We Chat business for foreign companies

Every couple months one of our China lawyers will get an email from someone asking us one of two things:

1. Does my company really true need a China WFOE to get a WeChat business account?

2. What is the bare minimum China WFOE I can form that will still allow me to get a WeChat business account?

Our short answer to the first email was “yes” and our short answer to the second email was that even the bare minimum China WFOE is still time consuming and expensive to form and time consuming and expensive to operate.

But today folks, our answers just changed. Because people, starting today, our short answer to the first question will be “no” and our short answer to the second question will be “why are you even asking us this question when no China WFOE is necessary to get a WeChat business account.

What gives?

What gives is that what has long been rumored — and like almost everything else related to China, falsely believed by many anyway — has now occurred. It is now possible to for a foreign company to get a WeChat business account a/k/a a WeChat Official account without needing a China WFOE. It does not allow WeChat Pay or APIs yet, but it has the core WeChat features. In other words, you can get your business on there and market, market, market.

China Skinny (I have told you before and I will tell you again that this is one of the very few China newsletters worth subscribing to) came out yesterday with an article on the new rules for getting an official WeChat account and, most importantly, step-by-step instructions on how to do exactly that.

It will cost you $99 but compared to having to form and operate a WFOE, it will no doubt be worth it.

 

 

China tariff lawyers

In talking with one of our international trade lawyers yesterday I learned that September 6th is the next key date regarding the $200 billion round of tariffs against China imports. This is the due date if you want to submit comments on your particular category of products in an effort to get that category removed from the tariff list.

It is already too late to submit comments regarding the first two tariff lists — the first $34 billion list and the second $16 billion list. However, if your product is on either of these lists, you still can make a product exclusion request. The product exclusion request process for the Second list will be similar to the process set up for the first list, but no deadlines have been established yet.

Decisions on exclusion requests typically require/hinge on the following:

  • Identify the product you want excluded.
The U.S. list of targeted products is identified by the Harmonized Tariff Schedule (HTS) number used to declare the product when imported into the United States. A company must identify the commercial name of the product, the HTS number for the product, and any other industry designation of the product under a recognized standard or certification (For example, ASTM or DIN).
  • Describe the product based on physical characteristics.
Physical characteristics can include, but are not limited to, chemical composition, metallurgical properties, and dimensions. This description distinguishes your products from other products subject to tariffs. A significant concern when considering exclusion requests is whether granting a specific exclusion request will create a loophole which other products will also be able to exploit.
  • The basis for requesting an exclusion.
Reasons for the exclusion request include, but are not limited to, the following: The product is unavailable from a domestic U.S. supplier; thus, imports are needed to fill a demand no U.S. supplier can meet. There are certain requirements only the 
import supplier can satisfy. The company has been put on allocation by domestic suppliers. There are no alternative suppliers in a country outside China.
  • The names and locations of any producers of the product in the United States and in foreign countries.
  • Total U.S. consumption of the product by quantity and value for each year for the past three to five years (2013 – 2017)
  • Projected annual consumption for the next few years (2018- 2020), with an explanation of the basis for the projection. 
Total U.S. production of the product (or possible substitutes) for each of the past three to five years.
  • Discussion of why the U.S. products (or possible substitutes) cannot be used in place of the imported products.
  • A viable narrative detailing why your company deserves the exclusion it is requesting. This typically includes the history of your company (e.g. fifth generation family-owned), the products produced by your company, the strategic significance of your company’s products, the number of workers in your company, and your company’s annual sales.

Successful comments result in the removal of tariff line items from the tariff list, contrasted with successful exclusion challenges which result in the removal of specific products from the tariff line item. In other words, the requirements for the exclusion process are much more product specific. This means if you have nine different types of widgets, you will need to make nine different product exclusion requests. 
The reasons given by the USTR for invoking the China tariffs center around Chinese practices of stealing or extorting intellectual property from U.S. companies. There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs noting that the tariffs have no relation to the premise of protecting U.S. companies. Many have also objected to the catastrophic effect these tariffs will have on certain American companies while likely having very little effect on how China respects U.S. intellectual property.

It is important to note that out of the first round of $50 billion in tariffs, comments led to $16 billion (32 percent) being removed. If your product or products are on any of the lists, it almost certainly behooves you to try to get them off. Your biggest risk of doing nothing is having to go up against one or more of your competitors that did do something and succeeded and whose costs are now a lot less than yours.

But you do need to reach out to an international trade lawyer FAST.

 

China lawyers fraudMost of what we write about frauds involving China usually are frauds perpetrated by Chinese companies against foreign companies. But as a reader recently pointed out to me the other day, frauds perpetrated within foreign companies “are at least as common and as damaging.”

I agree, and today’s post highlights six of the most common frauds our China lawyers see.

