute. But the more we dug into this company’s “relatively uncomplicated international’ dispute, the more compicated it became. But what was interesting was that the complications were not so much stemming from the dispute itself, but from the myriad and confusing and diverse and related and somewhat related chain of offshore holding companies this client had.

It had nearly fifty (yes, 50) such companies and when we asked why, they mumbled something about prior lawyers and accountants. When we asked how their having so many companies was working for them, their answer was anything but positive. It was costing them a fortune to keep these companies alive and to figure out their taxes and to pay people to do these sorts of things. It should not take a genius to figure out why international lawyers and international accountants like offshore entities so much. I can only imagine how much the international lawyers and accountants made from forming and then providing legal and accounting services to 50 companies.

To make a long story short, the international lawyers at my firm were able to quickly reduce the number of these companies down to five (one holding company and one for each country in which it was operating), saving our client a veritable lifetime of hassle and expense.

Now obviously the above is an extreme example, but for every five or so companies that come to us every year with a stray and unwanted offshore entity, there have been zero (ever) that have said, “gee I wish I had formed an offshore entity” years ago. Not one. Ever.

We are often asked about the benefits of forming an offshore entity for doing business with China or for acting as a holding company for forming a China WFOE. Our typical response is to determine whether the company has or is likely to have the sort of profits that will make forming such a company worthwhile and whether forming such a company will provide real monetary benefits. We are not big believers in spending money to form and maintain a company to delay taxes on profits that may never be realized. And then, if there is enough there, we turn them over to our tax lawyer, but most of the time no such entity is formed. If the company is in a high liability industry it sometimes makes sense then as well to set up and operate an offshore entity, but again this too is rare.

Bottom Line: Offshore entities rarely make sense for SMEs and when they do, keep it simple. These entities are a cost that keeps on taking, so be wary and go easy.

 

China WFOE
Photos from Hong Kong Free Press

According to the Hong Kong Free Press (and a number of other newspapers) The Shanghai government this week “ordered the closure of one of the city’s top maternity hospitals saying that it was illegally built on land owned by the armed forces, according to an official notice.”

According to the article, the hospital, Shanghai Redleaf International Women’s and Children’s Hospital, was “founded by Canadian investors” and it had “signed a 20-year lease for prime real estate owned by the military on central Shanghai’s Huaihai Road and started catering to foreigners and wealthy Chinese more than four years ago.” But because “The People’s Liberation Army has been banned from commercial activities since 1998” the hospital was being forced to close. The HK Free Press says this “hospital is one of the largest private business affected by the so-called de-commercialisation of the military to date.” The article then quotes the district government as saying “There exists a matter of illegal construction of building at the Redleaf Hospital. It must be rectified duly in accordance with relevant laws.”

Not surprisingly many patients and hospital employees were not happy with the closure:

A gynecologist who was vacating her workplace Sunday afternoon said that the owners, a Canadian couple, had invested billions [of RMB, presumably] into the clinic. “They had all the right documents and invested so much money… it just doesn’t seem fair,” she said.

Christine Cheng had been working as a nurse at Redleaf’s gynecology department for almost two years. “We spent a lot of money and work building this, and now the government wants us to move… We didn’t do anything bad,” she said.

When news transpired last Thursday that the upscale facility would be forced to close, some of the about 300 staff affected hung banners outside the main building criticizing the facility’s imminent closure.

The banners said that while the hospital supported the government, it shouldn’t be forced to move, adding that it wasn’t a “soft tomato” — a Chinese expression for a pushover. Police arrived on the scene shortly afterward and ordered that the banners be removed.

Louise Roy, director of patient support services at Ferguson Women’s Health, a clinic that rents facilities inside the Redleaf complex, said that staff first heard about the possibility of a closure several months ago, although they were never given confirmation or a specific date. “They’ve told us nothing — absolutely nothing,” Roy said. “We came in this morning, like [we do] every day. Then we saw staff gathered outside where the banners were hung, and then the police came.”

