Basics of China Business Law

How to form a china wfoe

Our China lawyers are often asked about the steps it takes to form a China WFOE. So often, in fact, that we long along drafted a stock response to that question. Figuring this response would be helpful to you-all, our faithful readers, I am running it below. Please note that the below is a generic roadmap for WFOE formation and the exact details for forming a WFOE in China will depend on, among other things, the WFOE’s business scope and the city/district in which the WFOE will be formed.

Generally, if all goes smoothly, the overall process will typically take 3-5 months. We do not breakdown each of the steps as to time because the time involved for each step can vary wildly, depending on (for instance) how long it takes to prepare financial information, negotiate a lease, obtain documents from the landlord, authenticate relevant documents, and validate the corporate structure. Lately though the Chinese authorities have been quite efficient in processing applications, at least in the major cities and usually once we have provided them with all of the requested information in the exact format they need, they usually provide a response within 2-3 weeks. It is getting to that point that takes so much time.

Generic WFOE Formation – Roadmap

A. Name Approval Application

  1. WFOE Investor(s): corporate structure chart, authenticated corporate documents, passports and other documents identifying key personnel.
  2. Business Scope: define scope of business.
  3. Registered Capital: determine amount of capital to be invested, pursuant to financial projections.
  4. Total Investment Amount: determine maximum investment amount (capital + investor loans).
  5. Capital Contribution Timeframe: default is within 30 years.
  6. Proposed Chinese Name(s) for WFOE: at least 6-10 choices.
  7. WFOE Address: dependent on lease/office space.
  8. Name Approval Application Form: prepared by your lawyers, signed by client.

B. During Formation Process

  1. Select accountant.
  2. Select bank.
  3. Draft labor and employment documents: employment agreements, WFOE rules and regulations, non-compete agreements, confidentiality agreements, etc.

C. Post-Formation

  1. Open bank account.
  2. Carve chops.
  3. Open social insurance accounts and begin tax reporting.
  4. Other post-formation activity as relevant.

For more on what it takes to form a China WFOE, check out the following:

China Law online

One of the things we often stress on here is that our posts should NOT be used as a substitute for real world advice. Like ever. This holds true (oftentimes in triplicate) about every other site out there that writes about Chinese law as well.

I am saying this again today because there are apparently a bunch of people out there who believe things about China personal income taxes because someone on WeChat is saying that we said this particular thing about China income taxes, even though we never did and even though it is apparently flat out wrong.

It all started when someone wrote to ask whether his living and business situation would mean that the Chinese government would deem him to be doing business in China. I responded as I usually do to such inquiries by saying that there is no way we are going to answer a question like that:

Much of what you say below is not at clear to me and there is much more I would need to know to even venture a guess as to whether what you are proposing is legal or not, and even then, we would probably want to confirm it with the local authorities. In any event, we cannot give out specific and direct advice to anyone not our client because our malpractice carrier forbids it — just imagine if on the sketchiest of facts (which are not even clear to me) I were to tell you that everything is okay and then you get jailed because it isn’t? See Doing Business in China Without a WFOE: Will the Defendant Please Rise.

This person then wrote back to say that he was confused about “the new tax legislation that would be coming into effect in 2019 for foreigners.” My response to that was to say “what legislation.” He responded by saying that xyz tax laws would be changing for foreigners. I then pointed out that this was a completely different question than his initial question and that what he was saying would be new in 2019, we had written about in 2014 (and it wasn’t even new then!).

Then I got another email, this one from someone who said that he had read a couple people on WeChat who were claiming that our blog had said that foreigners need to submit some strange form to the Chinese government by 2019, when in fact we absolutely never said such a thing nor are we aware of such a thing nor is something like that even something we would write about even if it were to be the case.

I then told these two people the following:

The internet on China laws is unbelievably bad. I think I need to write another article on why you should never take what you read on the internet as legal advice.