Before I talk about internal company fraud, I want to quote a long-time client and friend on how to deal with these. This person is from Europe but his “business empire” extends pretty much around the world and it includes some extremely difficult places in which to do business — places that make China look like a piece of cake. Once when I told him that I was convinced that people in one of his business (in a country usually prefaced with the words “war-torn”) were skimming fairly large amounts from his company his response was something like the following:

My goal is not to stop all internal theft as that would be impossible. My goal is to keep my eye on the prize and the prize is to maximize profits and to succeed wildly. And so as much as I hate company theft, my cracking down on it has to come at the right time and in the right way. I am not going to decimate a booming business by firing those who helped me build it even if they are stealing from me. In the meantime though, if you think you know who is stealing from me, let me know so that I can act when the timing is right.

I have used the “keep your eye on the prize” line at least 100 times in various speeches and I especially like that line when talking about stopping counterfeits. See How to Protect Your IP from China.

When it comes to internal company fraud, this means it is critically important you do whatever you can to prevent and/or root out the sort of fraud that will destroy your company, but far less important that you stop employees taking home pens. What to do with the far more common in between sorts of frauds is going to depend on the specific nature of your situation.

In any event, here are the top six China internal company frauds:

1. No real company. No real employees. This one was incredibly common ten years ago, but far less dangerous then. It is less common today but far more dangerous. See Doing Business in China Without a WFOE: Will the Defendant Please Rise. With this fraud, your “general manager” or someone else with a lot of power will charge your company to set up a China WFOE and then for years acts as though you have a China WFOE, but you don’t. The spoils from this fraud can be huge and ongoing. Suppose your WFOE generates $4 million in income a year and pays $1 million to its “employees” in salary. If there were a real WFOE, China income taxes would be around $800,000 a year and employee taxes and benefits would be another $400,000 or so. Now imagine this “WFOE” does not exist and so it also has no real employees. Someone other than your company is now clearing about $1.2 million a year by not paying taxes. Even worse, at some point (likely very soon in light of the harshest crackdown ever against operating in China without a legal entity) your fake WFOE will get shut down by the authorities (and rightly so) and you will then get hit with a massive tax bill that includes back taxes, plus interest, plus penalties, plus worse. See China’s Tax Authorities Want You.

How do you spot this one? We have had a couple companies come to us after learning that their general manager was living in a multi-million dollar condo and driving a $100,000+ car on a salary that could in no way sustain such a lifestyle. This is one way to spot this fraud, but the better way is to do the research to confirm your China WFOE is in fact a China WFOE and that all of your WFOE “employees” are in fact WFOE employees.

2. Overstated or Understated Income. Not sure which of these two is more common but they both happen fairly often. Overstating income is usually done to meet performance goals or to prevent a company from being shut down. Understating income is usually done to hide that someone is improperly taking money from the company. Overstated income can mean your company sinks money into an enterprise it probably should abandon. Understated income means you owe taxes and interest and penalties of which you were not aware. How do you stop these? Financial audits, financial audits, financial audits. It also helps to have someone in your company who cares about and understands what is happening in China and this usually comes from visiting the China WFOE often.

3. Friends and Relatives and Side Companies. Using friends and relatives as your China WFOE’s suppliers and paying more for the “privilege” is incredibly common. If the friends and relatives suppliers are charging 1 to 5% more you may never catch it and it may not be all that big of a deal if you don’t. But when our China lawyers are brought in on these situations, we typically see more like 30 to 50% in up-charging. I cannot tell you how many times we have worked with an American or a European company that terminates its China sourcing agency only to learn (usually from the factories that were actually making their product) that in addition to the 5% fee it knew it was paying its sourcing agent, it also was paying a 40% skimming premium. See Hidden commissions between China factories and sourcing agents. Even more common (at least in terms of what our China lawyers see) are outside companies set up by your own general manager. How do you stop these fraudulent supplier deals? You monitor pricing and you monitor who owns your suppliers. You also need to be very clear in your Employer Rules and Regulations (and pretty much every other place possible) that you will not tolerate supplier fraud.

4. Bribes. This one is too multi-faceted and complicated and important for me tot cover in the depth it deserves so I will opt to be incredibly brief. Bribery is bad for your business and you need to do what you can to prevent it. China Bribery: Not Smart and not Necessary.

5. Side Door Sales. This fraud is very profitable and hence very common. Imagine you can charge $800 for a widget which cost you literally nothing to develop or make or market. Imagine also that you have people calling you every day to buy this product. Now imagine that one of your employees is doing this with your product. We see this sort of thing most often in the following two situations:

  1. The China WFOE makes and sells a product all within China, or it makes the product in China and sells it to SE Asia or to some other emerging market country not so much on the foreign company’s radar.
  2. The China WFOE is in a business where it both buys and sells a product. As an example, a fish brokerage company that buys fish in China and then sells that fish worldwide might have an employee who uses company assets to buy $500,000 worth of fish and then sells that fish for $525,000 and then pays everyone back without anyone ever being the wiser. Or what if your employee is in cahoots with an employee at the fish company and they do the deal without any money even changing hands until your employee gets paid? What if your employee is siphoning off 50% of your business with this scheme? What if your employee becomes so successful at it that he or she no longer needs your money to do these transactions because he or she has built up its own funding, but he or she keeps using your good reputation and your marketing dollars to further his or her own business? What is amazing about this fraud is that nearly every time this sort of employee is terminated he or she already has a company set up to ready to compete against the foreign company a day or so after the termination.