Several women who were being treated at the hospital were clearly upset as they collected their medical records before closure.

“I found out from a friend,” said a 32-year-old patient named Jennifer who would not give her last name because of privacy concerns. She said that she had moved to Shanghai from the U.S. recently and was planning to deliver her child at Redleaf in three months. “I have friends who are due in two weeks or a month — I don’t know what they are going to do,” she said.

Wang Jue, PR supervisor, said that one patient in labor arrived at Redleaf over the weekend and was turned away by government officials. She arrived at another clinic just 10 minutes before giving birth.

Redleaf’s services have been highly sought-after by those who can afford them. A standard cesarean section delivery at the hospital costs 120,000 yuan, and a prenatal package is priced at 24,000 yuan.

Patients have been referred to a temporary clinic while Redleaf is working on a more permanent solution.

I do not know what happened with this hospital beyond what I read in the newspapers. I can though discuss some of what my firm’s China lawyers have seen in possibly similar situations over the years and I do so below.

Maybe fifteen years, a very savvy foreign businessperson came to my law firm with a proposed deal that involved our client building a hotel. Just about everything about the deal was perfect. The location was perfect. The cost was perfect. The deal with the landlord was perfect. There was just one flaw: the land on which the hotel was to be built was owned by the military and that made the entire deal 100% illegal.

We explained the clear illegality of the deal (in writing of course) to our client, who already knew it. But like I said, this was a long time ago and our client was very savvy. His response was something like the following:

Yes, I know this deal is illegal and I know that means I am at risk of the government coming in and shutting us down the day after (or even before) we build the hotel. But we’ve run all the numbers on this and the numbers tell us that all we need to do for this deal to be an economic positive is last three years and every year after that the hotel will be a cash cow. So even though I know full well all the risks, I am willing to take them because I am willing to bet we can last at least three years.

The client did the deal and ended lasting for around eight years before shutdown and ended up making a lot of money. The client’s eight year tenure ended around 7-8 years ago and for probably the last ten years our China lawyers have simply said “no” to such deals, as they have simply become too risky. This does not mean our firm has not continued to see a slew of deals and WFOE formations we know violate China law. I can hear myself saying the following to the companies that bring us such deals and WFOE formations simply because I have said it so many times in my China law career:

What you are doing is illegal and you will get caught. When will you get caught? I don’t know that. It could be tomorrow or it could be a year from now. It probably will be in less than two years from now. Maybe if you had come to me ten years ago with this deal (or WFOE formation) I would not have been so unrelentingly negative about it, but China has changed. China has become incredibly serious about enforcing its laws (at least as against foreign companies, which are the only clients we have in China) and so we see every day what happens to foreign companies that are doing business in China or with China. Not only has China gotten more serious about enforcing its laws, it has gotten way better at enforcement. China is highly computerized and its various agencies and governmental bodies are quite sophisticated at communicating with each other.

We need to change your deal (or your WFOE formation). We are not going to put our reputation on the line for this sort of deal.

Oh, and one more thing. When you go back to your Chinese counterpart or to your own China employees/people on this, they will tell you I am exaggerating or I am naive or I just flat out “don’t know China.” I would never claim “to know China” because I don’t, but I do know is what happens to foreign companies that violate China law and I also know that at least once a month one of our China attorneys gets a call from a foreign company in trouble for having violated some law in China. And when I say trouble I mean they are facing millions of dollars in fines or closure of their operations or in some cases arrest and criminal charges.

Most of the time, the client then explains that they didn’t know that their deal (or WFOE) would be illegal (or as they often put it, “so illegal”). Some of the time though they do view us as naive or as overcautious and they move on.

In 2010, in Cracking Down On Illegal Land Use In China. Do You Really Still Feel Lucky, Foreign Punk? I wrote about foreign companies

The following is an amalgamation of a number (maybe 5 or 6) of conversations I have had over the years with people wanting to register a WFOE (Wholly Foreign Owned Entity) in China fast:

Potential Client: Can you help me register a WFOE in China.

