Wholly Foreign Owned Entity

One of the things we are always preaching on this blog is the need to first ask whether what you are proposing to do in China is legal or not. I am always telling of how a company once contacted us, bragging about the huge amount it had spent on market research and proudly proclaiming it to have revealed a “huge need” for a Western company in a particular industry.  My knee-jerk response to which was that I did not even realize that foreign companies were now allowed in that industry.   Ten minutes of research soon revealed that they were not and this company ended up never going into China, wasting the money it had spent to prove it would have done well there.

We were recently contacted by a very much on the ball investement research company regarding the legality of setting up shop in China as a Wholly Foreign Owned Entity (WFOE). We did some quick research (so quick, in fact, that we did not even charge for it) and our initial response was as follows:

 The most recent version of China’s Catalogue of Foreign Investment provides the following:

Restricted Industry:

Article 9.3: Market Research (restricted to joint ventures)

Prohibited Industry:

Article 6: Social Survey

We view this as meaning that foreign companies cannot engage in company research as a WFOE. However, many companies do it by creating a service WFOE stating that it will assist foreign investors in investing in China. Then what they really do is market research. As long as you do get caught, it does not matter. If you do get caught, the risk of any real problem is pretty low. Unless that is that you say something in your research that offends the wrong person.

We actually have represented a number of market research firms operating in China as WFOEs.  Heck, we have represented some of them on contracts with large Chinese SOEs and with large multinationals.  But these companies mostly interview 3,000 people about their thinking on handbags; they are not doing in-depth research on Chinese publicly traded companies, which spin-off massive amounts of money to important people.

So here are some of your options:

1.   Do a “consulting” or a service WFOE and run the risk.

2.   Do it as a Joint Venture.  Find someone in China to do this with and set it up so that you effectively control it.

3.  Operate from Hong Kong and fly people in.

The company chose to wait.

Less than a month ago, we wrote a post, entitled, How To Form A China Company (WFOE or JV). Hong Kong Entities. They’re Baaaaack. The gist of that post was that my law firm was now favoring the forming of Special Purpose Entities in Hong Kong to hold the soon to be formed Mainland China Wholly Foreign Owned Enterprise (WFOE) or Joint Venture (JV).  We wrote on how our position on this had changed due to China’s having recently become increasingly tough on company formations involving non-Hong Kong companies:

It is relatively easy to prove the existence and organizational structure of a Hong Kong company. The process is straightforward and the Chinese investment authorities understand the documents and readily accept them. This is not true for corporate documents from other countries. The Chinese authorities want documents that are similar to their own. They do not understand foreign company systems, and will often challenge perfectly standard documents from foreign jurisdictions that do not accord with the way they think the world should work. For example, the Chinese authorities will often demand notarized documents. When the notary is from a common law jurisdiction like the United States or England, they will object to the form of the notarization because it does not look like a Chinese or civil law country notarization.

In other cases, we have had Chinese authorities object to United States limited liability company documents because the officers’ titles do not match the equivalent terms in Chinese. For example, in most U.S. jurisdictions, a limited liability company (LLC) does not have directors and officers. Instead, the LLC is either member managed or manager managed. We have had Chinese authorities object to both forms of management because they do not understand the U.S. system. Of course, the issues can be even worse when the investor company is based in a system even more different from China, such as the Middle East, Central Europe or Africa.

All of these sorts of problems are solved if the foreign investor sets up a Hong Kong company and specifies the Hong Kong company as the shareholder of the Chinese WFOE or Joint Venture. For this reason, many of our clients will almost automatically plan to form a Hong Kong company as the first step in the China company formation process.

We received a not surprising amount of blowback to that post, both in the form of comments and in the form of a fairly large number of angry emails.  As I have written many times previously, virtually whenever we say anything that might lead anyone to believe that doing business in China involves little more than just walking in, we get push back, mostly from those whose incomes depend entirely on a smooth flow of China business. Anyway, we received plenty of communications saying or hinting that absolutely nothing had changed in China and that it was either all in our heads or due to our inability to negotiate China’s bureaucracy.

This is the “I told you so” follow-up post.