How do you stop this sort of fraud? With Employer Rules and Regulations that make clear this will not be tolerated. With non-compete and non-solicitation agreements/provisions that prohibit this. And then you sue.

6. Fake Employees. Would you know if your China WFOE had 200 employees, not the 250 employees to whom it is allegedly paying salaries and benefits? If you answered in the negative to this, you should do something immediately so you can answer positively the next time because putting non-working friends and relatives on payroll is a classic China fraud. This one is particularly commonly used by Chinese companies in China Joint Ventures to zero out profits so there never have any profits that need to be shared with the foreign JV partner.

What are you seeing out there?

China Employment Lawyers

Our China employment lawyers are asked by China employers about pursuing claims against an employee who fails to give sufficient notice of their resignation. Generally speaking, you cannot demand an employee pay damages for an early resignation unless you can show actual damages as a result. Just a quick summary of the relevant law on employee resignations: in accordance with China’s Employment Contract Law, a China employee during his or her employment contract term can generally leave by giving 30 days written notice while an employee on probation can leave with 3 days notice. We usually (but not always) recommend our employer clients not  make it more difficult for their employees to leave than the law mandates. Though it’s not an easy task, it is possible to pursue an employee for failing to abide by legal standard on resignation or a contractual standard, provided the contractual arrangement does not violate applicable law.

Let’s consider a hypothetical. Employer and Employee enter into an employment contract for a fixed term for Employee to work as a front-desk cashier at a hotel. Employee leaves before her employment term is up without providing a reason or a notice of resignation. Employee’s manager tries to get in touch with her, but to no avail. Employer leaves the employee a text message warning her that if she does not return to work or otherwise get in contact with her Employer right away, Employer will take legal action. When Employee is no show, Employer hires a temp to perform her job duties. Employer then brings a labor arbitration claim for damages as a result of Employee’s unauthorized departure. Will Employer prevail?

In the real case on which the above hypothetical is based, the arbitrator noted that pursuant to China’s Employment Contract Law, an employee who violates the law on employment termination notices and causes damages to the employer by having done so shall be liable to the employer for damages. The arbitrator went on to hold that this particular had failed to provide adequate resignation notice as required by law (that is, 30 days’ written notice), had left her work position without authorization, and that her behavior had caused economic losses to her employer. It therefore ordered this employee to pay her employer damages. The employer did not get the amount it was seeking because the arbitrator held that the daily salary the employer claimed it paid to the temp was much higher than workers in similar and even higher positions and it significantly held that damages should be roughly $20 a day, not the $50 a day the employer had sought. To make a long story short, the employer had sought a little over $1300 in damages and it ended up being awarded a little over $200 instead.

This case affirms that it is possible for an employer to pursue an employee for leaving without providing proper notice which causes damages to the employer. However, as is true of so many other claims against an employee, the amount of possible damages are likely to be so low that it will rarely make sense on economic grounds to pursue an employee for leaving early. Of the times a China employer has asked one of our China employment lawyers about pursuing an employee for leaving early, I can recall only one time where we thought it might make sense and that one time involved a very high level employee who the employer believed had left with trade secrets and a plan to compete against his former employer. Bringing the action in that instance would be done as much to send a message to the ex-employee and to other employees as for economic reasons.

Bottom Line: As is true of so much employment litigation and of litigation in general, the decision to pursue a claim needs to be based on more than just the likelihood of success on the merits. If you are going to bring any sort of arbitration claim or lawsuit in China you should first weigh the likelihood of success on the merits and the amount you will be awarded if you prevail and your likelihood of collecting on the one hand against the economic and emotional and opportunity costs on the other hand. In most cases, your best course of action will be to walk away.

 

China tariffs wine

Jim Boyce’s ebullient, edifying Grape Wall of China blog (yes, about wine in China) has an interesting take on China’s imposition of an additional 15% tariff on American table wine. In two recent posts (see here and here), the latter a direct response to a pot-stirring story on Al Jazeera, he basically tells everyone to chill out.

It’s not that the tariffs won’t hurt the U.S. wine industry – they will. But they need to be viewed in context. As Boyce explains, only a small percentage (about 12.5%) of U.S wine is exported, and of that only 3.7% went to China. In short, only 0.4% of U.S. wine goes to China and will be subject to the additional tariff.

