China WFOE formationThe Chinese media has lately been replete with stories about corruption investigations against Huang Xingguo, former acting Party chief and mayor of Tianjin Municipality. Whenever I read about something like this, I always wonder how many foreign companies will get caught in the crossfire.

How does that happen? Let me explain with an example of a China law story I never tire of telling.

Many years ago, an American company retained my law firm to form a WFOE in a fairly remote China city. Remote in terms of foreign companies anyway. This American company had a Chinese General Manager based in that remote city on whom it relied for pretty much everything. Very early on in the WFOE formation process, it became clear to our China lawyers working on the WFOE formation project that there was (and would continue to be) tension between how our China lawyers wanted to form the China WFOE and how the Chinese General Manager wanted to form the China WFOE. You see, we wanted to form the China WFOE completely by the book, but the Chinese General Manager viewed us as naive and kept insisting that he could do it much faster and with virtually none of the formalities because he had friends in the government. So we put it to the owner of the American company: either give us full control over how this WFOE formation is going to be done or just fire us. Because having us involved and paying lawyer fees to do the WFOE formation “the Chinese way” (the General Manager’s term, not mine) makes no sense at all. The American company agreed with our assessment and told us that it had to go with its General Manager because without that person it would have no Chinese company. We parted on shockingly amiable terms.

So amiable in fact, that about two years later the owner of the American company wrote me to say that though it had managed to get the WFOE formed really easily and really quickly, Beijing had come in and audited the local government and shut down a bunch of improperly formed WFOEs, including theirs. Beijing had come in after terminating a whole crop of local government officials for corruption and then, as it so often does, it throws out a fair amount of the bath water (our client’s WFOE for instance) with the bath (the officials who were terminated and jailed). This sort of thing goes on all the time in China.

So if you have a Tianjin WFOE now would be a good time to go back and figure out whether you have one that is legitimate enough to withstand what looks like will be coming down the pike. And if not, you should do whatever you can to shore it up or even just prepare to have to tear it down.

Just saying….

Bottom Line: If you are not operating legally in China, there will come a time when you will pay the price for that. Going after American companies operating illegally in China is low hanging and lucrative fruit for the Chinese government and it is just one of the ways we see China retaliating against Trump. The Chinese government has stepped up its law and order efforts and that has meant that time is coming more often these days for foreign companies doing business in China. China’s Tax Authorities Want You.

 

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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.