Me: Yes. Not a problem. Do you have a lease yet? Do you know that a legitimate lease is required for the approval of a WFOE?

Potential Client: I know that but we are in a real hurry here.

Me:  Okay. But do you have a lease.

Potential Client: We have a lease but I don’t think it technically will qualify.

Me: What do you mean?

Potential Client: The land is zoned agricultural but my Chinese partner has secured all the okays to allow us to use it for our factory.

Me: Not a good idea. Trust me on that.

Potential Client: The factory has been there for two years without a problem and my Chinese partner assures me that the local government is fine with it.

Me: Don’t do it. Right now, the local government is okay with it. But what if the current mayor is pushed out next week on corruption grounds. Do you really want to be in a situation where you have spent a large amount of money on a space that gets shut down?

Potential Client: I am in a hurry and this is the only space that works.

Me: Are you sure? You are in a hurry, but is it really going to be worth the few months if you get shut down?

Potential Client: I am not going to get shut down. My Chinese partner is incredibly connected.

Me: Incredibly connected to the current local administration, MAYBE, but as I said, that administration could be out the door next week. Beijing checks on these things too and if they see that your facility is illegal, Beijing could see to its shut-down. I just don’t think it a good idea to go into a WFOE illegally and my firm cannot be a part of that.

Potential Client: That’s ridiculous. This is how business is done in China. Are you really saying you won’t take us.

Me: Yes. We won’t take you because we do not want our reputation damaged when you get shut down and we won’t take you because we do not want to be blamed when you get shut down.

Potential Client: Well I am sure I will have no trouble finding someone to help me on this. Good-bye.

I know that at least one of these companies did end up getting shut down (within about a year) because someone at the company who had sided with me on the company not going forward emailed me to tell me of this.

Now might be a good time for you to read the following:

Just yesterday, in China Law as California Law: There be Wolves out There, I wrote of how common it is for Chinese consumers and employees to sue foreign companies and I concluded that post with the following admonition on the importance of knowing and abiding by China law:

Yes, doing business in China is difficult and its laws are complicated, but that is true of pretty much every country I know. Be it California or China, it’s on you. People the world over — and that most certainly includes China — are ultra-litigious and that is not going to change soon if ever. Your defense to this is to know the laws and abide by them, to the letter. Saying that the laws are difficult or that there are bad people out there does not cut it and you ought to know that. Oral agreements in China are not worth the paper on which they are not printed and written agreements drafted by anyone not experienced with Chinese language contracts have no greater value.

You have been warned (yet again).

Today’s post is another warning.
 

 

China Court judgment and Hague Service
Move Along. Nothing to see here.

The China legal world was abuzz this last weekend about a Chinese court in Wuhan enforcing a California judgment against a couple of Chinese citizens. On one level this is indeed a huge deal, but on a practical level, this really does not change anything with respect to what you as an American company should put in your China contracts in terms of where your disputes should be resolved.

At least not yet, and likely not for a very long time.  

Since this blog’s inception, we have preached how terrible it is to draft a contract with a Chinese entity that calls for disputes between the parties to be resolved in the United States. That has not changed.

About a year ago, in Enforcing US Judgments in China. Not Yet, I wrote of how China had never enforced a United States court judgment.

At least once a month, one of my firm’s China lawyers will get a call or an email from a U.S. lawyer seeking our help in taking a U.S. judgment (usually a default judgment) to China to enforce. The thinking of the U.S. lawyer is that all we need do is go to a China court and ask it to convert the U.S. judgment into a Chinese judgment and then send out the Chinese equivalent of a sheriff to the Chinese company and start seizing its assets until it pays.

As we have consistently written, nope, nope, nope.