Moreover, U.S. wine has been facing headwinds in China for several years. From 2011-17, China doubled the amount of wine it imported, but the U.S. market share of those imports fell by more than 50%, decreasing in actual numbers from 16.1M liters to 14.2M liters. The problems U.S. wine faces in China are complex and multi-factored, and often intertwined with historical, political, or cultural backstories. Other countries (particularly France) were early entrants to the Chinese wine market and have retained a huge first mover advantage. Other countries spend more money on marketing and brand presence in China. And let’s not forget that even before China imposed the additional 15% tariff, U.S. wine already faced a 14% tariff, unlike wine from countries with China free-trade agreements (such as Chile, New Zealand, and Australia). Like I said, selling wine in China is complex. I could write a whole month of blog posts about it.

None of this is to minimize the very real pain some American winemakers (as Boyce notes) are feeling. Different winemakers have different selling strategies, and some have invested substantial amounts in developing or maintaining their market presence in China. At a conference I attended years ago, a high-end Napa winemaker told a cautionary tale about how he had been approached by several Chinese buyers who wanted to purchase the winery’s entire production run for the year (presumably to serve as the in-house wine for a large state-owned enterprise). It was a cautionary tale because such sales would be one-offs, providing a large cash infusion but with no long-term benefit, because there wouldn’t be any repeat purchases and little to no increase in brand awareness. The only way such a deal would make sense is if the winemaker was about to retire. Instead, the way to succeed in China was to cultivate distributors, retailers, and consumers who would become long-term brand adherents. And that takes time, money, and patience.

If you take a step back and look at these tariffs from China’s perspective, it’s pretty clear they are a win-win. They get to strike back at Trump in a highly visible, prestigious area of commerce. Chinese consumers are (for the most part) unaffected, because they have numerous credible alternatives available from countries with which China is not in a trade war. Meanwhile, the effect in the US is in states that overwhelmingly oppose Trump in any event: the top 5 wine-producing states – which control more than 96% of all production, are California (at 80%), Washington, Georgia, New York, and Oregon. And Georgia’s production in 2017 seems anomalous, rising more than 140% from 2016 according to the Alcohol and Tobacco Tax and Trade Bureau. (But even if the 2017 numbers are accurate, Georgia only accounts for 4.4% of US wine production.)

For more on China and wine, check out the following:

 

 

 

 

 

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

I got a super-short email this morning from a U.S. lawyer I do not know, asking me “What language should I use for a contract with a Chinese tech company.” I am going to give my answer below and direct him to this post.

That depends. It depends in large part on where you are going to have disputes resolved. If you are going to have disputes resolved in a US court or before a Canadian or British arbitrator you are probably going to want to have it be in English. But then you probably should have US or Canadian or British law apply to it. If your contract is calling for disputes to be resolved before a Chinese court, it should probably be in Chinese. I first ask where the dispute should be resolved so as to most benefit my client and after I make that exceedingly difficult decision the right language usually becomes crystal clear.

For various reasons (chiefly enforcement) we draft most of our contracts provisions stating that disputes will be resolved in a Chinese court. At that point it becomes critical for the contract to actually be enforceable in China. That usually means the following there things are critical:

1. The contract be governed by Chinese law. Chinese law will permit your contract to be governed by foreign law. However, because Chinese courts will require you to prove every relevant element of foreign law choosing foreign law for a dispute in a Chinese court almost never makes sense. Having to prove foreign law will be expensive and will likely lead to delay. Most importantly, the other side will dispute the application of foreign law, rendering your case and even any judgment you receive uncertain.

2. The governing language of the contract should be Chinese. Chinese law will permit you to provide for English as the governing language of your contract, however Chinese courts will only work with Chinese language documents. This means your contract will need to be translated into Chinese by a court appointed translator. The translator is often not particularly skilled and the resulting translation is often simply wrong. Even when the translation is correct, the other side will usually dispute the translation, leading to delays and ultimate uncertainty in the decision. Having someone else translate your contract after you sue means you will not know exactly what it is on which you are suing until after you get the translation back. Sometimes Chinese courts simply refuse to hear a case that involves contracts in a language other than Chinese.

3. The contract should be enforceable in a Chinese court with jurisdiction over the Chinese company. This normally means jurisdiction in a court in the district where the Chinese company has its principal place of business.

 

 

China tariff lawyer

This is part two in what will no doubt be a continuing and long running series on what American companies can and should be doing in light of the ongoing trade war between the United States and China. In part 1, I discussed how our  China lawyers are getting a slew of phone calls and emails from companies looking at massive tariffs being imposed on their products imported into the United States and wondering what they should do.

That first post focused on what companies facing tariff problems should NOT do:

They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

But what should you do? The below is the sort of plan our international trade lawyers (working in tandem with our China lawyers) are mapping out for companies needing our help:

The first and most obvious thing to do is to figure out how your products will be impacted. Has the United States imposed tariffs on your products? Is it planning to do so? Just this first step is more complicated than many realize both because it is not always clear whether a specific product comes within the classification of a product against which tariffs have been imposed and because the media has been less than clear in distinguishing between existing and upcoming tariffs.