Speaking personally, I recently spent about a year living in Spain (helping out our Barcelona office) and I read everything I could on Spain visas before I went but I knew that I still didn’t know enough to do it on my own. So I hired a really good and really expensive Spain immigration lawyer and in about three hours she totally set me straight and I walked out of her office knowing exactly what to do and I did it and it worked. 90 percent of what I had read about Spain visas on the internet was true but ten percent that was either dead ass wrong or had changed recently changed or just did not apply to our specific situation. Had I gone with just what I had learned on the internet, I likely would have been booted out of Spain in 90 days. Despite all that I had learned by going through all of this, when it came time for another American lawyer in my firm to take my place in Spain, he too went to this same Spain immigration lawyer and he reported back to me the same result. She saved him huge amounts of time and huge amounts of problems.

And China is ten times worse than Spain on this, for the following reasons:

1. China’s laws are incredibly local. See e.g., China Employment Law: Local and Not So Simple, China “Laws” Are Local And Don’t You Forget It, and China. Where Everything Is Local. Until It’s Not. More so than Spain.

2. China’s written laws say one thing and local government enforcement (or even Beijing enforcement) will do another. Sometimes there are laws that are not enforced and this benefits foreigners, but more often there are laws that are written for China to look good to foreign governments that are completely ignored to the detriment of foreigners. This is far far less common in Spain. This is why our China lawyers will first research the written laws and then go to the appropriate Chinese government authorities and just flat out ask whether our interpretation of those laws jibes with theirs. Fortunately, Chinese government officials are very good at responding honestly to such queries.

3. China’s laws are in Chinese. Unless your Chinese is amazing and you have China legal experience, you almost certainly do not understand them. Sorry, but this is true. And to top it off, most translations you see on the Internet range from terrible to just okay. In English Translations Of Chinese Laws. Don’t Call Us, I wrote about the risks of using our blog posts or English language translations of Chinese laws:

Pretty much every week someone asks one of our China lawyers for an English translation of a Chinese law or cites one of our blog posts as an explanation for a decision they made or are contemplating.

China’s laws are too precise/too vague/too changing/too real world/too dependent on regulations to use English language translations of one or two laws for making final decisions. An English language translation can in many cases give you a good “feel” for a situation or a starting point for how to proceed, but the risk of that translation being very wrong or just enough wrong to make a big (or even just a little difference) is just too great for you to rely on it without more.

And every year or so we get a company comes to us as a new client seeking our help in getting them out of some sort of trouble they find themselves in with the Chinese government for having accidentally violated some law due to a mediocre translation or one that simply did not include all of the laws and regulations on the subject.  In figuring out how to legally proceed in China, in many instances even a good translation is not nearly enough because decisions on how to proceed might require interpretations of local regulations or even knowledge of local quirks. Many times one of our China-based lawyers (or even one of our China lawyers in the US) will get on the phone and call a government official (or two) to get their views on how the relevant government body interprets/enforces particular laws/regulations and/or treats particular situations.  Chinese government officials are virtually always willing to talk these things out and they are often surprisingly helpful, even if they do not always provide the expected or desired answer.

So what do I tell those who ask me for English language translations of Chinese laws?  I send them the following form email:

I am sorry but because we do not work from translations of Chinese laws (we find them too risky and unreliable) I do not know where you can find translations of the particular laws you   seek nor am I aware of the best site or sites for such translations generally.  I wish you the best of luck in your search.

Reading Spanish is far easier than reading Chinese if your first language is English, for obvious reasons — the alphabet, the cognates, the sentence structure, among other things. And in Spain the laws do not change as often as in China. Not nearly.

Years ago, a company called us about forming a WFOE in China. They asked about the minimum capital requirements and then mentioned that they had read on our blog that assets could count towards that. I said that was correct. They then said good, because they had shipped over $5,000,000 (yes, 5 million dollars) of equipment and they would need that to count as their minimum capital for their WFOE. I immediately went into near-panic mode, demanding to know whether they had secured Chinese government approval to have that equipment count towards their minimum capital before they sent it to China. They had not and I had to tell them that getting it approved in advance was a requirement. To which about all they could say was “that’s ridiculous, that’s putting form over substance,” to which about all I could say, was “that’s right but that’s how it is in China on this.” They had relied on one of our blog posts saying that physical assets can count towards a WFOE’s minimum capital requirements but they had not bothered to determine the rules required to make that a reality.