I just read a Financial Times article, entitled,  “China, India and Russia less business friendly,” on how “executives around the world” think China has become “less friendly towards business over the past three months,” as based on an FT/Economist Global Business Barometers Survey.  This survey is conducted every three months of 1,500 global senior executives.  According to the survey, of the four largest emerging market economies, only Brazil has eased up on business; China, Russia and India have gotten tougher. “The survey comes amid concerns that growth in Brazil, Russia, India and China – together known as the Brics – is slowing.” Brazil was the only one of the four Brics that more consider friendly than unfriendly towards foreign business.

I yearn for the day when China views getting “friendlier” towards foreign business as its best reaction to a slowing economy, rather than getting more “unfriendly.”

What are you seeing out there?

 

By: Steve Dickinson

When making a WFOE (Wholly Foreign Owned Enterprise) or JV (Joint Venture) investment in China, the investor must consider: who will be the shareholder in the PRC entity? Will the investor invest directly, or will the investor create a special purpose subsidiary company  (an SPV or Special Purpose Vehicle/a/k/a SPE or Special Purpose Entity) to act as shareholder. If an SPV is used, where will it be formed?  In the U.S.? In a generally recognized tax haven such as the British Virgin Islands or the Cayman Islands? Or in Hong Kong in accordance with the favorable PRC/Hong Kong tax treaty?

From a tax standpoint, the decision is complex and requires careful analysis by the primary investor. Ignoring the tax issue, however, from the standpoint of company formation, the use of a Hong Kong entity offers the advantage that it solves many of the technical problems in forming a WFOE or JV in China.

It is relatively easy to prove the existence and organizational structure of a Hong Kong company. The process is straightforward and the Chinese investment authorities understand the documents and readily accept them. This is not true for corporate documents from other countries. The Chinese authorities want documents that are similar to their own. They do not understand foreign company systems, and will often challenge perfectly standard documents from foreign jurisdictions that do not accord with the way they think the world should work. For example, the Chinese authorities will often demand notarized documents. When the notary is from a common law jurisdiction like the United States or England, they will object to the form of the notarization because it does not look like a Chinese or civil law country notarization.

In other cases, we have had Chinese authorities object to United States limited liability company documents because the officers’ titles do not match the equivalent terms in Chinese. For example, in most U.S. jurisdictions, a limited liability company (LLC) does not have directors and officers. Instead, the LLC is either member managed or manager managed. We have had Chinese authorities object to both forms of management because they do not understand the U.S. system. Of course, the issues can be even worse when the investor company is based in a system even more different from China, such as the Middle East, Central Europe or Africa.

All of these sorts of problems are solved if the foreign investor sets up a Hong Kong company and specifies the Hong Kong company as the shareholder of the Chinese WFOE or Joint Venture. For this reason, many of our clients will almost automatically plan to form a Hong Kong company as the first step in the China company formation process.

However, there are several important issues that must be considered before making the final decision regarding formation of a Hong Kong company.

1. The use of an SPV is in many cases prohibited by Chinese law. For many investments in the service sector, the investor must prove that the foreign shareholder has been in operation for a certain number of years. In other cases, the foreign investor must prove that it has had a certain business income for a specific period or that its capitalization meets a certain standard. Where this type of requirement exists, the standard is applied to the direct shareholder in the Chinese company. That is, it is not acceptable to say that the ultimate parent company meets the requirement. For this reason, many investors in China are required to make the investment directly and not through a SPV or other subsidiary.

2. Though establishing a Hong Kong company is relatively fast, cheap, and easy, creating a bank account in Hong Kong is not. For formation of a Chinese company, the Chinese authorities require that a Hong Kong bank account exist and they also require a letter from the Hong Kong bank stating the details of the account formation. Under Hong Kong banking and anti-money laundering rules, a bank account in Hong Kong can only be opened by a person who is personally present at the bank in Hong Kong. Moreover, the rules on who this person is are very strict.  This person must be the party the Hong Kong banking authorities determine is the person who exercises actual control over the Hong Kong company. Usually this will be the chairman of the board of directors of the Hong Kong company. Where there are multiple shareholders, this will also include a representative of each shareholder who holds more than 10% of the stock in the Hong Kong company.

