China LawyersIn the original post in this series, Getting Money Out of China: It’s Complicated, I wrote on how incredibly frequently Western companies have been seeking the help of my firm’s China lawyers in an (often desperate) effort to get money out of China so they can get funds due to them on all sorts of deals. On our China Law Blog Facebook Page, I linked over to the original post and described it as “In which we begin to answer THE question everybody is asking.” That has turned out to be no exaggeration as that Facebook post alone has generated nearly 10,000 views. And the requests for help from American and European companies seeking assistance in getting paid from China show no signs of letting up. But as I noted in part 2 of this series, most of the requests deal with purchasing single family homes in the United States and “slapping together 3-5 single family homes and calling it a fund is not likely to make a difference with the Chinese government allowing money to leave!”

In part 2, I discussed how the Chinese government seems to apply a three part test in determining whether to allow funds to leave China to go to a Western company. Based on the many deals on which our China attorneys have worked, and the reports we get from our clients and their bankers and financiers, and from China consultants and bankers and financiers with whom we regularly share information, we see legitimacy and benefit to China and deal structure as the three key elements. Part 2 focused on legitimacy.

In part 3, I looked at the “benefit to China” element and in part 4, I looked at what is actually happening in China that is slowly down payments from China.

In this part 5, I will look at what has historically been the primary reason why foreign companies face China payment problems: how they structure and write up their deal. This post will also discuss what you can do to increase your odds of getting paid.

The one thing you as the foreign company can control is whether you provide your Chinese counter-party with your product, your company shares, your assets, or your services before you receive payment for those things, or after.

With all of the recent problems in getting money out of China, it makes sense that when doing a deal with a Chinese company or individual, that you demand a nontrivial amount upfront, and confirm payment before you even lift a finger. Do this to prove that the Chinese side can in fact make a payment on the contract. The renminbi is still a nonconvertible currency, and aside from a $50,000 annual exception, any time a Chinese entity wants to send US currency to a foreign entity, it needs to get approval from the transmitting Chinese bank. This generally means that the parties have executed a contract for goods or services that are acceptable for foreign entities to provide, and that you have submitted a formal invoice in a form acceptable to the bank – because the bank in turn usually needs to get approval from government authorities. Sometimes this approval never comes, and the Chinese counter-party is unable to make any payments at all. It’s a lot better for you to find this out at the beginning.

To get paid from China, there have always been and for the near future will always be two critical points you must consider: documentation and tax.

Documentation. When a Chinese company seeks to send you as a foreign company money, it is not a simple matter. The Chinese company must go to its foreign exchange bank. At the bank, RMB must be converted to U.S. dollars or some other convertible currency. This conversion is subject to strict rules issued by the State Administration of Foreign Exchange (SAFE). The foreign exchange bank acts as the agent for SAFE in enforcing the rules. These rules were originally designed to protect China’s foreign exchange reserves but now they are used to prevent capital from illegally leaving China. Payment of falsified invoices is one of the primary ways capital illicitly leaves China, so careful review of all transactions is therefore required to prevent fraud.

To comply with these rules, the Chinese company is not permitted to simply make a wire transfer request; it is required to provide documentation proving there is a legitimate underlying transaction for which payment is being made. The following is the basic documentation usually required for money to flow:

  • A formal written contract, executed, dated by both parties and sealed by the Chinese party. Though not officially  required, it is best if this contract includes a Chinese translation.
  • A Formal, written invoice, signed and dated by the foreign service provider. There must be a separate, signed invoice for every required payment. Again, though not required, it is best if this invoice includes a Chinese translation.

These first two requirements are mandatory and will always be required. Depending on the specific situation, the foreign exchange bank may also impose the following additional requirements:

If the invoice amount is high, or if the bank otherwise suspects fraud, the bank may request proof of existence of the foreign company. The proof required varies from bank to bank. For some banks, a copy of a business license is sufficient. Other banks will require a formal certificate of good standing from the secretary of state or a related document. China just keeps getting tougher on this front.

If the bank determines that the payment is a royalty for a technology license or similar licensing agreement, it will require the contract be registered in accordance with the requirements of Chinese law. Depending on the locality, this registration can take from three days (Shanghai) to six months or more (Shandong Province). Our China intellectual property lawyers register China licensing agreements as a matter of course, and you should too.

Banks can impose other requirements, depending on their mood and their concern about the legitimacy of the transaction. The bank controls the situation and you have no real standing to discuss the matter. No payment can be made until the bank is satisfied and the bank has no incentive to approve the transaction. Delay in processing payment for services is therefore the norm rather than the exception.

Your Chinese counter-party is going to be better positioned than you to secure China bank/government approval and it is therefore essential then that your deal and your contract with your Chinese counter-party both put the onus on the Chinese company and incentivize it to get the job done.

Taxation. It comes as a shock to many foreign service providers that the amount paid to them may be subject to Chinese tax. The Chinese tax authorities deem all service work provided to Chinese clients as Chinese source income. Licensing fees are also usually subject to tax. As with the SAFE rules, the foreign exchange bank serves as an agent for the local tax office to ensure that the correct amount of tax is imposed and paid. No wire transfer can be made until this happens.

We have seen tax amounts imposed ranging from 10% all the way to 40% of the invoice amount. Even the same tax office will take an inconsistent position on the amount of tax to impose. One payment will be taxed at 10% and the next payment for exactly the same services will be taxed at a substantially higher rate.

The resolution of the tax issue is critical because the invoice cannot be paid until the tax amount is calculated and paid. Your Chinese counter-party acts as the agent for the foreign service provider and pays the required amount on behalf of the foreign party. Since the total amount paid by the Chinese company does not change, it has virtually no incentive to work with the tax office to lower the tax amount unless your contract with. Since you, the foreign company want to get paid as soon as possible, the incentive for the Chinese company is to agree with whatever the tax office decides and to make the tax payment as soon as possible without complaint about the amount imposed.

The amount of tax can be high and the time required for processing can be very long. It is therefore important that you understand the issues and enter into an agreement with the Chinese party on how to proceed. Under international commercial practice, it is most common to simply provide that 1) the Chinese side is liable for all taxes imposed by the Chinese government and 2) the amounts payable by the Chinese side are net of taxes. That is, the amount invoiced by the foreign party must be paid in full without regard to any taxes imposed in China. This provides certainty to the foreign party and places the burden of dealing with the complex, uncertain and constantly changing Chinese tax system where it belongs: on the Chinese party. Since the Chinese party is responsible, the Chinese party will then have the appropriate incentive to advocate for the lowest tax possible. Certainly the Chinese party is better positioned to do this than you are.

It is common for the Chinese party to strongly resist this standard approach and to seek to place all of the risk of the Chinese tax system on you, the foreign party. This means you must consider whether to abandon the transaction or move forward without certainty on the amount of payment you actually will receive. There are various complex ways to mitigate the risk of tax payment, but these measures must be negotiated carefully in advance.

Any time you enter into a contract with a Chinese company that requires it pay you outside of China, there is risk of delay and there is risk that no payment will ever be approved by the Chinese bank. It is therefore important that you confirm the ability of the Chinese side to make payment very early. Usually we provide in the contracts we draft that the Chinese side will make an initial payment before any substantial work is done or anything of much value is sent.

We do this to determine how quickly the payment will be processed and the tax that will be imposed on payment. Often, the Chinese side itself has no idea what will be the result.

We also often get called by service companies upon learning that their payment is going to be delayed and taxed heavily. By that point, there is little we can do.

Please do not let your company be another name added to the China payment casualty list.

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 (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.