If one of your products is on a U.S. tariff list, your next step is to figure out what you can do about that. Surprisingly enough, you do have options. The U.S. Trade Representative will accept comments until September 6 on whether entire categories of products listed on the third wave of proposed tariffs — the $200 billion in imports from China — should be exempted. And later waves of U.S. tariffs will have later dates by which comments must be made. Out of the first round of $50 billion in tariffs, comments led to the removal of $16 billion (32 percent), which shows there is real value to challenging these tariffs.

But even if your product is not exempted due to challenges, you can make what is called an exclusion request. These too have their deadline dates and these exclusion requests typically include the following:

  • Identify the product you want excluded. The U.S. list of targeted products is identified by the Harmonized Tariff Schedule (HTS) number that is used to declare the product when imported into the United States. A company needs to identify the commercial name of the product, the HTS number for the product, and any other industry designation of the product under a recognized standard or certification (for example: ASTM, DIN).
  • A description of the product based on physical characteristics (for example: chemical composition, metallurgical properties, dimensions) so your product can be distinguished from other products that would still be covered by the tariffs. A significant concern in considering exclusion requests is whether granting a specific exclusion request will create a loophole many other products can also use.
  • The basis for requesting an exclusion. Is the product unavailable from a domestic U.S. supplier and thus imports are needed to fill a demand no U.S. supplier can fill. Are there certain qualification requirements only the import supplier can satisfy? Have you been put on allocation by domestic suppliers? Are there alternative suppliers in any country other than China?
  • The names and locations of any producers of the product in the United States and in foreign countries.
  • Total U.S. consumption of the product by quantity and value for each year for the past three to five years (2013 – 2017) and projected annual consumption for the next few years (2018- 2020), with an explanation of the basis for the projection.
  • Total U.S. production of the product (or possible substitutes) for each of the past three to five years.
  • Discussion of why the U.S. products (or substitute products) cannot be used in place of the imported products.
  • A good story why your company deserves the exclusion it is requesting. This typically includes the history of your company (e.g., fifth generation family-owned), the products produced by your company, the strategic significance of your company’s products, the number of workers in your company, and your company’s annual sales.

The difference between the comment process and the exclusion process is that successful comments lead to the removal of tariff line items from the list whereas successful exclusion challenges remove specific products from the tariff item. In other words, the requirements for the exclusion process are much more product specific; if you have six different types of widgets, you will have to make six different product exclusion requests.

The first deadline for a product exclusion list is October 9th for the first $34 billion list.  USTR has not yet set up Product Exclusion requests for the $16 billion, not to mention the $200 billion list.  So we are still waiting on that.

There have already been many opposing comments and exclusion requests submitted for the first two waves of proposed China tariffs. Many of the opposing comments have noted how the proposed tariffs on the Chinese products have nothing to do with  Chinese practices of stealing or extorting intellectual property from U.S companies, which are the reasons claimed for invoking the China tariffs in the first place. Many have also objected to how these tariffs are not likely to change how China respects intellectual property  rights, but will have a catastrophic effect on certain American companies.

A U.S. exclusion process will likely proceed fairly slowly because there are so many exclusion requests already in the pipeline for the steel and aluminum tariffs, though a successful exclusion request likely will result in a refund of any tariffs paid. Waiting for a tariff refund is not the best thing in the world, but requesting such a refund will be the best path for many. Our trade lawyers are representing companies in more than a dozen industries that are seeking to have their products excluded from tariffs.

In part 3, we will discuss what actually makes a product “Made in China” for purposes of United States tariffs and what you can legally do to take your products outside that classification.

 

China employment lawyer

China employment law is technical and local and nearly all foreign companies get it wrong. See China Employment Law: Local and Not So Simple. It is one of the most consistent and expensive problem areas for foreign companies doing business in China and it has become a massive growth area for our law firm. More than ever, China wants harmony. And don’t forget, China is a communist country. Combine these two and you have a country that badly wants to keep its workers happy, especially as compared to your run of the mill foreign company that competes with Chinese businesses.

If you have employees in China or you are thinking of having employees in China you should have at least a basic knowledge of what you must or should be doing as an employer in China. This book, for the low low price of less than $20 in paper form, gives that to you. It is also sold as a Kindle version for $9.99, but you really should spend the extra $10 to be able to have it in physical form in your office so that you and others can consult it easily whenever necessary. You can get this book at Amazon or at Barnes & Noble.

Disclaimer: This book is written by our lead China employment lawyer, Grace Yang and we get a cut of every sale.

