Basics of China Business Law

China employment lawyersThe issues related to China employee probation are usually more complicated than they first appear and though many of our employer clients and potential clients are telling us “we get it now,” our China employer audits consistently find the opposite to be true.

Let’s consider a hypothetical based on an amalgamation of some document-based HR audits we performed for China employers. Employer and Employee enter into an employment contract that does not specify either a probation period nor a term of employment. The contract provides for a monthly base salary amount. For the first six months of employment, Employer pays Employee an amount less than the base salary amount specified in the contract. Employee later resigns and brings a claim against Employer for the six month difference between her reduced rate and the contract amount. Employer argues it does not need to pay because of a provision in its Employer Rules and Regulations stating that all new employees have a six month probation period during which they receive a reduced salary — it even provides a specific salary amount for the probation period. So the basic issue is whether the employer and the employee agreed on a probation period.

They did not.

There was no explicit agreement between the parties regarding the probation period. Under Chinese law, the probation period is not one of the mandatory items that must be included in an employment contract. This essentially means that an employer that wants a probation period to test out a new employee must clearly describe the probation period in the employee’s employment contract. An employer cannot unilaterally impose a probation period on an employee and that means that an employer that wants to pay a reduced rate to a probationary employee must explicitly provide for that in its employment contract.

Note also that because the cited provision in the employer rules and regulations applies to all new employees it could be deemed illegal and unenforceable for a couple of reasons. First off, it fails to exclude certain categories of employees for whom a probation period is not permitted. For example, Chinese law prohibits an employer from setting a probation period for part-time employees. For that reason, if the employer applies this provision to any of its part-time employees, it is in violation of the law. In addition, the term of the probation period should be proportional to the term of the employment. Specifically, for an employment term of more than three months but less than one year, the probation period cannot be more than one month; for an employment term of one year or more but less than three years, the probation period cannot exceed two months. The employer can only use a six-month probation period for 1) an employment term of three years or more or 2) an open-term employment arrangement. Unless the employer always brings on new employees under either of those circumstances, this provision needs to be revised to accord with the law.

Note another mistake made by the employer in the hypothetical above: it fails to clearly specify a term of employment in the contract. What this usually means is that the employer will be “stuck” with the employee indefinitely as the employee becomes an open-term employee, which basically means there is no definitive end date for the employment relationship.

Our China employment lawyers see problems related to probation periods far too often — well over 50 percent of the time for companies that have or seek to use probation periods. To ensure you as a China employer are in full legal compliance, you should check both your employer rules and regulations and your individual employment contracts. If you find they contain a provision similar to the above, you should update your documents now.

 

China scams. China attorneys. China lawyers.

Recent business confidences surveys conducted in China show a downturn in the Business Confidence Index for small and medium -sized manufacturing companies of all types, falling to its lowest level since the 2008 financial crisis. The decline in business confidence is the result of features built into the Chinese economy.

This declining BCI shows that economic stress on SME manufacturers in China continues to increase. This is a long term trend, and any resolution of the trade war likely will not impact this general trend. As a result, China based non-government economists are predicting a wave of plant closures and bankruptcies that will ripple through the entire PRC SME manufacturing sector over the next year. The large state owned enterprises will not be significantly impacted; the impact will be primarily center on small and medium enterprises. This means bankruptcy and closures both in the private sector and in the provincial and local state owned manufacturing sector.

These closures and bankruptcies do not reflect the condition of the Chinese economy as a whole. The companies that will be swept away are weak and technologically backward entities that would have been eliminated many years ago in a fully market economy. The Chinese system tends to keep these weak players alive far longer than is economically rational. Then the life support is suddenly removed and they all die at once. This sudden rise in business deaths is what is being predicted for the next decade.

The concern for foreign buyers of Chinese product is that an increase in closures and bankruptcies will also mean an increase in scams and frauds. When a factory in China knows it will be shutting down, its owners often work to make a final score. They set up a deal that allows them to bring in as much cash as possible in the short term. The owners then take the cash as a final bonus, shut down the company and then move on. No bankruptcy is involved. They just shut the doors.

In implementing their scam, the factory owners are faced with a problem. If they commit fraud against another Chinese person or entity, they likely will be pursued for retribution. That retribution may be criminal investigation and prosecution through China’s criminal justice system. Or the retribution may be informal action carried out by an effective criminal gang system active in China.

Perpetrating a scam on a Chinese entity involves considerable risk. On the other hand, scams against foreign buyers have hardly any risk at all. When a foreign buyer is cheated, the Chinese police often do nothing at all and there is virtually nothing your Embassy or Consulate can do beyond put the names of the offenders on a list. The Chinese courts can do little to nothing as well and the informal methods of retribution are rarely available to foreign entities. For this reason, when it comes time to do that last big scam or series of scams before shutting down the factory, foreign buyers will always be the preferred target.

The scams at this stage follow a regular pattern. The three primary patterns are as follows:

Model Scam Number One: It is typical for Chinese factories to require buyers make an initial deposit on the date it accepts the buyer’s purchase order (PO). A common structure for China suppliers is 30% down and 70% paid prior to shipment. Using this structure, a factory that knows it will shut down will take the deposit, do no work at all and simply fail to deliver. If the factory does this with enough foreign customers, it can collect a substantial sum for funding its owner’s retirement.

This kind of scam is hard to detect and for that reason is very effective. The problem for the scammer is that in a declining market, the total return for the scammer may be disappointingly small. So to milk more from unsuspecting buyers some factories will go for an even bigger score. They go to their buyers and offer to sell their product at a substantial discount. But the price for this discount is a substantial increase in the order amount and an increase in the deposit from 30% to 50%. The Chinese side says: “It is a great deal for you. Make a full year of orders all at once and you will save big money.” Using this scam, the Chinese factory collects a much larger deposit amount and the owners shut down the factory and disappear.

In China Tariffs and What to do Now, Part 1 we focused on how Chinese factories were offering to illegally transship their products to Malaysia or Thailand or Vietnam or Bangladesh or the Philippines (mostly), thus avoiding U.S. tariffs:

But before I discuss what companies do about their tariff problems, it is far more important I start out discussing what they should NOT do. They should not have their China products shipped to Taiwan or to Malaysia or to Thailand or Vietnam or anywhere else and then have those products shipped to the United States as though they are not from China. Doing this sort of transshipping can and does lead to massive fines and to JAIL TIME. I am not kidding. I am starting out with a post on what not to do because the risks from this one thing far exceed the benefits of the things we will be discussing in our subsequent posts.