I then went on to discuss how my firm’s China lawyers are often called on to conduct research on this very issue (usually for lawyers or companies wanting to prove to their insurance company or to a court that it would be futile for them to pursue enforcement of their United States judgment in China) and I pulled a large section from a recent memorandum on that topic:

Article 282 of the PRC Civil Procedure Law, requires all of the following conditions be met for enforcement of a foreign judgment to be recognized in China:

The foreign judgment has taken legal effect in the jurisdiction in which it was rendered.

The country where the deciding court is located has a treaty with China or is a signatory to an international treaty to which China is also a signatory or there is reciprocity between the countries.

The foreign judgment does not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Though China is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, it is not a signatory to any international treaty on recognition and enforcement of foreign court judgments. There is no bilateral treaty between China and the U.S. on recognition and enforcement of foreign court judgments. There also is no bilateral treaty between the two countries on civil or commercial judicial assistance.

Even judgments from countries that have an enforcement treaty with China are oftentimes not enforced in China. For example, China and Australia entered into an agreement on reciprocal encouragement and protection of investments in 1988 that mandates both countries promulgate laws recognizing and enforcing each other’s judgments. But in response to a 2007 request by the Guangdong Province High People’s Court for instructions regarding an application by an Australian plaintiff for recognition and enforcement of an Australian court judgment, the Supreme People’s Court of China rejected enforcement. Since there was no international treaty to which China was a signatory nor any treaty between China and Australia on mutual recognition and enforcement of court judgments, nor any reciprocity between the two countries, the application should be rejected.

Since China is not a signatory to any international treaty on recognition and enforcement of foreign court judgments nor is there any treaty between China and the U.S. regarding judgment enforcement, the only possible way to get a U.S. judgment enforced in China would be if there were reciprocity between the two countries, but there isn’t.

In considering the question of reciprocity, a Chinese court will consider whether there is any precedent indicating reciprocity. In other words, the court will seek to determine whether there are any prior cases where a U.S. court recognized or enforced a Chinese court’s decision. If there are no examples of a U.S. court having enforced a Chinese judgment, the Chinese court will almost certainly rule against enforcing the U.S. judgment because the reciprocity requirement will not have been met.

In 1994, the Dalian Intermediate People’s Court considered a Japanese party’s application to recognize and enforce a Japanese judgment and two rulings. The application was eventually referred to China’s Supreme People’s Court for guidance and the SPC held that because there was no multilateral or bilateral treaty governing such matters between China and Japan and because the two countries had not established reciprocity, the Japanese judgment would not be recognized or enforced by a Chinese court. This case confirms China requires factual reciprocity, not presumed reciprocity.

But are there any examples of a U.S. court enforcing a Chinese Judgment? On August 12, 2009, the United States District Court for the Central District of California issued a judgment enforcing a $6.5 million dollar Chinese judgment against an American corporate defendant under California’s version of the Uniform Foreign Money Judgments Recognition Act and in 2011, the Ninth Circuit Court of Appeals affirmed the district court’s decision. The plaintiffs in that case were Hubei Gezhouba Sanlian Industrial Co. Ltd. and Hubei Pinghu Cruise Co. Ltd., two PRC companies located in Hubei Province. The plaintiffs won a judgment against Robinson Helicopter Company Inc., a California corporation, at the Higher People’s Court of Hubei Province. The United States District Court for the Central District of California held that the PRC judgment was final, conclusive and enforceable under PRC laws and the plaintiffs were therefore entitled to an issuance of a domestic judgment in the amount of the PRC judgment.

This was the first time a U.S. Court recognized and enforced a PRC judgment, but it does not necessarily mean a Chinese court will invoke the principle of reciprocity to recognize and enforce a U.S. court judgment. First, the enforcing court in that case is in California (though it was federal court), and the laws usually differ from state to state in the U.S., so it’s uncertain whether a Chinese court will deem the U.S., as a country, to have established a reciprocal relationship with China. Second, since the enforcing court was a federal court, it’s also not clear whether a Chinese court will deem a state court’s judgment enforceable in China. Third, the enforcing court is not the U.S. Supreme Court, thus, a Chinese court may not deem it to amount to reciprocity at the highest judicial level between the two countries. Finally, that case involved a U.S. defendant who had previously argued that only China had jurisdiction over the case, so it hardly could be deemed unfair for a U.S. court to rule on enforcing the Chinese judgment.