Our typical attorney-client interaction on China employment laws usually goes something like this:

  1. Foreign employer company contacts one of the China lawyers at my firm after having terminated an employee and after that employee has either sued or threatened to sue, oftentimes over a technical legal violation by the foreign employer.
  2. One of our China employment lawyers looks at the case and determines the termination did not comply with China (or perhaps local) laws and the employee will almost certainly prevail in his or her claim. See China Employee Terminations: Don’t Get Lazy.
  3. We explain the above to the foreign company employer and we learn the company is violating China’s employment laws in various ways with all of its employees.
  4. The foreign company employer wants its violations excised.
  5. We then conduct an employer audit to determine what other employment problems need fixing. See China Employment Compliance and Audits: THE New Big Thing.
  6. The employer audit invariably generates a laundry list of employment problems that need fixing.
  7. We fix the employment law problems, one by one.

Nearly all foreign company employers have employment problems in China because Chinese employment laws are so complicated and so localized, because China is so tough on foreign employers, and because pretty much every employee in all of China fully understands the leverage they hold over the foreign employers.

The typical small to mid-sized foreign company goes into China with maybe one or two foreign employees and one or two Chinese employees, none of whom know anything about Chinese employment laws (on the local, regional or national level) and all of whom are focused on getting the business off the ground more than on complying with the letter of the multiple sets of China employment laws. On top of this, at this time, they are usually a tight-knit group of founding employees who view themselves as much as founders as they do employees and who all get along with each other and view their futures with the company as bright. But as the company grows, nobody realizes how important it is to grow out the company’s employment compliance as the company expands and even if they did, nobody in-house knows how to do it. And why spend money trying to complying with obscure employment laws when there has never been a problem with those laws?

But then a problem arises and a China employment attorney at my firm gets called — usually by someone high up in the U.S. or in Europe or in Australia. This person is often the head of HR, the CFO or the CEO, or the GC and they are trying to find out what is going on with HR in China and they are getting only vague or nonsensical answers from their people in China and they are starting to worry. They see the potential for big problems down the road and they want to nip those in the bud now.

Foreign companies with employees in China need to get on top of their China employment situations and stay there. China Employer audits are the way to go in most situations, but in the meantime and as a supplement, someone at your company needs to understand China employment law basics. Someone at your company needs to know enough to be able to spot your company’s China employment law issues before they escalate.

The China Employment Law Guide is the book for that 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. You actually should get a couple copies and give them to anyone in your company who manages your China employees or plays any role in their hiring or their firing or their vacation time or…. This book is meant to be used for background and for reference and as a decision-making guide.

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 and graduated from the University of Washington Law School where she again excelled. Grace is our 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 (licensed in 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. What though will you learn from this book? Among other things, you will learn the following:

  • The basics of China’s employment law rules
  • How to draft an employment agreement that works for your China locale
  • How to draft China employer rules and regulations (aka employee handbooks)
  • The other agreements you should consider for your China employees
  • Frequently contested issues, such as overtime, vacation days, commission payments, and leaves of absence
  • Employee terminations
  • HR audits
  • Most importantly, how to keep your company out of trouble
  • AND MUCH MORE!

So just click here and buy the book.

 

 

You did do that right?

China lawyers ICP license

We are in the midst of a new wave of foreign (European and American, mostly) companies coming to our China lawyers when about 80-90% into their WFOE formation process and asking us what to do about getting a China ICP (Internet Content Provider) license. These companies are coming to us after realizing that getting a WFOE in China is no guarantee for getting an ICP license in China.

In many of these cases, these companies were lured into forming China WFOEs with an ICP license as the carrot. These companies believed that their forming a China WFOE was their ticket to a China ICP license but then when it came time for actually moving forward on securing the ICP license, they started getting stuck in a morass of vagaries and double-talk and stalling.

They then contact one of my firm’s China tech lawyers, still mostly believing it will be easy for them to get the China ICP license they so much want. Thinking that we will immediately and easily be able to tell them exactly who to contact or what to do.

The following is an amalgamation of a fairly typical email:

We are nearing completion of our China WFOE formation and at the stage of wanting our China ICP license. It now appears that our WFOE formation company does not fully understand China’s ICP licensing process and so can you please tell us what you would charge to get that for us and how long that will take.

Our response is usually something like the following:

I’m sorry, but unless and until we know what exactly it is you will want to do with your ICP license we cannot tell you much at all. I suggest we talk briefly and then we can tell you whether we can help and if we can help, we will give you some fee estimates. Much of the time, having a China WFOE has little connection to getting an ICP license and so we very well may have to essentially start at square one on the ICP issue.

Bottom Line: Don’t pay for forming a China WFOE to get your China ICP license unless and until you are at fairly certain that forming that China WFOE will get you that license. In subsequent posts we will talk more about China ICP licenses. I just wanted to throw this post up now (and fast) to stop others from going down this expensive and often pointless WFOE path.

China WFOE formation

I do mean to sound alarmist here.

Almost since this blog’s inception, we have written about how if you are doing business in China you need a Chinese legal entity, be it a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV) or a Representative Office (RO). And pretty much each time, our writings on this get more emphatic and more strident. Today they reach a whole new level. Today we warn you about jail time because that is what we are hearing is happening in China right now.