And yet, many are telling us that their Chinese factories are suggesting these exact sort of transshipments and giving assurances that they are legal or that nobody ever gets caught, neither of which are remotely true. Step back for just a second and ask yourself why you are even considering taking legal advice about United States customs law from a Chinese factory owner or salesperson who has all the incentive in the world to sell you Chinese products and very little incentive to keep you out of jail. Please, please, please don’t fall for that. Please.

Chinese companies and the U.S. importers of their products often believe they can get around United States tariffs  by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, Thailand, Bangladesh, India, [or some other country] before sending them on to the United States. Their plan is to relabel the products with a new country of origin and then export the products to the US free of China , without US Customs and Border Protection (“CBP”) ever being the wiser.

I bring this up because many of the same factories that are making this transship offer are at the same time offering to discount their prices in return for a large increase in the deposit. This sort of “double” offer to illegally avoid tariffs and raise the down payment amount is a terrific indicator of a brewing scam.

Model Scam Number Two: Chinese factory sells a standard product: usually something like a chemical or a basic raw material or a food product. As with scam number one, it pumps up its orders by offering a substantial discount — sometimes even too good to be true. In exchange for the discount, the factory requires full payment before shipment. Then the factory ships a non-conforming product, collects the payment and disappears.

The below are some examples brought to the attention of our China lawyers by foreign companies that were scammed:

  1. Container of custom cut food product: 25 containers, neatly packed. The first layer of these cartons contain conforming product. The rest of the container is filled with bricks.
  2. Barrels of a granulated chemical (say citric acid). The top two inches in each barrel is conforming product and the rest is filled with sand. Or barrels are for a liquid chemical (say sulphuric acid). The barrels are filled with salt water.
  3. Containers filled with frozen food product, which when thawed, reveal that the food is rotten. In my own experience, this happened with 8 containers of frozen salmon. The decay was so bad that the containers were declared a hazardous waste site and the buyer was required to pay the substantial cost of a hazardous waste clean up.

Model Scam Number Three. The owners of the Chinese factory contact a foreign customer (oftentimes a regular buyer who gets all or most of its product(s) from the dying Chinese factory) and offer to sell their business at a unrealistically low price. In exchange for this low price, the deal must close very fast. This fast close means no time for due diligence and no involvement of experienced and trustworthy China lawyers or consultants.

The foreign buyer pays the purchase price by wire transfer to the Chinese factory. Then the buyer travels to China to inspect its factory and here is what they find:

— The factory building was rented, not owned. The building is stripped. Not only has all the machinery been removed, but even the window glass and plumbing fixtures are gone.

— The bank account has been emptied by the former owners and they have disappeared.

— The landlord shows up and demands a full year’s rent on the factory that has not been paid. 200 hundred workers show up and demand 6 months back salary. The local government shows up and demands one year in back taxes. To make it even “better” the local government colludes with the workers to take the passports of the foreign owners, lock them up in a local hotel, and then announce that they will not be able to leave town until all back payments are made.

The above sort of scams are committed in China all the time. However, their frequency and severity increases whenever there will be a wave of factory closures and bankruptcies. This is what is predicted for the next couple of years for China, so particular care is now required. For some of the things you need to be doing now to reduce your chances of problems stemming from this wave, check out last week’s post, China’s Economic Slowdown and YOUR Business: The Times they are a Changin’.

And be careful out there.

Forming a China WFOE
Forming a China WFOE is not kids play

If I were to list the ten biggest/most common mistakes the China lawyers at my firm see committed by foreign companies doing business in China, not forming a WFOE and forming a WFOE unnecessarily would no doubt both be on that list.

Let me explain….

We have written constantly about the risks of doing business in China without a WFOE. For more on that, check out the following:

Today’s post is going to focus on the mistake of forming a WFOE in China when no such WFOE is actually necessary or advised, an incredibly common and very expensive mistake.

It is expensive and time consuming (usually 3-5 months) for foreign-owned businesses to be formed in China. The following is the most basic list of what you need to do to form a Chinese WFOE and then operate it legally and safely in China:

  • Determine whether your business model is legal for a foreign business in China.
  • Form and register your WFOE in China. This will typically be a WFOE, a Representative Office, or a Joint Venture.
  • Lease property (a prerequisite for the registration process above).
  • Draft an employee manual and execute written employment agreements with all of your employees.
  • Open a bank account with a Chinese bank.
  • Figure out and pay all of your taxes, including company taxes, employee taxes, and social insurance payments for your employees.

It is complicated and expensive to form a WFOE in China and it is complicated and expensive to operate a WFOE in China. Very. To do so in most cities, you need good office space and you need employees and you need to meet with the tax authorities four times a year and you need to calculate and pay all sorts of taxes and….

To make matters even worse, shutting down a WFOE makes forming one seem like a piece of cake. See Closing Down a China WFOE: You Can Run But You Can’t Hide (Part 1) and Closing Down a China WFOE: You Can Run But You Can’t Hide (Part 2). Let’s just say that I once heard a China accountant at a seminar analogize it to a colonoscopy. Not kidding.

Because forming a China WFOE is very expensive, there are scads of companies in every tier 1 or tier 2 China city that exist solely or mostly to form China WFOEs. This means that if you go to one of these companies to form a WFOE the odds of them telling you that you do not need a WFOE are slim to none. The odds of them questioning you on why a WFOE might or might not make sense for you and then analyzing whether it does or does not are about the same.

The result of this is that countless foreign companies go through the pain and expense of forming a WFOE they don’t need, then operating a WFOE they don’t need, and then closing down a WFOE they never needed in the first place. Ugh.

Even worse are the entity formation companies that encourage foreign companies to start with a Representative Office that the foreign company does not need and then a year or two later encourage that foreign company to shut down that Rep Office because a WFOE is now allegedly needed and then charge for shutting down the Representative Office and for forming the new WFOE. This allows the entity formation company to charge for two additional processes that were never needed in the first place — forming and shutting down the Rep Office. Ugh. Note: Rep Offices cannot directly employ anyone nor can they get paid in RMB and just to give you an idea of the utility of China Rep Offices, we have not written about them since 2013!