For many Hong Kong companies, the shareholder will set up the Hong Kong company so that the chairman of the board is a high ranking officer in the corporate parent. For company formation purposes, this is is easily done since for company formation, only the signature of that officer is required. This then backfires when it is time to open the company bank account in Hong Kong. For this, the chairman must be physically present in Hong Kong. In addition, the chairman must also prove his or her identity using documentation that cannot be determined precisely without consultation with the bank. It is not acceptable for the chairman to designate another person such as a lower level staff person or a lawyer to act on his or her behalf. Only the chairman or similar officer of the Hong Kong company can act.

In our experience, it is the rare chairman of the investor company that has the interest in or the time to travel to Hong Kong simply to open a bank account. However, no one else will be permitted to open the account and without a funded Hong Kong bank account, it is not possible to form a company in China. Once this problem arises, it can be difficult and time consuming to fix. For this reason, consideration of how a company bank account will be opened in Hong Kong should be considered in advance, before forming the Hong Kong company. We have seen many unnecessary delays in forming a Chinese WFOE or JV that arise as a result of having to deal with bank account issues.

Having said all this, forming a WFOE that is owned through a Hong Kong company is — more often than not –generally easier these days than just forming a WFOE that is owned direct from a country like the United States.

What do you think?

Many a time a company has come to us wanting a Wholly Foreign Owned Entity (WFOE) formed “right away” so that they can “immediately” bring on a China-based employee or employees.

It’s not that easy.  Not at all.

First off, no matter what anyone may tell you, it is the very rare WFOE that can be formed in less than three months, and three months is possible only if everything goes according to plan.

So what’s a company to do in the meantime? Is there a any way to hire a China Employee before your WFOE is registered?

There is an established legal way to do accomplish the hiring of China employees, pre-WFOE.  The legal way to do it this is to have the person hired by FESCO or some other Chinese company created for hiring Chinese individuals on behalf of foreign entities. The Chinese individual is hired by FESCO and then is dispatched to work for the foreign entity. Under rules that apply to FESCO and others, the minimum term of the contract is two years. Usually there is an agreement between FESCO, the foreign company and the employee that at the time the WFOE is formed, the employee will voluntarily resign from the FESCO position. However, the risk of this is taken by the foreign entity, not by FESCO. This kind of arrangement is further complicated by the fact that in addition to the FESCO contract, the foreign entity will also require a series of contracts with the employee to deal with the transition to the WFOE, intellectual property/trade secrets and the like. FESCO charges a lot for the service, but it is the only way to do it while complying with Chinese law requirements.

There is also an illegal way to do it: The U.S. entity hires the Chinese individual as a consultant. The U.S. entity pays the consultant to assist with forming the WFOE. After the WFOE is formed, the WFOE hires the Chinese consultant as an employee. The Chinese consultant is paid on an independent contractor basis. That is, the Chinese individual is paid a gross amount and it is the responsibility of the Chinese individual to pay his or her taxes in China. This entire arrangement is illegal under Chinese law because China does not permit Chinese individuals to enter into consulting contracts with foreign entities. All businesses done in China by foreign entities must be done with a registered China business entity. We are aware of many companies having “hired” Chinese employees using this illegal method and years ago the odds of being caught and punished seemed pretty low.  But with the economic downturn, we are hearing more and more of foreign companies being blocked from forming their WFOEs for having engaged in this practice and we are even aware of one WFOE that was shut down after formation for having done this.

We are of the strong view that companies who want to be in China long term should either wait until their company is formed to start hiring or go through FESCO or a FESCO type company for any pre-WFOE hiring.

What do you think?

Though we often talk generally about what it takes to form a company in China, a reader recently pointed out to me that we have never set out the basic steps one must take to do so. The following sets out the basic steps a foreigner usually must take to form a Wholly Foreign Owned Entity (WFOE) in China. For more information on what is required to form a company in China, check out How To Start A Business In China — WFOE and How To Start A Business In China — The Minimum Capital Requirements For A WFOE.

 Forming a WFOE in China typically requires the following:

1. Make Sure Your Business is Legal For Foreigners. Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. Be sure your business will be legal.

2. Provide The Proper Documentation. The investor in the WFOE must provide the documentation from its home country proving it is a duly formed and validly existing corporation or Limited Liability company, along with evidence showing who from the investor is authorized to execute documents on behalf of the investor. The investor also often must provide documentation demonstrating its financial adequacy in its home country. 