Chinese courts tend to be more willing to recognize and enforce foreign divorce judgments involving Chinese citizens so they don’t have to initiate a separate divorce proceeding. However, since this is not a divorce case, it almost certainly is not relevant.

We have not been able to find a single instance where a Chinese court enforced a U.S. non-divorce judgment.

This memorandum does not address the possibility of your suing the Chinese company directly in China and there are times where doing so makes sense.

In conclusion, a U.S. court judgment against ______________ will almost certainly not be recognized or enforced in China. Unless ___________ has assets in the U.S. or in some country other than China that enforces US judgments, a US judgment will probably not be collectable against this company in any way.

Earlier this year, in Is Now the Time to Take Your U.S. Judgment to China? I pondered whether China might be ready to start enforcing U.S. judgments and I talked of how I would love to see someone take such a judgment to a Chinese court to test this out:

I find it hard to believe that this decision regarding [enforcing] the Singapore judgment did not receive a thorough vetting from on high and maybe it does signal a change in enforcement of foreign judgments in China. I for one would love to test it out, but I would want to do it with the perfect case, or something close to it. The perfect case would be a Chinese defendant company that is a real bad hombre (sorry to use a Trump line, but I just cannot help it) who cheated someone in a commercial dispute and then got sued in a U.S. federal court and fought and lost on the merits. Ideally the judgment is for millions of dollars and the Chinese company has the wherewithal to pay it. I know it is asking too much but if the Chinese defendant appealed the lower court’s ruling and lost on appeal also, well that would be the icing on the cake.

I will now discuss the Wuhan (Liu Li v. Tao Li and Tong Wu) case and explain why it has not changed the risk equation for enforceability to impact how you should be writing your contracts with Chinese companies.

This Wuhan case was before the Intermediate People’s Court of Wuhan City. The case sprung from a commercial dispute involving a plaintiff (a Chinese citizen) who paid USD$125,000 to two Chinese citizen defendants for shares in a California company and then got nothing, not even a return phone call. Plaintiff then sued defendants for fraud in Los Angeles Superior Court. Defendants were served with the complaint and summons in this case but they ignored it and the Los Angeles court granted plaintiff a default judgment. Note this was a dispute between Chinese Nationals on both sides and the dispute involved a United States sale of stock. In other words, the fact that it was a United States sale of stock means that it was wholly appropriate for a US court to reach a decision in the case and the fact that the dispute was entirely between Chinese Nationals gives a Chinese court every incentive in the world to enforce the judgment. The additional fact that the defendants certainly appear to be “bad hombres” (I apologize again for using that line but since I started with it I have to continue with it) is all the more reason to expect enforcement.

Plaintiff then took that default judgment to the Wuhan court to have it enforced there. The Wuhan court ruled it had jurisdiction because the defendants live and have assets there. The court ruled defendants had notice of the Los Angeles action and it also held that the Los Angeles judgment did not violate any basic principles of Chinese law, national sovereignty, security, or social public interest.

Most importantly, the court found reciprocity between China and the United States (California?) and it also held that it should not consider the merits of the Los Angeles court’s ruling, beyond determining that it did not violate any China basic principle. The court found reciprocity based on the Robinson Helicopter case I discuss above. For more on the Robinson Helicopter case see Your Company Can Be Sued In China And That Matters.

This all sounds good right? But for the following reasons I am of the view that this changes little.