My law firm and most law firms (both foreign and Chinese) do not play these tricks. What we do before forming any company in China (WFOE or otherwise) is to determine whether any such company makes sense at all. In Forming A China WFOE: The Agony and the Ecstasy, I wrote the following:

At least once a month, one of our China lawyers will get a call from someone asking us to form a “China company” for them before they start doing business in China “next month.” Half the time when we get this sort of call, the better solution is not to form a China entity at all.

That “half the time estimate” is still true but I should also mention that many times when our China lawyers get a call from someone having a problem with their WFOE, additional discussion reveals they should never have formed their WFOE in the first place. Ugh.

Do YOU need a China WFOE? Generally speaking there are two main situations when a China WFOE is legally necessary and a third situation where it can make good sense to have one, even though not legally required.

It is legally necessary to have a China WFOE (or some other legal Chinese entity such as a China Joint Venture) if you will have one or more employees in China. Note that you should assume that anyone you are paying in China as an “independent contractor” is in fact an employee. See Four Common and Dangerous China Employee Hiring Myths, in which Grace Yang, my firm’s lead China employment lawyer, lists “Hiring without a Chinese legal entity (WFOE or Joint Venture) is fine so long as you only bring on independent contractors.” as Myth 1.

It is also legally necessary to have a China WFOE (or some other legal Chinese entity) if you are going to get paid in RMB.

If neither of the above are or will be true for you, you probably do not legally need a WFOE.

There are though many instances where a WFOE is not legally required yet forming and having one still makes sense. If you sell products or services to universities, banks, hospitals, governmental bodies, SOEs or Chinese businesses with any sort of governmental ownership it might make sense for you to have a WFOE, even if you are not legally required to do so. These sorts of businesses are often pressured by the Chinese government to buy from Chinese entities and if you don’t have a WFOE your sales could be way less or non-existent. We also have seen instances where having a WFOE is worth the money and pain because it increases sales by convincing Chinese buyers that you are in China to stay and that there will be someone local to whom they can go if ever they have problems.

But just to complicate things even more, our China lawyers often see instances where a foreign company formed a China WFOE to hire employees in China and/or to get paid in RMB in China and yet would have been better off without having done so. These are cases where the foreign company did not realize that it had better options for accomplishing its China goals without need for a China WFOE. The following are the two most common examples we see of this:

1. Foreign company forms a WFOE in China to sell its widgets. Foreign company hires two employees in Shanghai to do this after having been convinced that it needs a WFOE because it will have employees in China and because it will be getting paid for its widgets in RMB. In Want Your Product In China? Try Using A Local Distributor, an article I wrote for Forbes Magazine, I emphasized the benefits of selling widgets to China through a distributer, rather than going it alone:

When foreign companies want to get their products into China, they often think they only have two choices: go it alone via a China WFOE or form a joint venture with a Chinese company.

Joint ventures are notoriously risky, while a WFOE can take three to five months to form, leaving you with a company in China to operate (that includes bookkeeping, hiring employees, etc.).

But there’s actually an easier option. Companies can enter into a distributorship relationship with a Chinese company (or companies).

Use a Chinese distributor

From a business perspective, taking most products into China (be they industrial or consumer) is a massive task for any foreign company. China is a big and diverse country and it should be viewed as many markets, not just one. Using an experienced Chinese distributor is oftentimes the best way for to sell your product in China.

And from a a strictly legal perspective, distribution (and reseller) relationships between foreign and Chinese companies are fairly straightforward.

Distribution contracts with Chinese companies can have much in common with U.S. distribution agreements, but they also almost always also have stark and important differences.

Licensing your brand name and/or your technology is another excellent (and far less risky) way to profit from China without setting up and operating a WFOE there. See China Technology and Trademark Licensing Agreements: The Extreme Basics.

2. Foreign company forms a WFOE to hire one or two people to handle its China quality control. There are many very good and very inexpensive QC companies in China and oftentimes that is a better way to go. And here’s the thing. Oftentimes if you want a QC person in each of the two or three cities in which you are having your products made, you need to form a separate WFOE (or at least a branch office) to be able to legally hire employees in all of those cities and then deal with China’s highly localized employment laws.

Bottom Line:  Forming and operating a WFOE in China is difficult and expensive and you likely have all sorts of other options. It would behoove you to explore those options before you form your WFOE.

China lawyers
Halfway for a China WFOE is not good enough. Photo by Jacqui Sadler

Earlier this week, I wrote about how China’s economic slowdown should impact how you do business in China and even with China. Today I focus on why this slowdown (and if you are an American company, the US-China trade war which is precipitating that slowdown) are why now is not the time for you to be operating quasi-legally in China.

And yet, there seem to be as many companies operating this way in China right now. For nearly a decade now, we have been stressing the need to have a WFOE if you are going to be doing business in China. Along these lines we have stressed again and again how independent contractors are almost never legal in China and how if you have “employees” in China you need a WFOE. For more on this and for how our tone on this has become increasingly strident as the Chinese government has consistently and unrelentingly stepped up both its enforcement of this requirement and the penalties for failing to comply. For more on this, check out the following posts from the following years:

  1. Doing Business in China Without a WFOE: Will the Defendant Please Rise. In this post from August, 2018, we wrote about how our China lawyers are increasingly hearing of foreigners getting arrested and imprisoned for operating in China without a WFOE.
  2. Doing Business in China with Deportation or Worse Hanging Over Your Head. In this post from March, 2017, we wrote about how our China lawyers were increasingly hearing of foreigners (especially Americans) getting deported from China and being cut off from doing business in China for having operated in China without a WFOE.
  3. China’s Tax Authorities Want You. In this Forbes article from May, 2015, I wrote about how our China lawyers were increasingly hearing of foreigners getting hit for massive taxes for having operated in China without a WFOE.

With all the pressure to have a WFOE in China, our China attorneys are now increasingly hearing of foreign companies forming a China WFOE but then continuing to operate illegally in China. This is more common than you would probably think and it also seems more common than ever.

Let me explain.