In the last two years our stridency on this issue has gone into hyperdrive. Today I want to SCREAM that if you are doing business in China without a Chinese legal entity you should probably leave China immediately and consider what to do in China from the safety of your own country.  I will explain why I am saying this shortly.

In March of 2017, in Doing Business in China with Deportation or Worse Hanging Over Your Head, I had the following to say:

We have frequently been writing of late on how China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. In China’s defense (not that its decision to rigorously enforce its own laws needs any defense), the new WFOE formation rules enacted last year do actually make it somewhat faster, cheaper and easier to form a WFOE.

Anyway, since we started hitting this issue hard here on the blog, we have gotten an even greater stream of emails from people who have been “caught” by the Chinese government and from people who want to know what exactly they need to do to get legal. But the most interesting emails come from those who either fully or partially refuse to believe what has been happening in China and how at risk they are. About half of the emails sent to our China lawyers evidence at least some aspect of this and about half of those mention forming a company in Hong Kong as an option for solving all problems.

So let me say right here and right now that forming a company in Hong Kong will not do a thing to make you legal in Mainland China. Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

The below email is an amalgamation of two emails I received just this morning, both involving people with United States and Taiwan passports.

I came across your law blog and would like to ask a question. I’m in a slightly strange situation, professionally and nationality wise, and I I wonder if you might be able to offer me guidance.

I am a US/Taiwan dual national living and working as a freelancer in Shanghai, which is my base. I work in the _________ business on a contract-to-contract basis. Though my Taiwanese friends are always telling me not to worry about things like taxes, the more established and successful I become, the more I think I should be figuring out how to get legal in China and make myself legitimate, business-wise.

I am a ________________ and I do other related things. For example, I’ve just been asked to __________ on a relatively large project. Sometimes I am paid in RMB and other times I am wired foreign currency to accounts I hold overseas. Sometimes because I am not a legal business the companies I work for negotiate discount rates from me because my not having a China company precludes them from getting a tax deduction for their payments to me.

As I progress professionally, the amounts I charge and get paid keep increasing and I worry about what all of this means for the long term.

A friend has suggested I go to Hong Kong to set up a WFOE. However, I know some of the rules are different for Taiwanese nationals who wish to set up businesses in China.

It is not my ambition to have a big company or service but I also know that this gray area situation may not be sustainable forever. I also want to know if any of this might affect me as a U.S. citizen. At the moment, I just file federal taxes online.

Please let me know if you have encountered cases such as my own, and if you might be able to point me to resources that would enable me to best formalize my situation.

Many thanks.

Our response is always something like the following:

Setting up a company in Hong Kong will not help you one bit in terms of getting legal in China. You need to re-think what you are doing because as you get bigger you become a bigger target. I do not know how China treats Taiwan citizens, but if you are an ethnic Chinese there on a US passport, you are probably at the top of the list. My advice is that you start doing something and fast. You should consider either leaving China or setting up a WFOE in China that employs you. If you leave China you can do some business in China without triggering the need to have a WFOE in China, but because you provide services there, you will still be required to pay income tax there. So long as you are paying your United States taxes, the U.S. very likely does not care what you are doing or where you are doing it; your big concern should be the PRC, especially since you live there. The bigger you get, the more likely it is that someone will rat you out or that you will be noticed by the Chinese government. Productive legitimate businesses do not operate with this sort of hammer poised to hit them on the head. What you should do is weigh the various costs and benefits of your various alternatives and decide on one.

Then just last month, in American Companies in China without a WFOE and the Impact of Donald Trump and US Tariffs and Why Hong Kong is not the Answer I wrote again how American companies are at increased risk of serious trouble for operating in China without a WFOE:

If you are an American company doing business in China, you don’t need me to tell you how so many things have changed for you over the last year or so, and so I won’t.

But I do need to tell you — somewhat urgently — that if you are operating in China without a legal Chinese entity, you need to stop. Like right now.

Back in March, we did a post, Doing Business in China with Deportation or Worse Hanging Over Your Head in which we discussed how “China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See also Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. Our thesis — based on what we were seeing on the WFOE front and on other crackdowns involving even things like bar fights, visas, expat taxes, cannabis, and employment law — was that China was toughening up enforcement against foreigners and foreign companies in China on all fronts, but especially against Americans and American companies as a sort of a slow and not terribly public retaliation against President Trump.

With all the talk now about US tariffs against China, legal enforcement in China against American companies operating in China without a WFOE has gone into hyperdrive. One of our readers, herself a China lawyer, recently wrote me to let me know how ridiculous she thought I was for believing Beijing would “quietly” go after American companies. My response to her was that we had no idea whether China’s stepped up legal enforcement is being directed from Beijing or is more in the nature of a slow and quiet and yet widespread uprising against the United States being mounted by government officials throughout China.