So please, please, please do not make any business or legal decisions based on what you read on the Internet. Go ahead and use it to give you a basic education and some sense of the issues, but not for more. Our own disclaimer basically says this:

The China Law Blog is for educational purposes and to give a general information and a general understanding of Chinese law. It is not intended to provide specific legal advice. By using this blog you understand there is no attorney client relationship between you and our law firm. You should not use the China Law Blog as a substitute for competent legal advice from a licensed attorney.

Why does anyone ever think otherwise?

12-7-2018 Update:  Fake News on WeChat, International Panda does a great job tracking down how our China Law Blog appears to have been inappropriately used to bolster support for a tax position on which we never ever wrote a thing. Read this for a good idea on how wrong information can quickly spread on China’s internet. Of course, this sort of thing is not peculiar to China’s internet, it’s endemic pretty much everywhere and it is further reason to be wary of using the internet as the sole basis for your important legal decisions.

 

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.

One question we almost always receive from clients who are seeking to protect a logo (or “device,” as it is called in the trademark world), is whether they should register their device in color or in black and white.

According to trademark practice in China, registration of a black and white device in China would protect the logo regardless of the actual color scheme used on the device, and for that reason we typically recommend our clients file an application for the black-and-white version of their trademark.

The exception is if the color scheme for the device is part of the trademark, such as UPS’ brown-and-beige, FedEx’s purple-and-orange, John Deere’s green-and-yellow. In that case you would in fact want to claim the color scheme, because it’s an integral part of the brand identity. But these are the exceptions, not the rule. For most companies, a black and white device is both appropriate and sufficient.

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?

China employee terminationsIf you are a China employer, you must have a written employment contract with all your employees. This means that once you hire an employee in China it is generally difficult to terminate that employee during his or her contract term.

Consider this hypothetical (based on a real case with its facts greatly simplified for this post). Employer and Employee enter into an employment contract for a non-fixed term. Several years into employment and before the end of the year, Employer issues a termination notice to Employee for immediate termination of the employment contract, but the termination notice fails to specify any basis for the unilateral termination. Employer pays Employee a big severance and an additional amount of money in lieu of advance notice for the termination. Employee demands Employer pay the year-end bonus and Employer claims no bonus is required because Employer’s rules and regulations document says if an employee is terminated for any reason (including as a result of employee serious wrongdoing), the employee will not be entitled to any portion of the year-end bonus for that year. Employee brings a labor arbitration claim against Employer to collect the unpaid year-end bonus, among other things.

Employer lost big. What did Employer do wrong here?

Mistake #1: Issuing a termination notice without specifying the reason for termination. This can and will lead to problems for the employer and yet many foreign employers in China do this, oftentimes because they want to quickly wrap up the employee termination. Terminating a China-based employee is almost always complicated and proceeding with a termination in haste is almost always a bad idea. In this case above, the employer did not have any legal basis for terminating the employee and it only claimed the employee was terminated for employee wrongdoing after it was sued. As a China employer you need to provide your soon-to-be-former-employee with appropriate notice of what led to the employee termination and you must do so at the time of the termination. If the employee did something wrong to bring about your unilaterally terminating that employee, you must make that clear in the termination notice.

Mistake #2: Claiming the employee was terminated for wrongdoing yet giving the employee a big severance payment. This sort of thing confuses everyone from the employee being terminated to other employees in the company to — most importantly — the arbitrators and judges that eventually get the case. If an employer has a legally permissible ground for a unilateral termination, why pay severance? Paying severance oftentimes is used to show that the employer probably had no good legal grounds for termination. If that is the case, fine; but that would be a completely different type of termination and you cannot call that unilateral termination due to employee’s fault. It is called an employer-initiated mutual termination. On the flip side, if you as the employer know that your facts or evidence are not looking great from a legal standpoint, why not make clear that you are entering into a mutual termination deal with the employee? When terminating an employee it is critical that both your severance payments and your termination documents line up with each other and that both truly fit the situation.