3. Investor Documents Needed. The Chinese government normally requires the following documents from the investing business entity:

  • Articles of Incorporation or equivalent (copy)
  • Business license, both national and local (if any) (copies)
  • Certificate of Status (original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions)
  • Bank Letter attesting to the account status of the investor company (original).
  • Description of the investor’s business activities, together with added materials such as an annual report, brochures, website, etc. The first four of these must be in Chinese. The last one may be submitted in English, with a Chinese summary.

4. Consider Forming a Special Purpose Company to Own the WFOE. Many investors create special purpose companies to serve as the investor in China. China’s company regulators have become accustomed to this process. However, the Chinese regulators will often still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. It is common to form a Hong Kong company for this purpose and there are often tax benefits in doing so. 

5. Secure Chinese Government Approval. In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the company registration process. If the project is not approved, the company will not be registered. 

6. Compile and Provide These Documents for Chinese Government Approval. The following documents must usually be prepared and then submitted to the Chinese government:

  • Articles of Association. This document will set out all the details of management and capitalization of the company. All basic company and project issues must be determined in advance and incorporated in the Articles. This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital.
  • Feasibility Study. The project will not be approved unless the local authorities are convinced it is feasible.This usually requires a basic first year business plan and budget. We typically use a client produced business plan and budget to draft up the feasibility study (in Chinese).
  • A Lease. An agreement for all required leases must be provided. This includes office space lease and warehouse/factory space lease. It is customary in China to pay rent one year in advance and this must be taken into into account in planning a budget because the governmental authorities will be expecting this.

7. Compile and Provide These Additional Documents for Chinese Government Approval. You will also usually be required to provide the following documents:

  • Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from around 30% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time (usually one year or more) during the start up phase of the Chinese company. These documents must be in Chinese.
  • Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required.

8. The Approval Process. It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

if you comply fully with the above, your chance of getting your WFOE approved is nearly 100%.

A few months ago I was talking with a Korean lawyer friend of mine about where Korean companies are locating in China. He talked of how Qingdao and Dalian were still really popular with his Korean clients, but that some of them were looking at Chengdu and a few other places “more inland.” They were looking to cut costs. I told him of how very few of our clients were seriously looking to inland China.

Boy was I wrong.

Within about a week of that conversation, we were hit with a flurry of companies looking to move out from places like Suzhou and Shenzhen and Dongguan to places like Yantai, Chengdu and Datong. Two of these companies have already begun the process. Note though that I intentionally used the ambiguous term “move out from” as opposed to “leave” because in none of the cases is the company going to shut down any operations. At least not yet. Their plans are to open ancillary facilities elsewhere, see how those go, and then, based on that, decide what to do with their existing facility or facilities.  

These companies are reluctant to shut down their existing operations entirely, in part out of a concern about how the local government at their existing locations will respond. Though the local government is not legally entitled to prevent these companies from leaving, it is “entitled” to make things difficult on them by making very sure that they are caught up on all of their obligations to the government (i.e. taxes, etc.) and to their employees.

So in both instances, rather than moving the WFOE (Wholly Foreign Owned Entity) from one place to another or shutting down the WFOE in one place and opening a new WFOE in another place (or even trying to open in the new place as a branch of the old WFOE), both companies have chosen to keep their old WFOEs and form new ones in their new locales. Both are of the view that if they reach a point where moving their operations fully to the new locale makes sense, they can at that time consider whether to close down their old WFOEs or merge the old and new into one WFOE.

What do you think?

Got the following question regarding FICE (Foreign Invested Commercial Enterprise) today that I thought worth answering via a post:

As a company we have been planning how we step things up in China for several years and your comments have had a major influence on our thinking. I do have a question. I have heard about a corporate structure that you never seem to mention. FICE, Foreign Investment Corporate Entity I believe does not allow for manufacturing but does allow for multiple sites, whereas WOFEs are I believe single site operations. Does it truly exist? Why is it never mentioned as an option? Appreciate the info.

A FICE is a WFOE that is authorized to engage in wholesale and/or retail trade. The approval requirements for these sorts of entities tend to be stricter than for a manufacturing or service WFOE. Additionally, approval of a FICE usually must come at the provincial level, not the local level. There are some provinces that do not even accept FICE applications. Shanghai and Beijing have the authority to approve the establishment of a FICE, and for that reason, most FICE operations are formed in those two cities.