Forming a WFOE is not the same thing as operating legally in China. In fact, it is so different that around a decade ago my law firm made the decision not to simply form WFOEs for clients and then walk away. At that time we ceased doing what we called pure WFOE formations. Instead, if anyone wanted us to form a WFOE for them, we would do so only if they retained our law firm for what we called a WFOE formation package. Our explanation for this was that operating legally in China with a WFOE requires a lot more than just a WFOE and we did not want to charge clients to form a WFOE only to have them get in trouble with China’s authorities for operating illegally. One of the things we always (as in 100% of the time) require as part of our WFOE formation work is what we call our China employment package, which consists — of among other things — our drafting dual language China-specific employment contracts for all WFOE employees and Employer Rules and Regulations to go with those. See China Employer Rules and Regulations: A Must Have No Matter Your Size.

Unfortunately, many law firms and companies that do WFOE formations are not concerned with launching China WFOEs that operate illegally from day one. I say this because in the last year or so our China lawyers are hearing more and more from foreign companies with WFOEs in China that are operating illegally in China. I find this very distressing because it strikes me as so illogical. Why spend the substantial time and money to form a WFOE if doing so is not going to make you legal in China? Why form a WFOE telling the Chinese government that you are there only to make it so much easier to be discovered for operating illegally.

What are these WFOEs doing illegally? Two main things, both centered around trying to reduce costs by avoiding taxes. One is setting up a WFOE and doing various things to illegally reduce the WFOE’s income taxes. We get maybe one call every six months from someone caught for this and we tell them that the only solution is to try to negotiate down the total figure for back taxes, interest and penalties, and to do that from outside China. The other thing is China WFOEs that hire China “employees” through their foreign company and not through their WFOE. They do this to avoid having to pay the approximately 40% on salaries China employers are to pay in employer taxes and benefits and to avoid having to withhold the approximately 20% they are to withhold on behalf of their employees for their employees’ individual income taxes.

Way back in 2010, we did a post, Operating Illegally In China. Half-Assing It Does Not Help. In that post we explained how operating quasi-legally so greatly increases your risk of getting caught that you would actually be better off operating fully illegally. Back then, the issue was forming a company with a Chinese citizen (which though less common today than back then, is still an issue). Here was our position on that back then (and now too):

Legally, you pretty much cannot go into business with Chinese citizens without a joint venture. China recently started allowing partnerships, but the impact of that is still not clear.

You pretty much have two options:

1. You form a WFOE and you own it. Forming a company in Hong Kong is no different for China purposes than forming one in the United States, so forget about Hong Kong for a moment. [For an update on why having a Hong Kong company does not cut it, check out American Companies in China without a WFOE and the Impact of Donald Trump and US Tariffs and Why Hong Kong is not the Answer.] Forming a WFOE can be very expensive, in large part depending on the Chinese city in which you will be forming it.

2. You let your fiancé, her mother and cousin own the entire business. You do this and you are exposing yourself to losing whatever you put into the business. Twice, I have had men break down and cry right in front of me because they went into business with their fiancée and her family and they put 3-8 years of their lives into the business, only to be completely and unceremoniously booted out once it really started to make the big money. These are just the ones who cried. I can tell you about the guy who invested millions in condos with his fiancée and her mother, only to leave China for a few weeks and return with all of the condos sold and his fiancée and mother in law gone. Vanished.

My emails often lead to pushback, with the person complaining of how China makes things so difficult for the “little guy” and then their explaining how they know of how these things usually turn out for the foreigner, but in their case it will be different because:

a. Their girlfriend/fiancé/wife’s family would never be anything but above board.

b. Their girlfriend/fiancé/wife’s family is so “connected,” it makes sense for them to go into business with them.

They then usually ask us to write up a contract that protects them “as best as possible.” We tell them that we will not do that because those contracts are usually not enforceable in China and we are not in the business of writing contracts we know will not work.

In that same post I wrote about an email to me from my co-blogger, Steve Dickinson, to me, which went as follows:

If these people are going to go illegal in China, they should go 100% illegal. That is, enforcement either through really strong family connections (your father knows her father) or enforcement through gangsters and the like. I know people who have succeeded this way but I don’t know anyone who has succeeded with an illegal contract. This is not because contracts don’t work in China, because you and I have won enough China contract cases to know that they do.

It is because the Chinese judges are totally on to these sorts of arrangements and they know they violate or seek to evade Chinese law. They therefore have and will continue to deem such contracts void. Why do people live in this fantasy world thinking that somehow they are so different or that they have discovered the solution? Why do they think a Chinese court would enforce a contract designed to evade the law?

Take an alternative example. Remember John Smith’s [yes, it is an alias] company we formed in Beijing a few years ago? Not sure if you remember this, but that investment was with his Chinese wife. However, we did that as a very formally organized WFOE and left the wife and her family with the irregular side of the deal. His US company is the only shareholder and he runs the board. His company has had no trouble and he has had no trouble because he is legal and secure. His US LLC [and with it, the China WFOE] were just purchased by _______ [a pretty big name U.S. company]. The reason the purchase was successful is that the whole company was “clean” and therefore it could be purchased by a foreign public company.

I then went on to say that “as lawyers we are never going to tell our client to go full illegal, but in my role as a blogger, I have to think going full illegal would probably make better sense than paying a lawyer to draft a void contract. I think people know this, but their rightful discomfort at operating illegally makes them want to clutch on to something that will allow them to justify (however falsely) their actions.”

We also used to frequently see the same sort of thing by companies seeking to justify operating illegally in China with a Representative Office instead of a far more expensive WFOE. We has this to say about this situation way back in 2010:

Every couple of weeks my firm gets an email or a phone call from a small business that is seeking to justify forming a Rep Office in China instead of a Wholly Foreign Owned Enterprise (WFOE). These small businesses typically go into advocacy mode explaining why their business can and should be a Rep Office in China. They then go on to explain that they simply cannot afford to form a WFOE in China due to the minimum capital requirements, the legal fees, and the taxes.

They then want me to condone their Rep Office plans but I never do.

In fact, the increasing number of these requests has caused me to get even blunter than usual, and my most recent response exemplifies this:

What you are describing doing as part of a Rep Office is definitely not proper for an RO. Not even close.

In terms of minimum capital required, because it is Dongguan, it is likely to be pretty high. Sorry.

You pretty much have two choices. You can operate completely off the grid and risk getting shut down, or you form a WFOE. Probably the worst thing you could do would be to form an RO that operates illegally because that will just draw attention to how you are operating illegally.