  1. This is just one case and it comes from an intermediate court in Wuhan. Are you willing to risk a $30 million contract by making it subject to U.S. court jurisdiction based on this one case out of Wuhan?
  2. Did this decision depend on reciprocity with California as opposed to the United States as a whole? If you are a Texas company are you going to be willing to risk a $30 million contract by making it subject to Texas court jurisdiction?
  3. The underlying case involved a dispute between two groups of Chinese nationals. The case only makes sense if the defendants have property in Wuhan. So the Wuhan court just takes this a dispute between two Chinese that should properly be settled in China. There is always a chance a Chinese court will enforce an arbitration award or a foreign judgment when the parties on both sides are Chinese. It is not at all clear this case can or will be extended to enforce a judgment in a dispute between a foreign party and a Chinese national and the Chinese side appears in China and strongly opposes enforcement.
  4. The the bad act in the underlying lawsuit occurred in the U.S. It is normal for there to be jurisdiction in the place where the bad act will occur. So this case is perfectly normal. Why would you sue someone in China for a stock transaction violation that takes place in the U.S.? It is just a strange accident of fate that the seller/defendant also had presence and assets in China. In fact, it is probable that the entire transaction was illegal under Chinese law because Chinese citizens are supposed to have government approval before investing overseas and it is doubtful these defendants had that approval. This likely illegality also probably colored the Wuhan court’s decision.
  5. The Wuhan court found reciprocity based on the Robinson Helicopter case in which a California federal court enforced a Hubei province court judgment. Wuhan is in Hubei province and the judgment it enforced here was from California. Would the Wuhan court have ruled the same way if Robinson Helicopter had enforced a Beijing judgment? Would the Wuhan court have ruled the same way had Robinson Helicopter been a decision out of Kansas? No way to know.
  6. Even if you get past the various hurdles above, there is a final hurdle which essentially neuters one’s ability to sue a Chinese company in the United States and then use that judgment to collect in China: service of process. China’s Central Authority and its courts have over the last few years begun dragging their feet so much when it comes to Hague Service of Process that those lawyers who do it (and one of the China lawyers in my firm does these all the time) have been discussing among themselves whether it is even possible. It seems China is taking years to effect Hague service of process on Chinese defendants in U.S. cases and it is quite possible that it is no longer effecting such service at all. Without proper service (or at best, with service that takes two to three years), how valuable is suing a Chinese company in the United States?

This Wuhan case arose from a highly unusual and unique situation. When our China attorneys insist on China-centric contracts, we are focusing exclusively on business activity taking place entirely or primarily in China. For example, take this same lawsuit. What if the stock were stock in a Chinese entity and the transfer was supposed to take place in China? Would it make sense to take that law suit to Los Angeles? And if it were to be brought in Los Angeles, would a Chinese court really be likely to enforce the judgment that results from it? Same for failure to deliver product manufactured in China. Same for violations of IP agreements or for violations of reseller agreements and for violations of JV agreements and so on and so on. If you are going to enter into a contract with a Chinese company and some or all of the goods and services covered by the contract are going to be made or provided in China, your situation is going to be 180 degrees different from the situation that gave rise to this Wuhan case.

What is the best way to resolve a dispute in China? Even if we were living in a fantasy world where service of process in an American dispute can be made quickly and easily (or even at all) against a Chinese defendants and the Chinese courts promptly enforce those monetary awards from U.S. courts, you must consider the cost and expense of a U.S. litigation. Consider the problem of evidence and proof if your contract is mostly or all about China. Consider all of these things and then ask yourself whether setting up your contract to require litigation in a U.S. court and then enforcement of any eventual judgment in that court would make sense for you on any particular contract, or even ever? In what circumstances would having to go to two courts be a good contracting strategy?

In the case where a tort has occurred in the U.S., the situation is more complex. The product was made in China but the damage occurred in the U.S. In that setting, a law suit in the U.S. makes legal sense. However, the question then whether the U.S. is the best place to sue? Is it likely that a U.S. style products liability award will be enforced in China against an unwilling defendant? These are important issues and far more likely to be situation specific than the issue of what to put in your contract. So in this respect, this Wuhan case does make it more difficult to figure out the proper way to proceed in China for certain kinds of legal disputes.