Foreign Invested Enterprises (FIEs) mostly consist of Wholly Foreign Owned Entities (WFOEs) and Joint Ventures (JVs). All Foreign Invested Enterprises must set out the nature of their business during the licensing phase of the entity registration process. There are all sorts of possible categories, including Regional Headquarters, Service, Purchasing Center, Research and Development Center, Investment/Holding Company, Service Company, Manufacturing Company and Foreign Invested Commercial Enterprise (FICE).

In the end though, a FICE is nothing more or less than a type of WFOE or JV.

Pretty much every week my law firm gets contacted by an American or European company with big plans for China. Almost invariably (and this is a good thing), this company has spent tens of thousands of dollars in researching China for their business and in travelling back and forth to China to scope things out. Their calls to me usually begin with them telling me that they have done their research and they want to form their own China company to conduct business in China.

I then explain the various options foreign companies have for going into China — still essentially confined to going it alone as a Wholly Foreign Owned Entity (WFOE, a/k/a Wholly Owned Foreign Entity or Enterprise or WOFE), Representative Office (Rep Office) or partnering with a Chinese company in the form of a Joint Venture (JV).  

Then we start talking about what sort of entity makes sense for this particular company. Nine out of ten times, the company wants to go into China on its own as a WFOE and that is where the problem sometimes starts. The company has heard that China is very capitalistic and “wide open” and did not know that is not really the case, particularly as it relates to foreign companies. 

China has what it calls its “Catalog for the Guidance of Foreign Invested Enterprises.” This catalog divides foreign investment into “encouraged,” “restricted” and “prohibited” investments. Foreign companies cannot invest in prohibited industries and foreign investment in restricted industries typically requires the foreign company joint venture with a Chinese company. Industries that are not classified into any of the three categories are generally assumed to be permitted.

So every once in a while, I have to inform the American or European company that it simply cannot go into China at all or that it can only do so if and when it has found a Chinese company with which it can joint venture. The moral of the story is that it makes sense to find out whether your proposed company can work in China at all, and to do so before funding market and operations research or China trips.

But this research is oftentimes not so simple and that is because a lot depends on how the business is defined when the application is made. The business scope is relevant to the catalog on foreign investment because a business sometimes can fit within one or more categories of the catalog and how you describe your business scope on your WFOE application can make the difference between approval and rejection. You sometimes can massage the description of your business scope to obtain more favorable classification.

BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble.  We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.

In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.

If you take away nothing from this post, please at least understand that your getting local government approval for your WFOE does not mean you are out of the woods. There is little to no benefit in getting approval for a non-conforming WFOE.  

A reader sent me a link to a post from the very controversial blog, Atlas Shrugged. The post is entitled, “A Case of Perjury: Mohamed Bary’s Vast Web of Lies.” The gist of the story is that the Sri Lankan parents of a 17 year old Rifqa Bary are being denied the return of their daughter by a Florida judge because the family has been unable to document that they are in the United States legally. It appears the judge is denying the daughter’s return both for immigration reasons and because her parents’ credibility has been so damaged by their apparent history of immigration untruths.

The reader asked me if I am aware of anything like this having happened in China or the United States with Chinese businesspeople and whether “something like this” can impact one’s business in China.

HECK YES it can.

I am aware of all kinds of instances where one’s immigration status has harmed a business.

Many years ago, I was involved in an international litigation matter involving two Russian fishing companies. One of the key witnesses for the Russian company on the other side was a woman who had secured a US visa based on her extensive education and experience in the fishing industry in Russia. She had secured this visa by claiming a college degree from one of Russia’s best fishing institutes and by claiming to have spent many years working for one of its largest fishing companies. Somehow or other, my firm’s Russian paralegal extraordinaire had acquired a copy of this person’s visa application and had noticed that her college degree from a college in Town A had been stamped by someone in Town B. My paralegal told me this was the equivalent of a Harvard degree with an official Yale stamp on it. In other words, it could never happen if the degree were not a fake.
Our next move was to depose this person and depose her we did. At her deposition, we asked her a whole series of questions intended to make clear we knew she had lied to get into the country. Among the questions we asked were the following:

1. Who was your favorite professor? She said she had no favorite.
2. Name one of your professors. She said she could not remember any.
3. Name one professor at the entire college. She said she could not remember any.
4. Who was your best friend at college. She said she was too busy studying to have had any friends.
5. Name one fellow student at your college. She said she could not remember.
6. List the classes you took. She gave some sort of vague answer.
7. Name some of the buildings on the campus. She could not remember any.
8. Describe the campus. She gave some incredibly vague description.