I get the sense that the people contacting us on these things are hoping that they somehow have found THE loophole that nobody else has found and that if only they can get the blessings of an attorney for what they are doing, that their operating illegally will somehow not be illegal. I wish I had some magic oil I could sell (for a helluva lot of money) that I could sprinkle on illegal China businesses to make them legal, but I have no such thing.

Those who think they are going “sorta” legal by forming what is clearly an illegal Rep Office in China are very similar to those who think they are “sorta” protecting themselves legally by doing a “sorta” joint venture with their girlfriend. I wrote about those people in a post, entitled, “Operating Illegally In China. Half-Assing It Does Not Help.

I went on to explain how forming a Rep Office that then operates as though it were a WFOE “will just serve to let the Chinese government know where you are and what you are doing and will make it easy for them to realize that what you are doing requires a WFOE.” I then made clear my frustration with these sort of quasi-legal schemes:

What really drives me crazy about all this though is that on at least three occasions, companies for whom we have refused to form Rep Offices have written to tell me that “so and so” entity formation company is willing to form the Rep Office for them, as though this mere fact means my firm was wrong in declining to take money to do something we know will eventually not work.

And though I take no happiness from this, I will note that one of the three companies that went ahead and formed a Rep Office against our advice did contact us about a year later to tell us that the Chinese government was now making them form a WFOE.

It is frustrating to hear about the latest round of foreigners believing that going half-way with their China WFOE is enough, especially as most of these people we are hearing from do not even know they are operating illegally because they were told otherwise by the “experts” they hired. These companies that are hiring and paying their China employees outside their WFOEs seem to believe the following make what they are doing legal, but they don’t:

  1. Setting up a Hong Kong business and paying the employees from that. Wrong. This is no different than paying your China employees from the United States. If you are going to have employees in China you need to pay them through a legal China entity, not from overseas. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also, China Expat Pay: Splitting with Hong Kong is 100% Illegal and 200% Dangerous.
  2. Hiring only expat employees in China. Wrong. Expats working in China need to work for a legal China entity just like everyone else.
  3. Hiring only Hong Kong or Taiwan (or Singapore?) citizens. We have heard this one many times over the years, in large part because citizens from these places often claim to their employers that they can and should be treated differently because they are from these places. Wrong. A China-based employee is a China-based employee and a China-based employee needs to work for a legal Chinese company, be that a WFOE, a Joint Venture or a Chinese domestic company. Yesterday, in China Employment Law Update: China Work Permits no Longer Needed for Taiwan, Hong Kong and Macau Residents, our lead China employment lawyer, Grace Yang, wrote about how citizens of these places no longer need work permits to work legally in China. Just since then our China lawyers have received a couple emails from people who seem to believe this work permit change means people from these regions can legally work in China without being directly employed by a legal China entity. Wrong. This work permit change has no impact on this.

Doing business in China with employees in China? Don’t do it half right because you are only increasing your risk.

 

China lawyers
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

What with all the US-China tensions and trade tariffs,

our China lawyers are getting an increasing number of questions from U.S. companies regarding Sinosure. To grossly summarize, they go something like this: “We have received an email from Sinosure’s lawyers saying we owe XYZ China factory $371,456. We do owe them some money but not this much because this does not include the $123,675 that should have been subtracted for the poor quality product we received but could not use. Should I just send them the money we owe them?”

Short Answer:  No. If you send them the money you say you owe the odds are overwhelmingly that you will be pursued for the rest. Also, if you are going to pay anyone anything in China you need a full-fledged Chinese languageChina-specific settlement agreement making clear your payment will resolve all outstanding issues both with Sinosure and with the XYZ China factory. Most importantly, you will want that settlement agreement to be signed and chopped by both Sinosure and by XYZ China factory.

For more on how to deal with Sinosure, check out China Sinosure: What You NEED to Know.

China Employment Lawyers

Our China employment lawyers are asked by China employers about pursuing claims against an employee who fails to give sufficient notice of their resignation. Generally speaking, you cannot demand an employee pay damages for an early resignation unless you can show actual damages as a result. Just a quick summary of the relevant law on employee resignations: in accordance with China’s Employment Contract Law, a China employee during his or her employment contract term can generally leave by giving 30 days written notice while an employee on probation can leave with 3 days notice. We usually (but not always) recommend our employer clients not  make it more difficult for their employees to leave than the law mandates. Though it’s not an easy task, it is possible to pursue an employee for failing to abide by legal standard on resignation or a contractual standard, provided the contractual arrangement does not violate applicable law.

Let’s consider a hypothetical. Employer and Employee enter into an employment contract for a fixed term for Employee to work as a front-desk cashier at a hotel. Employee leaves before her employment term is up without providing a reason or a notice of resignation. Employee’s manager tries to get in touch with her, but to no avail. Employer leaves the employee a text message warning her that if she does not return to work or otherwise get in contact with her Employer right away, Employer will take legal action. When Employee is no show, Employer hires a temp to perform her job duties. Employer then brings a labor arbitration claim for damages as a result of Employee’s unauthorized departure. Will Employer prevail?

In the real case on which the above hypothetical is based, the arbitrator noted that pursuant to China’s Employment Contract Law, an employee who violates the law on employment termination notices and causes damages to the employer by having done so shall be liable to the employer for damages. The arbitrator went on to hold that this particular had failed to provide adequate resignation notice as required by law (that is, 30 days’ written notice), had left her work position without authorization, and that her behavior had caused economic losses to her employer. It therefore ordered this employee to pay her employer damages. The employer did not get the amount it was seeking because the arbitrator held that the daily salary the employer claimed it paid to the temp was much higher than workers in similar and even higher positions and it significantly held that damages should be roughly $20 a day, not the $50 a day the employer had sought. To make a long story short, the employer had sought a little over $1300 in damages and it ended up being awarded a little over $200 instead.

This case affirms that it is possible for an employer to pursue an employee for leaving without providing proper notice which causes damages to the employer. However, as is true of so many other claims against an employee, the amount of possible damages are likely to be so low that it will rarely make sense on economic grounds to pursue an employee for leaving early. Of the times a China employer has asked one of our China employment lawyers about pursuing an employee for leaving early, I can recall only one time where we thought it might make sense and that one time involved a very high level employee who the employer believed had left with trade secrets and a plan to compete against his former employer. Bringing the action in that instance would be done as much to send a message to the ex-employee and to other employees as for economic reasons.

