My wildly unscientific observations tell me that about nine out of ten companies that go into China legally end up succeeding. My wildly unscientific observations also tell me that about eight out of ten companies that go into China illegally end up failing within a couple of years. Of the other two companies that went into China illegally, one usually becomes legal within a few years and ends up suceeding and the other one ends up failing a few years later.
I have no idea on the accuracy of my statistics, but I truly do make an effort to keep up with every company that contacts my law firm. I do this by every six months or so sending an email asking them how things are going in China. These emails go to those companies that chose not to retain my law firm, but instead to do things illegally in China, and to those that did. No science here, but a bit more than a feeling….
I thought of all that today when I read in the highly respected Economic Observer of how China is cracking down big time on China Rep Offices. Let me start out by saying that I am generally (not always) not a big fan of Rep Offices and that for every WFOE my law firm registers for our clients, we probably do around one Rep Office. The biggest problem with Rep Offices is that their utility is limited. Rep Offices are not to make money in China. Rep Offices are mostly to be used to market the home office. The Rep Office is not to engage in sales within China. The last Rep Office we did was for a US company that makes multi-million dollar equipment in the United States. The point of the Rep Office was to market that equipment within China, with the contracts for the sale of that equipment to be with the US company and the payments for that equipment to go to the US company and the manufacturing of that equipment to occur in the US, and the shipment of that equipment to come from the US to China. So far, near as I know, all of the sales have been from our US client to US and other foreign businesses doing business in China. These businesses pay our client in US dollars, all outside China, no problem. That is a legitimate Rep Office.
The problem is that Rep Offices are easier and cheaper to form and register in China than Wholly Foreign Owned Entities (WFOEs). This sometimes leads cash-strapped companies to want to start in China as a Rep Office and then later convert to a WFOE. This is usually a bad idea. It is a bad idea because if your China based business operations in China do not legally entitle you to operate there as a Rep Office, you are operating there illegally. Some may believe that operating in China as a Rep Office is better than operating in China without having registered as anything at all, but I am not so sure. I have absolutely no evidence to back this up, but my sense is that if you are going to operate illegally anywhere, you are probably going to be better off being entirely off the gird, than half on it.
Starting as a Rep Office with plans to convert to a WFOE at some later date is also usually a bad idea because the conversion is not likely to be smooth. It is not as though one can start as a Rep Office and then smoothly file one piece of paper with some governmental office saying “I want to convert to a WFOE now, so here is my 10,0000 RMB conversion fee.” No, not at all. The way one “converts” to a WFOE from a Rep Office is more like having to go through all of the rigmarole of shutting down the Rep Office in China (no small task) AND having to go through the whole rigmarole of forming a WFOE from scratch.
I mention all this because I have just learned from the Economic Observer (a highly regarded Chinese publication) that China has stepped up its crackdown on illegally operating foreign Representative Offices. The article is entitled, “China Cracks Down on Foreign Representative Offices,” and it makes a whole lotta sense. To grossly summarize, it says that the Chinese government is sick and tired of full fledged businesses operating in China as Rep Offices and it is going after those businesses that are doing so. It is increasing the fines to 500,000 RMB (around USD$75,000) and stepping up enforcement. The article talks about how the government is looking at a shortfall in 2009 tax collection and going after illegally operating Rep Offices is one of the measures it will be taking to increase collections.
No surprise to me….

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.