Two of my firm’s Spain lawyers are in town this week and they yesterday explained to us the advantages for foreign countries to form Spain entities before going into Latin America and the Caribbean. They explained how Spain has long-standing, well-tested agreements with 19 such countries that not only provide favorable treatment, but require these 19 countries to in all respects treat Spanish companies exactly as they treat domestic companies. This privileged position for Spanish companies has led companies from all around the world to set up a Spain business entity for going into the Caribbean and Latin America.
At the start of the e-commerce boom, our international lawyers did a steady business with mostly European companies that wanted us to set up United States companies for them so that they would appear more trustworthy to American consumers shopping online. Over the years we have also formed U.S. companies for many service companies (especially in the global construction industry) that want to bid on big projects as an American company rather than as a company in a country whose construction prowess is not viewed as highly,
And then there was the period in which we formed countless companies for Chinese businesses that wanted to return to China as a U.S. company so as to be able to secure various tax and other benefits China was giving to foreign companies to spur foreign direct investment. See China’s New Foreign Investment Law — Less Than Meets the Eye. My personal favorite is forming United States companies for foreign companies in countries where domestic businesses are far more likely to get shaken down by government agencies and/or local gangs than foreign companies.
What’s all this got to do with China though?
Let me explain….
If you have not been living under a rock for the last year you know that relations between China and the United States/most EU nations/Australia/Japan/South Korea/Vietnam (just to name a few) have not exactly been great of late. But the frostiness of those relationships is nothing as compared to the tension between China and Canada. Earlier this week, China imposed the death penalty on a Canadian convicted of drug smuggling, after previously having sentenced this person to 15 years and yesterday, China threatened reprisals if Canada bans Huawei from its 5G networks. If you are a Canadian company and you need to realize that “business as usual” in China or even with China is no more.
So let’s just say you are a Canadian company looking to form a WFOE in China today. Do you go into China as a Canadian company or do you at . least consider forming a new company in some other country first and then using that third country company to go into China? Six months ago, our China WFOE lawyers would not even have pondered this question but now we do. This is not a simple question because forming a new company in a third country has all sorts of costs and because China requires you reveal ownership of your WFOE forming entity, forming a new third country company must be done in such a way so as to comply with China’s WFOE laws while at the same time not revealing the downstream Canadian ownership. How to Form a China WFOE: Revealing Investor Ownership is NOT Optional.
What if you are a Canadian company that has for the last five years successfully sold your factory equipment into China? Should you form a new sales entity in a third country so as to increase the likelihood of being able to maintain sales? No way to answer that in a blog post, but certainly this should be considered. If you have a Canadian and a Costa Rican passport, which one do you use on your next trip to China? This one is easy: welcome to China señor.
Welcome to the frenemy era. Welcome to the New Normal.