Our China lawyers have been getting a rash of emails lately from foreign companies (mostly from Northern Europe!) that need help in getting paid. These foreign companies typically provided services to Chinese companies and they are not getting paid for having done so. The below is an amalgamation of a few such emails we received:
We have a company registered in Denmark and we recently introduced a client with a large project to a Chinese company. It was agreed that our company would receive a commission for this introduction, to be paid to our Denmark bank account. The Chinese company is now claiming that we first must pay the taxes on the commission and they do not even know how much those taxes will be. We are not resident in China (our company has no office in China) and we will need to pay taxes on our company income in Denmark. Is what this Chinese company is saying accurate or are they are just trying to cover some of their tax liabilities by deducting an amount from our commission fee or are they using this as a ploy not to pay us at all? How much in taxes will we need to pay?
Our response is usually something like the following:
Probably yes to all of your questions. What they say is almost certainly true, especially if you do not have a written contract or if your written contract is not a Chinese appropriate contract or it does not make clear who should pay the taxes or it was not written with taxes in mind. All of this means there is a good chance your company will be out a substantial amount of money here. How much will depend on what exactly your contract says the payments are for but it could be 40% of whatever you are owed. Even worse, if your contract or your invoices were not drafted properly (and I fear they were not), you may never get paid anything. Your Chinese counter-party will likely act as if it is concerned about paying you but odds are that it would like nothing more than to be able to hide behind all of this Bank of China and tax stuff to never pay you. I apologize for adding to your problems but I am also concerned that the Chinese government will view you as having done sufficient business in China such that your not having a Chinese company has put you and others at your company at serious risk. For this reason, I strongly urge that nobody from your company go to China unless and until these various company and tax issues are resolved. For more on all of this, I urge you to read the following:
- China Payment Risk and China Payment Risk, Part 2
- Service Companies in China: How to Get Paid
- Doing Business in China Without a WFOE: Will the Defendant Please Rise
About half the time the companies that contact us with this problem come from one of the following Northern European countries: Denmark, Norway, Sweden, Germany, Switzerland or Finland. On top of this, a grossly disproportionate number of the frantic calls/emails we get from companies facing major tax problems in China come from those same countries. Since less than 10 percent of our client base is from those countries (because we have a Germany licensed lawyer, this number is relatively high) the “in trouble” phone calls we get from Northern European companies are way out of whack to what they should be. Why is this the case? I will quote from a China consultant friend of mine from Denmark:
We are not so used to using lawyers for our deals and we are used to trusting governments and getting help from them. Also, we have a tendency not to believe the Chinese government operates efficiently or fairly and so we think that they can and should be avoided.
I don’t know if this China consultant is right, but in my experience Northern European companies both fail to use lawyers enough to avoid problems in China and fail to take sufficiently seriously the problems once they happen.
What have you seen out there?