With the last quarter of the year approaching and China increasing its scrutiny of foreign businesses operating in China, now seems like the right time to talk about what such businesses (WFOEs, joint ventures, representative offices) should be doing to protect themselves on the compliance front.
Let me start by saying that if you have familiarized yourself with the applicable Chinese laws and your business has done its utmost to comply with those laws, the odds of your company getting into legal hot water in China are low. My firm has helped countless foreign companies deal with China compliance failures, and very rarely have we concluded that our client was singled out for no good reason. Even when our client had done nothing wrong, we could still understand why the Chinese government had initially thought otherwise.
On top of this, the foreign companies we represent have become much savvier in realizing the need to remain in compliance. It has truly been years since any of our clients have excused their non-compliance by claiming that “everyone is doing it.” And yet we still get plenty of calls from companies that make this excuse after they have been caught operating illegally. Guess what — in China like pretty much everywhere else in the world — this is no excuse.
But what exactly should you be doing now to ensure that you are in compliance with Chinese laws? The following is a basic list.
Corporate Compliance. Are your company’s activities still covered by the scope of business used during registration? If you registered as an import/export company and you now own a factory, you should make some changes. Is your business in a different location from that listed on your business license? That requires a change also. Is the the person listed as your company’s legal representative still with your company and still the person you want in this position? What about the general manager? The supervisor? Have there been any changes to the parent company?
Employment Compliance. China’s employment laws are complicated, localized, and pro-employee. Make sure you have appropriate written employment agreements with ALL of your employees in China, domestic and foreign. Review and update your employee manual (a/k/a Employer Rules and Regulations). Review and update all other employment-related documents, from offer letters to severance agreements and everything in between. Make sure you otherwise stay in compliance: are all of your non-Chinese employees’ work permits and residence permits up-to-date? Have you secured approval from the local labor bureau for any employees under a non-standard working hours system? Have you secured all necessary renewals for such employees? Are you paying into the appropriate social insurance accounts for each employee?
Tax Compliance. It is essential to engage a competent local accounting firm. Your accountant must of course understand Chinese tax law, but they should also have at least a rudimentary understanding of your home country’s tax laws as well. For instance: make sure your transfer pricing is current and accurately reflected in your contracts and that your profit margins are high enough to keep China’s tax authorities at bay.
IP Compliance. We constantly get calls from foreign companies doing business in China that have let their China IP registrations fall into disorder (or never organized their IP in the first place). Even if you registered everything appropriately when you first came to China, have you kept up with newer products/services or brands? Are you registering design patents before you release your products? Are you keeping sufficient evidence of trademark use to fend off a non-use cancellation? Have you properly drafted and registered any trademark license agreements? Are you taking full advantage of the Chinese trademark system?
Contract Compliance. Many foreign companies do business in China in a way that makes it all but impossible for them to enforce their contractual rights. Do you have written agreement with all your major sources and clients? Are you using a lawyer to draft your design/manufacturing/licensing/purchase/etc. agreements? Are these agreements in Chinese? Enforced under Chinese law?
Spend the time now on the above to avoid having to spend a lot more time later.