China getting paid

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:

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?

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Dan Harris

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

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My 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.

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

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). 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 me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus 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.