But not typically for commercial contracts regarding matters that will mostly or exclusively take place in China. China is not a colony of the United States or of any other country. We are no longer in the early 20th century where China was carved up into foreign spheres of interest and where foreign law was applied against the Chinese people. China is a modern country with an increasingly developed legal system. China is not what it was in the 1980s, where there was virtually no legal system that could be used to resolve disputes. The Chinese know this and its courts fervently believe this and they are offended by foreign parties who insist on applying foreign law and foreign dispute resolution to matters 100% conducted in China. For this reason, it will almost certainly never be the case that China’s courts will enforce foreign judgments for what is truly a China-centered business dispute. For example, if you enter into a Joint Venture arrangement with a Chinese company and you think you can resolve your intra-company joint venture disputes in the United States and have a Chinese court enforce that resolution, you will almost certainly be sadly mistaken. If foreign companies are going to do business in China, they need to be prepared to accept having their disputes resolved in China.

At this point, it would be a mistake for anyone to draft a contract with a Chinese company with a jurisdiction provision calling for disputes to be resolved in U.S. courts. Unless and until there is that certainty, or unless your Chinese counter-party truly has assets in the United States (See Suing Chinese Companies and Citizens in the United States and in Canada: When it Makes Good Sense), it would behoove you to draft your contracts with Chinese companies to have disputes resolved in a Chinese court or, in some cases, before a China-qualified arbitral body. See Is Your China Contract Worthless?

But, if you already have a contract that calls for U.S. court jurisdiction, it would absolutely make sense for you to consider moving forward with litigating it in a U.S. court and trying to effect Hague service of process on the Chinese defendant(s). And then if you succeed in effecting Hague service and in securing a U.S. court judgment, you take that judgment to a Chinese court to have it enforced, perhaps you even do the same if you get the U.S. court judgment even without having effected Hague service.

But to count on this one decision on which to base future US-China contracts? No, that would not be smart.

What are your thoughts?

China brandingWe’ve been writing for years about the need to register Chinese-language versions of your trademarks. Back in 2015 I wrote, “If you care about your brand in China, it’s not enough just to register your English-language brand. You also need to select a Chinese name and register that as a trademark in China. Otherwise, you’ll forfeit not only the right to use your Chinese brand name, but the ability to choose it in the first place.” See Don’t Be Like Mike: Register Trademarks In CHINESE.

Picking a Chinese name is tricky, and simply being fluent in Chinese does not make someone an expert in Chinese-language branding any more than being fluent in English makes a random American an expert in English-language branding. Far too often we see companies delegate this important decision to their “guy in China,” with predictably middling results. Yes, it’s better than having a non-native speaker pick the Chinese brand name by using Google Translate, but that’s not saying much. We work with several branding companies that specialize in this work.

Typically, a foreign company’s Chinese name falls into one of the following categories:

  1. A direct translation. (This usually only works with companies that use actual, translatable words in their name.) This is what Microsoft has done: 微软, Chinese characters for “micro” and “soft.”
  2. A transliteration, in which the Chinese characters approximate the sound of the English-language name. This is what Google has done: 谷歌, Chinese characters that make the sounds “gu” and “ge.”
  3. A new name with a positive connotation with no obvious connection to the English-language antecedent. This is what Pfizer has done: 辉瑞, Chinese characters that make the sounds “hui” and “rui” and mean “brilliant and auspicious” (more or less).
  4. A combination of the above. This is what Starbucks has done: 星巴克, the Chinese character for “star” and Chinese characters that make the sounds “ba” and “ke” (“bucks,” more or less).

