China WFOE formation lawyersNot sure why (China government arrest quotas?), but at the end of every year, my law firm always gets a slew of emails and phone calls from foreigners in big trouble in China. In past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario:

Foreigner (disproportionately Northern European) calls to say that they are in their home country for the holidays and they have learned that the “tax man” has come by and is extremely unhappy about the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking reveals that this company has not even come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I very dispassionately tell this person that I don’t know what percentage of foreign companies pay their China taxes, but that the China attorneys at my firm advice all our clients to pay all their taxes and that is in large part because China LOVES going after foreign companies that don’t pay all their taxes AND has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties. I got only one such phone call (so far) this year.

No, this seems to be the year of the busted (pun intended) China WFOE, as we have received one email on this, one Facebook communication (on our China Law Blog Facebook Page), and one phone call. Vaguely summarized, these are two people who were . arrested and put in jail for about ten days and then released and told not to leave their city and one person who was visited by the police and told not to leave his city. All are being “questioned” about doing business in China without a WFOE. Doing Business in China Without a WFOE: Will the Defendant Please Rise. Hard to tell exactly what is going on with any of the three. One vehemently claimed he had paid someone to form a WFOE for him and that person had said he had in fact formed the WFOE, and yet the police said he had no WFOE. So it appears he was scammed. The other weakly claimed he “thought” he had formed a WFOE but my sense is that he never did and now the chickens were coming home to roost for him.

The third one was the most interesting, because he insisted that he had formed a WFOE with a “legitimate” entity formation company but it appeared that company had formed the WFOE as a consulting WFOE and this company (with 18 employees) clearly should not have been a consulting WFOE. I do not know if the entity formation company duped this person by forming the company as a consulting WFOE (this is not uncommon because these are typically the easiest and fastest WFOE to form), knowing it did not really qualify under that scope, or if the foreign company had started out as consulting WFOE and then morphed into something else and then failed to alert the Chinese government, as required. This was the person who was never imprisoned. See Forming a China WFOE: Scope is Key.

All three of these broken/non-existent WFOEs were in second tier (at best) Chinese cities and in all three cases I recommended that the person in extremis secure a really good and local criminal lawyer.

Bottom Line: Check your WFOE. Now. And if you are going to form a WFOE, make sure you do it right. Please. Oh, and one more important thing: many times foreign companies would be better off not forming a WFOE at all and not having any of their own people on the ground in China at all. For more on this, check out Forming a China WFOE: Needed or Not.

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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.