Bottom Line: As is true of so much employment litigation and of litigation in general, the decision to pursue a claim needs to be based on more than just the likelihood of success on the merits. If you are going to bring any sort of arbitration claim or lawsuit in China you should first weigh the likelihood of success on the merits and the amount you will be awarded if you prevail and your likelihood of collecting on the one hand against the economic and emotional and opportunity costs on the other hand. In most cases, your best course of action will be to walk away.

 

China lawyers
Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

I got a super-short email this morning from a U.S. lawyer I do not know, asking me “What language should I use for a contract with a Chinese tech company.” I am going to give my answer below and direct him to this post.

That depends. It depends in large part on where you are going to have disputes resolved. If you are going to have disputes resolved in a US court or before a Canadian or British arbitrator you are probably going to want to have it be in English. But then you probably should have US or Canadian or British law apply to it. If your contract is calling for disputes to be resolved before a Chinese court, it should probably be in Chinese. I first ask where the dispute should be resolved so as to most benefit my client and after I make that exceedingly difficult decision the right language usually becomes crystal clear.

For various reasons (chiefly enforcement) we draft most of our contracts provisions stating that disputes will be resolved in a Chinese court. At that point it becomes critical for the contract to actually be enforceable in China. That usually means the following there things are critical:

1. The contract be governed by Chinese law. Chinese law will permit your contract to be governed by foreign law. However, because Chinese courts will require you to prove every relevant element of foreign law choosing foreign law for a dispute in a Chinese court almost never makes sense. Having to prove foreign law will be expensive and will likely lead to delay. Most importantly, the other side will dispute the application of foreign law, rendering your case and even any judgment you receive uncertain.

2. The governing language of the contract should be Chinese. Chinese law will permit you to provide for English as the governing language of your contract, however Chinese courts will only work with Chinese language documents. This means your contract will need to be translated into Chinese by a court appointed translator. The translator is often not particularly skilled and the resulting translation is often simply wrong. Even when the translation is correct, the other side will usually dispute the translation, leading to delays and ultimate uncertainty in the decision. Having someone else translate your contract after you sue means you will not know exactly what it is on which you are suing until after you get the translation back. Sometimes Chinese courts simply refuse to hear a case that involves contracts in a language other than Chinese.

3. The contract should be enforceable in a Chinese court with jurisdiction over the Chinese company. This normally means jurisdiction in a court in the district where the Chinese company has its principal place of business.

 

 

China employment lawyer

China employment law is technical and local and nearly all foreign companies get it wrong. See China Employment Law: Local and Not So Simple. It is one of the most consistent and expensive problem areas for foreign companies doing business in China and it has become a massive growth area for our law firm. More than ever, China wants harmony. And don’t forget, China is a communist country. Combine these two and you have a country that badly wants to keep its workers happy, especially as compared to your run of the mill foreign company that competes with Chinese businesses.

If you have employees in China or you are thinking of having employees in China you should have at least a basic knowledge of what you must or should be doing as an employer in China. This book, for the low low price of less than $20 in paper form, gives that to you. It is also sold as a Kindle version for $9.99, but you really should spend the extra $10 to be able to have it in physical form in your office so that you and others can consult it easily whenever necessary. You can get this book at Amazon or at Barnes & Noble.

Disclaimer: This book is written by our lead China employment lawyer, Grace Yang and we get a cut of every sale.

Our typical attorney-client interaction on China employment laws usually goes something like this:

  1. Foreign employer company contacts one of the China lawyers at my firm after having terminated an employee and after that employee has either sued or threatened to sue, oftentimes over a technical legal violation by the foreign employer.
  2. One of our China employment lawyers looks at the case and determines the termination did not comply with China (or perhaps local) laws and the employee will almost certainly prevail in his or her claim. See China Employee Terminations: Don’t Get Lazy.
  3. We explain the above to the foreign company employer and we learn the company is violating China’s employment laws in various ways with all of its employees.
  4. The foreign company employer wants its violations excised.
  5. We then conduct an employer audit to determine what other employment problems need fixing. See China Employment Compliance and Audits: THE New Big Thing.
  6. The employer audit invariably generates a laundry list of employment problems that need fixing.
  7. We fix the employment law problems, one by one.

Nearly all foreign company employers have employment problems in China because Chinese employment laws are so complicated and so localized, because China is so tough on foreign employers, and because pretty much every employee in all of China fully understands the leverage they hold over the foreign employers.

The typical small to mid-sized foreign company goes into China with maybe one or two foreign employees and one or two Chinese employees, none of whom know anything about Chinese employment laws (on the local, regional or national level) and all of whom are focused on getting the business off the ground more than on complying with the letter of the multiple sets of China employment laws. On top of this, at this time, they are usually a tight-knit group of founding employees who view themselves as much as founders as they do employees and who all get along with each other and view their futures with the company as bright. But as the company grows, nobody realizes how important it is to grow out the company’s employment compliance as the company expands and even if they did, nobody in-house knows how to do it. And why spend money trying to complying with obscure employment laws when there has never been a problem with those laws?

But then a problem arises and a China employment attorney at my firm gets called — usually by someone high up in the U.S. or in Europe or in Australia. This person is often the head of HR, the CFO or the CEO, or the GC and they are trying to find out what is going on with HR in China and they are getting only vague or nonsensical answers from their people in China and they are starting to worry. They see the potential for big problems down the road and they want to nip those in the bud now.

Foreign companies with employees in China need to get on top of their China employment situations and stay there. China Employer audits are the way to go in most situations, but in the meantime and as a supplement, someone at your company needs to understand China employment law basics. Someone at your company needs to know enough to be able to spot your company’s China employment law issues before they escalate.

The China Employment Law Guide is the book for that and you really really really should buy it and put it on your shelf. And when I say put it on your shelf, I mean you should buy the softcover version (not the Kindle version) so you can literally put it on your shelf. You actually should get a couple copies and give them to anyone in your company who manages your China employees or plays any role in their hiring or their firing or their vacation time or…. This book is meant to be used for background and for reference and as a decision-making guide.

Just a little bit about Grace Yang, its author. Grace grew up in Beijing and excelled at and graduated from China’s best law school there — Beijing University. She then came to the United States and graduated from the University of Washington Law School where she again excelled. Grace is our firm’s lead China employment and labor lawyer and she is the lawyer at our firm to whom everyone else goes for China employment and labor law questions. Grace is a licensed U.S. lawyer (licensed in Washington and New York) and she splits her time between Seattle and Beijing.