We asked the same sort of questions regarding the fishing company at which she had allegedly worked in Russia and we got the same sort of answers. It was fun.
And guess what, this key witness for the other side never showed up to testify at trial, which greatly strengthened our case and probably helped us prevail. I have no doubt her failure to appear stemmed from her fear of her illegal immigration status being exposed.

A few years later, I was contacted by a Russian-American company that wanted my firm to sue an American company over a debt. I pushed my client about skeletons in his and his company’s closet and he admitted he was in the United States on a student visa and so should not have been working at all. We talked about how his bringing this case might expose him to visa issues and how he should think long and hard about bringing the case. He chose not to and I assume this meant he would be walking away from a not insubstantial debt.
We have had to tell a number of foreigners in China the same thing when they have sought our help in collecting on a debt in China or in suing their Chinese partner for having run off with what the foreigner thought was its own business. If you or your business are not legal in China, you have pretty much foreclosed your ability to sue anyone, no matter what they do to you.

A handful of times (usually during periods of stepped-up visa enforcement), my firm has been contacted by foreigners with illegal businesses in China who have either been denied re-entry into China or have been told to leave. These people are desperately seeking our help to get them back into China. They are desperate because their profitable China based businesses cannot function without them. The odds of our being able to help them are slim.

One of the most underrated benefits of having a Wholly Foreign Owned Entity (WFOE) in China is that entity’s ability to hire foreigners and those foreigners’ ability to secure Chinese work visas (Z visas). These companies are legal and they have standing to sue and since their employees are working in China legally on Z visas, they have nothing to fear by testifying on the company’s behalf.

One of my favorite stories is when I went to Papua New Guinea to help a Sakhalin Island client secure the return of two helicopters. When I landed in Port Moresby, I was asked if I was in the country as a tourist or for business. The tourist visa was something around $35 and the business visa was something around $350, but I said “business” and I paid the much higher fee. I then flew to Goroka where I met the next day with the governor of the Eastern Highlands Province, Malcolm “Kela” Smith. I was told “Kela” means bald man. The first thing Mr. Smith did when I met with him was to check my passport. When it revealed I was there on a business visa, I could sense a change in his view of me. Though he never confirmed this to me, I am convinced that had my passport revealed I was in PNG on a tourist visa, Mr. Smith would either have had me thrown out of the country or he would have refused to meet with me because I was in the country illegally. Kela Smith ended up meeting with me and with my client and within a day or two we had a deal whereby my client would get his helicopters back.

The bottom line is that if you are going to be doing business in a foreign country, particularly China, it pays to do so legally and it pays to have the right visa. Don’t mess around with China immigration.

China Business Services Blog just did a short post on joint ventures (JV), entitled, “Don’t Quote Me (on Joint Ventures).”  Regular readers know we are generally not fans of joint ventures.  Yes, they are sometimes necessary for doing business in China, but when they are not, they are usually to be avoided.  What you can get out of a joint venture you can almost always get out of a contractual relationship, and that will be without the oftentimes devastating entanglements.  For more on this, check out To Succeed In China Know The Now, The Decentralization of China for SMEs, When In China, Don’t Get Screwed — The Movie, and the post that started it all, China WFOE v. JV.

The China Business Blog’s post consisted entirely of the following quote from Alan Brown, Unilever‘s head guy in China, responding to a question whether to have a joint venture in China:

If you are working in a highly regulated industry, then JV partners are almost essential.  If you are working in a highly deregulated industry, they can be a damn nuisance.

Very well put.  But, for those still considering a joint venture, this CEIBS (China Europe International Business School) article, “To JV, or Not to JV – How MNCs Choose Local Partners?” [link no longer exists] makes a nice starting point for the various strategies on picking the right joint venture partner.