We can debate who is leading this enforcement charge and even the reasons for it, but to me the most important thing is that if you are an American company and you are not in full compliance with Chinese law you are at greater risk now than you have ever been. If you are doing business in China, especially if you are doing business there “through” a Chinese citizen you are paying, you need to think long and hard about your China company formation options.

Whenever we write about how China is getting tougher with such and such a law, we invariably get emails and/or comments saying how idiotic and/or unfair we are for criticizing China for enforcing its laws. Just so the record is clear, we have not said that and we are not saying that; we are as neutrally as possible merely writing on what we are seeing and we would be more than happy to leave it to the legal philosophers to put these sort of real-life China business and legal issues into some larger context.

In addition to the stepped up enforcement of China’s WFOE requirements, we are also seeing a massive uptick in American companies forming Hong Kong Companies or consulting WFOEs in ill-advised efforts to get legal. So let me use this blog post to once again make clear, forming a company in Hong Kong does not do a thing to make your business operations legal in Mainland China:

Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

In fact, the more you get on the grid in China without actually doing everything the right way in China, the more you make your illegality more obvious and easier to spot. See Quasi-Legal In China. Not the Place You Want to Be andQuasi-Legal in China. Not the Place You Want to Be, Part II.

We are also hearing from many American (and some European companies as well, but we’ll save that for a subsequent post) companies that formed their WFOE in China the “fast and easy way.” Some less than reputable WFOE formation companies will tout how they can form China WFOEs quickly and cheaply and for only around USD $15,000 in minimum capital. What these WFOE formation companies typically then do is form your company as a consulting WFOE in an “easy” China city. Please don’t fall for this. If your WFOE is not going to be in the consulting business, it cannot legally operate as a WFOE in China and it will get shut down. See How To Form a China WFOE. Scope Really Really Matters, Part II. And if your WFOE is going to be operating in Xi’an you do not want it to be formed in Shenzhen, for just a whole host of reasons.

If you are not complying with Chinese laws it is important you move quickly to get into compliance. But it is also important that in moving quickly you not expose yourself to even more and potentially greater problems. To borrow from a famous legal quote, you should move to get legal in China with all deliberate speed.

China company formation done wrong is not going to be your answer.

Today I write to say that things have reached another level for people of all nationalities doing business in China without a legal entity. Today I write to say that doing this — whatever your nationality, puts you at extreme risk of being arrested and put in jail. I cannot go into much detail but I can tell you that over just the last three days I have heard of three instances (in three different Chinese cities) where foreigners (from three different countries) were put in jail for operating in China without a business license and failing to pay taxes on their China income. Jail. Prison. The clink. The slammer. The real thing people. The real thing. One of these cases also involves vague allegations of custom violations, claims for which the Chinese government has never been shy about imprisoning foreigners. See China Customs Violations and How to Avoid Jail Time.

Why are these arrests happening now? I posit the following two explanations:

  1. The arrests are happening because China is concerned about its economy and/or its general situation in light of US trade tariffs.
  2. The arrests are happening as just another “stepping up” of China tax collection efforts.

Again though, these arrests are not just of Americans. It is so early in the criminal law process that it is not clear to me how serious these charges are against those arrested. Will they merely be deported? Have they been arrested with the goal of getting evidence against others? What is it going to take for these people to be freed? Will paying off their taxes with interest and penalties be enough to get them released? See China’s Tax Authorities Want You. Will paying some part of the taxes be enough to get them released? What taxes are being pursued? Income taxes? Employer taxes? Both? Most importantly, is China serious about putting these people in jail for an extended period and if so, for how long.

No matter what the reasons for this most recent and most alarming crackdown, if you are in China right now and if you believe you or your company might be operating in China without a Chinese company when you should have a Chinese company, if I were you I would leave China quickly. I just would. And if you do get detained on your way out, you should as quickly as you possibly can retain a top-tier Chinese criminal lawyer in the city in which you arrested.

That is all. Sorry.

 

UPDATE: A loyal reader emailed me to note how this is the second day in a row that we have warned people not to do something at risk of going to jail. Yesterday, in China Tariffs and What to do Now, Part 1, I passed on advice from my law firm’s international trade lawyers regarding the criminal risks relating to changing the country of origin via transshipping to avoid the tariffs the US is imposing on products from China. This reader pointed out how the devolution of free trade is increasing the risks for companies that operate internationally. I agree with that assessment, but note that it is particularly true for those who are not careful and who are willing to operate close to the line between legal and illegal. Your thoughts?

ADDITIONAL UPDATE:  A Chinese lawyer friend of mine sent me an email stating that “the point here is that operating in China without a WFOE is illegal. This also applies to Internet/SaaS operations operating in China illegally, and you and I both know plenty of those. So long as the operators of these illegal Internet/SaaS operations stay out of China, they will avoid jail. But what about their partners who are operating in China? And what about when they take a two week business trip to China to check up on the situation there? Do you think companies really understand the fire they are playing with here?”