Anyway, did I tell you that you should buy the book? Of course I did and you should. What though will you learn from this book? Among other things, you will learn the following:

  • The basics of China’s employment law rules
  • How to draft an employment agreement that works for your China locale
  • How to draft China employer rules and regulations (aka employee handbooks)
  • The other agreements you should consider for your China employees
  • Frequently contested issues, such as overtime, vacation days, commission payments, and leaves of absence
  • Employee terminations
  • HR audits
  • Most importantly, how to keep your company out of trouble
  • AND MUCH MORE!

So just click here and buy the book.

 

 

You did do that right?

China WFOE formation

I do mean to sound alarmist here.

Almost since this blog’s inception, we have written about how if you are doing business in China you need a Chinese legal entity, be it a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV) or a Representative Office (RO). And pretty much each time, our writings on this get more emphatic and more strident. Today they reach a whole new level. Today we warn you about jail time because that is what we are hearing is happening in China right now.

In the last two years our stridency on this issue has gone into hyperdrive. Today I want to SCREAM that if you are doing business in China without a Chinese legal entity you should probably leave China immediately and consider what to do in China from the safety of your own country.  I will explain why I am saying this shortly.

In March of 2017, in Doing Business in China with Deportation or Worse Hanging Over Your Head, I had the following to say:

We have frequently been writing of late on how China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. In China’s defense (not that its decision to rigorously enforce its own laws needs any defense), the new WFOE formation rules enacted last year do actually make it somewhat faster, cheaper and easier to form a WFOE.

Anyway, since we started hitting this issue hard here on the blog, we have gotten an even greater stream of emails from people who have been “caught” by the Chinese government and from people who want to know what exactly they need to do to get legal. But the most interesting emails come from those who either fully or partially refuse to believe what has been happening in China and how at risk they are. About half of the emails sent to our China lawyers evidence at least some aspect of this and about half of those mention forming a company in Hong Kong as an option for solving all problems.

So let me say right here and right now that forming a company in Hong Kong will not do a thing to make you legal in Mainland China. Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

The below email is an amalgamation of two emails I received just this morning, both involving people with United States and Taiwan passports.

I came across your law blog and would like to ask a question. I’m in a slightly strange situation, professionally and nationality wise, and I I wonder if you might be able to offer me guidance.

I am a US/Taiwan dual national living and working as a freelancer in Shanghai, which is my base. I work in the _________ business on a contract-to-contract basis. Though my Taiwanese friends are always telling me not to worry about things like taxes, the more established and successful I become, the more I think I should be figuring out how to get legal in China and make myself legitimate, business-wise.

I am a ________________ and I do other related things. For example, I’ve just been asked to __________ on a relatively large project. Sometimes I am paid in RMB and other times I am wired foreign currency to accounts I hold overseas. Sometimes because I am not a legal business the companies I work for negotiate discount rates from me because my not having a China company precludes them from getting a tax deduction for their payments to me.

As I progress professionally, the amounts I charge and get paid keep increasing and I worry about what all of this means for the long term.

A friend has suggested I go to Hong Kong to set up a WFOE. However, I know some of the rules are different for Taiwanese nationals who wish to set up businesses in China.

It is not my ambition to have a big company or service but I also know that this gray area situation may not be sustainable forever. I also want to know if any of this might affect me as a U.S. citizen. At the moment, I just file federal taxes online.

Please let me know if you have encountered cases such as my own, and if you might be able to point me to resources that would enable me to best formalize my situation.

Many thanks.

Our response is always something like the following:

Setting up a company in Hong Kong will not help you one bit in terms of getting legal in China. You need to re-think what you are doing because as you get bigger you become a bigger target. I do not know how China treats Taiwan citizens, but if you are an ethnic Chinese there on a US passport, you are probably at the top of the list. My advice is that you start doing something and fast. You should consider either leaving China or setting up a WFOE in China that employs you. If you leave China you can do some business in China without triggering the need to have a WFOE in China, but because you provide services there, you will still be required to pay income tax there. So long as you are paying your United States taxes, the U.S. very likely does not care what you are doing or where you are doing it; your big concern should be the PRC, especially since you live there. The bigger you get, the more likely it is that someone will rat you out or that you will be noticed by the Chinese government. Productive legitimate businesses do not operate with this sort of hammer poised to hit them on the head. What you should do is weigh the various costs and benefits of your various alternatives and decide on one.

Then just last month, in American Companies in China without a WFOE and the Impact of Donald Trump and US Tariffs and Why Hong Kong is not the Answer I wrote again how American companies are at increased risk of serious trouble for operating in China without a WFOE:

If you are an American company doing business in China, you don’t need me to tell you how so many things have changed for you over the last year or so, and so I won’t.

But I do need to tell you — somewhat urgently — that if you are operating in China without a legal Chinese entity, you need to stop. Like right now.

Back in March, we did a post, Doing Business in China with Deportation or Worse Hanging Over Your Head in which we discussed how “China has like never before been tracking down foreign companies (especially U.S. companies) that are operating in China without having a business entity (a WFOE or a Joint Venture) that allows them to legally do so. See also Donald Trump and Your China Business: Double Down, Ditch It or Die and Donald Trump and Your China Business: Double Down, Ditch It or Die, Part 2. Our thesis — based on what we were seeing on the WFOE front and on other crackdowns involving even things like bar fightsvisasexpat taxescannabis, and employment law — was that China was toughening up enforcement against foreigners and foreign companies in China on all fronts, but especially against Americans and American companies as a sort of a slow and not terribly public retaliation against President Trump.

With all the talk now about US tariffs against China, legal enforcement in China against American companies operating in China without a WFOE has gone into hyperdrive. One of our readers, herself a China lawyer, recently wrote me to let me know how ridiculous she thought I was for believing Beijing would “quietly” go after American companies. My response to her was that we had no idea whether China’s stepped up legal enforcement is being directed from Beijing or is more in the nature of a slow and quiet and yet widespread uprising against the United States being mounted by government officials throughout China.

We can debate who is leading this enforcement charge and even the reasons for it, but to me the most important thing is that if you are an American company and you are not in full compliance with Chinese law you are at greater risk now than you have ever been. If you are doing business in China, especially if you are doing business there “through” a Chinese citizen you are paying, you need to think long and hard about your China company formation options.