Selecting your Chinese name is just the first step, though. You then need to register the mark as a trademark, and you also need to think about copycat or soundalike marks. Because China has a limited number of syllables, it is easy to come up with homophones to a foreign company’s Chinese name – especially when that Chinese name is a transliteration. This makes it even more difficult to protect your Chinese name. Chinese trademark examiners might reject a mark that has all of the same characters as yours except one, but if the mark has all different characters and they just have similar pronunciations, the mark is much more likely to be approved.

Where we see this most often is the following scenario: a foreign company has a word mark, and that is what they register in the U.S., Europe and China. They incorporate this word mark in a logo that is slightly distinctive – say an oval around the text and in a specific color. The foreign company is careful, and comes up with a Chinese language version of their mark that they register in China. Then a Chinese entity registers two completely different Chinese characters, often with a similar sound, which they then insert into a graphic with the same shape and the same colors. In this way, the Chinese entity produces a deceptively similar trademark without infringing on the specific word mark the foreign company registered.

This is a problem, and it’s made even worse when (1) the client has only registered the Chinese-language version as a word mark or (2) the logo is too generic to be protectable as such.

What can you do? If you’re going to have a logo, make it distinctive, and make sure you register that too. And when you come up with a Chinese-language name, think about also registering other Chinese-language names with characters that have similar sounds and/or meanings. It’s a prophylactic measure akin to registering multiple domain names – annoying, but better than the alternative path of brand dilution or litigation. Trademark owners should also seek, via contract, to constrain their Chinese manufacturers, distributors, and other business partners (especially their distributers and resellers) from registering any trademarks similar in any way (including soundalikes and marks with similar meanings). This won’t affect the trademark squatters, but a significant percentage of trademark infringement comes from current or former business partners.

Bottom Line: Think through what you are trying to accomplish in China with both your English language and Chinese character branding and your logo and take steps to protect those things. Now.

China trademarkI have had a number of conversations over the last few months with American and European start-up companies looking to sell their high end products into China. Most of these calls touched on pretty much the same things and so it occurred to me to write about the issues we discussed, as they apply broadly to many such companies. The following issues seemed to come up nearly every time, as they should:

  1. What sort of entity should we have in China? In both instances I talked of how time-consuming and expensive it is to form a WFOE in China and how they should delay forming a WFOE in China until such time as they truly needed one, and of how that time might never come. See How to Form a WFOE in China, Part 12: Do You Really Even Need One?
  2. When should we register our trademarks and where and who should own those registrations? My response was that you should register your trademarks before anyone outside your inner circle might learn of them. I then lectured them on the dangers of not using a qualified lawyer for such registrations and on how it is a myth that trademark registrations are easy. I then gave a couple of horror stories of companies that had botched their trademark registrations in China and in the United States, and ended up going broke because of that. I told them that foreign entities can own China trademarks and there are even advantages to doing it that way. I told them that in addition to registering their English language names and their logos, they should probably get a Chinese language name and register that as well. See Register Your Trademark In China, All Things Considered
  3. What’s it like selling on Alibaba? We talked about the legal requirements/legal issues they likely would confront if they sought to sell their products on Alibaba and the major differences between Tmall and Taobao.
  4. Do we need a China WFOE to get a WeChat business account? Yes.
  5. What about setting up offshore entities to save on taxes? Unless you have a lot of money right now, it makes better sense to spend your time and your money focusing on growing revenues and profits, and not on worrying about paying taxes on profits years down the road. I’ve had many clients wonder why their previous attorneys or accountants had set up complicated and multi-country entities but I’ve never had a client bemoan their having been late to do so.
  6. What do we need to do to hire people in China? Get a WFOE. Please. See Doing Business in China with Deportation or Worse Hanging Over Your Head.
  7. What about customs issues? We are happy to help, but usually the much cheaper way to handle these is to have your China distributer or reseller (if you end up going one of those routes) be in charge of this or you bring in a third party logistics company to assist.
  8. Anything else? Yes. Take it upon yourself to try to figure out any rules specific to your particular product. You can pay your lawyers to do this now and in the future, but that usually isn’t necessary.