Whenever we write about how China is getting tougher with such and such a law, we invariably get emails and/or comments saying how idiotic and/or unfair we are for criticizing China for enforcing its laws. Just so the record is clear, we have not said that and we are not saying that; we are as neutrally as possible merely writing on what we are seeing and we would be more than happy to leave it to the legal philosophers to put these sort of real-life China business and legal issues into some larger context.

In addition to the stepped up enforcement of China’s WFOE requirements, we are also seeing a massive uptick in American companies forming Hong Kong Companies or consulting WFOEs in ill-advised efforts to get legal. So let me use this blog post to once again make clear, forming a company in Hong Kong does not do a thing to make your business operations legal in Mainland China:

Nor will forming a company in Macau or Taiwan or Singapore. If you are doing business in the PRC/Mainland China, you need a PRC legal entity, such as a WFOE or a Joint Venture. See Having A Hong Kong Business Does NOT Make You Legal in Mainland China. See also A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark. If it were otherwise, virtually nobody would go through the agony and the costs of forming a WFOE; they would instead pay some accountant in Hong Kong about USD$1,000 and have an HK company in less than a week. Please, please, please do not fool yourself into believing otherwise!

In fact, the more you get on the grid in China without actually doing everything the right way in China, the more you make your illegality more obvious and easier to spot. See Quasi-Legal In China. Not the Place You Want to Be andQuasi-Legal in China. Not the Place You Want to Be, Part II.

We are also hearing from many American (and some European companies as well, but we’ll save that for a subsequent post) companies that formed their WFOE in China the “fast and easy way.” Some less than reputable WFOE formation companies will tout how they can form China WFOEs quickly and cheaply and for only around USD $15,000 in minimum capital. What these WFOE formation companies typically then do is form your company as a consulting WFOE in an “easy” China city. Please don’t fall for this. If your WFOE is not going to be in the consulting business, it cannot legally operate as a WFOE in China and it will get shut down. See How To Form a China WFOE. Scope Really Really Matters, Part II. And if your WFOE is going to be operating in Xi’an you do not want it to be formed in Shenzhen, for just a whole host of reasons.

If you are not complying with Chinese laws it is important you move quickly to get into compliance. But it is also important that in moving quickly you not expose yourself to even more and potentially greater problems. To borrow from a famous legal quote, you should move to get legal in China with all deliberate speed.

China company formation done wrong is not going to be your answer.

Today I write to say that things have reached another level for people of all nationalities doing business in China without a legal entity. Today I write to say that doing this — whatever your nationality, puts you at extreme risk of being arrested and put in jail. I cannot go into much detail but I can tell you that over just the last three days I have heard of three instances (in three different Chinese cities) where foreigners (from three different countries) were put in jail for operating in China without a business license and failing to pay taxes on their China income. Jail. Prison. The clink. The slammer. The real thing people. The real thing. One of these cases also involves vague allegations of custom violations, claims for which the Chinese government has never been shy about imprisoning foreigners. See China Customs Violations and How to Avoid Jail Time.

Why are these arrests happening now? I posit the following two explanations:

  1. The arrests are happening because China is concerned about its economy and/or its general situation in light of US trade tariffs.
  2. The arrests are happening as just another “stepping up” of China tax collection efforts.

Again though, these arrests are not just of Americans. It is so early in the criminal law process that it is not clear to me how serious these charges are against those arrested. Will they merely be deported? Have they been arrested with the goal of getting evidence against others? What is it going to take for these people to be freed? Will paying off their taxes with interest and penalties be enough to get them released? See China’s Tax Authorities Want You. Will paying some part of the taxes be enough to get them released? What taxes are being pursued? Income taxes? Employer taxes? Both? Most importantly, is China serious about putting these people in jail for an extended period and if so, for how long.

No matter what the reasons for this most recent and most alarming crackdown, if you are in China right now and if you believe you or your company might be operating in China without a Chinese company when you should have a Chinese company, if I were you I would leave China quickly. I just would. And if you do get detained on your way out, you should as quickly as you possibly can retain a top-tier Chinese criminal lawyer in the city in which you arrested.

That is all. Sorry.

 

UPDATE: A loyal reader emailed me to note how this is the second day in a row that we have warned people not to do something at risk of going to jail. Yesterday, in China Tariffs and What to do Now, Part 1, I passed on advice from my law firm’s international trade lawyers regarding the criminal risks relating to changing the country of origin via transshipping to avoid the tariffs the US is imposing on products from China. This reader pointed out how the devolution of free trade is increasing the risks for companies that operate internationally. I agree with that assessment, but note that it is particularly true for those who are not careful and who are willing to operate close to the line between legal and illegal. Your thoughts?

ADDITIONAL UPDATE:  A Chinese lawyer friend of mine sent me an email stating that “the point here is that operating in China without a WFOE is illegal. This also applies to Internet/SaaS operations operating in China illegally, and you and I both know plenty of those. So long as the operators of these illegal Internet/SaaS operations stay out of China, they will avoid jail. But what about their partners who are operating in China? And what about when they take a two week business trip to China to check up on the situation there? Do you think companies really understand the fire they are playing with here?”

China contract lawyers

The other day I cleaned up and revised the various email templates our China lawyers sometimes use to answer frequently asked questions we get from our clients. One of them is on how to send to the Chinese side of a deal the contracts we have drafted. Our standard answer is as follows:

 

It is usually best for you to send this contract to the Chinese side as an already signed sPDF. You achieve two goals by doing it this way. First off, the Chinese side cannot easily modify this without your seeing the modifications they have made. It is not unusual for Chinese companies to sign and return your signed Word document as though they did not make any changes when they actually did. Using a PDF makes this a lot less likely.

Second, your sending them the contract this way is essentially telling them, “please execute this without any changes so that we can move forward quickly.” If you send them a Word document you are all but inviting them to make changes to it.

I note though that in the last few years it has become customary to use a Word documents for China contracts because Chinese companies have started to make a lot of changes to their contracts. This is actually a good thing though because it means they now take their contracts very seriously and that in turn means they realize the courts there have gotten a lot better at enforcing them. All of this means that they don’t typically sign these planning to breach them.

So the current best strategy is for you to send them a signed PDF. Then, if they ask for it in Word format you can and should send them that. Just don’t send the Word document until they ask for it!

 

Your thoughts?