Mistake #3: Not possessing good evidence to support the unilateral termination for alleged employee wrongdoing. In a China employment dispute, the employer bears the burden of proving it had a valid basis for the employee’s termination. In real life this means that the moment you as a China employer realize you have a problem employee or the moment you realize that one of your employees has done something wrong you should start documenting everything you can so that you will eventually be prepared to argue your case in the event of a termination or employee dispute.

Mistake #4: Not resolving all outstanding issues at the time of termination. In the real case on which the above hypothetical is based, the employee was a high-paid employee and the employer paid the employee a big severance before the employee sued. The employer should have had its employee sign a termination agreement that set forth employer-employee agreement on all necessary issues before it paid the employee the large severance. If you are going to pay one of your employees severance, there is no excuse for not doing what is necessary to get full resolution for doing so.

Mistake #5: Not understanding that an employee termination does not absolve the China employer from having to pay a year-end bonus. And please note: just because you have a company rule that says your employees are not entitled to something (like a year-end bonus) when their employment relationship with your company ends does not give you the right to terminate the employee. In other words, even if your company rule is legal in your locale, the fundamental rule of China’s employment laws does not change: China is not employment-at-will jurisdiction.

Employee terminations in China always require you make sure the termination is done legally and correctly so you will not get sued over a termination after you thought you had completed the employee separation.

China laws and business are very different from the West, of this there should be no dispute. China lawyers

And yet, our China lawyers oftentimes get emails from potential clients telling us that they have drafted a contract for China and asking us whether we would revise that contract to “make it work for China.” Our initial response to this is to say yes but to warn them that our fees for doing so will almost always be the same as our fees for our drafting the contract from scratch. The reason for this is because, with very few exceptions, the contract we are given is so different than what is required for China that its only benefit is that we can pull some (never all) of the terms we need for drafting the contract.

But guess what, that benefit almost never outweighs the harm. Let me explain.

Much of the time when we are given a draft contract that contract is a result of weeks of negotiations between the Western company and the Chinese company. If our China attorneys then substantially revise the contract and our Western company client then sends the substantially revised contract to the Chinese company, the Chinese company is rightly irritated because it believed it had a deal or was on the verge of a deal with the Western company, even though it really wasn’t.

But most of the time, the draft contract we are given is so far afield from what is needed that instead of our China lawyers being able to draft a new contract, our China lawyers instead have to tell our client that it really needs to start back at square one. Most of the time the draft contract we are given is so internally contradictory and so rife with provisions that literally do not work at all under China’s laws, that the first thing we need to do with our client is figure out exactly what it is trying to accomplish with the deal.

And then, once we have that figured out, the next step is usually to draft (in English and in Chinese) a term sheet to send to the Chinese company to determine whether drafting a contract will ever be warranted. Oftentimes, there is a critical provision that the Western company and the Chinese company never previously discussed and on which they are at clear loggerheads. The term sheet quickly reveals this and the parties then choose to go their separate ways. Oftentimes, there is a critical provision that simply cannot legally work and without that provision one or both sides do not want to go forward with the transaction and the parties then choose to go their separate ways.

We see these sorts of looming problems so often with draft agreements that I have drafted the following “template” explanation, which I then modify to fit the particular situation:

We reviewed the draft contract you sent us and we think it premature to begin drafting a contract based on it. Some of it is contradictory, some does not make sense, and some is almost unworkable or illegal. It also fails to address critical deal terms.
What we need to do here is to work with you to figure out what exactly you are seeking to do and then use that to determine whether the Chinese side will be on board with that or not. Once we are clear on what you are seeking to do here, we then draft a term sheet in English and in Chinese and use that to see whether a deal is possible. If a deal is possible, we then move forward on drafting the contract. If it is clear that no deal is possible on your terms, you then determine whether you want to compromise or walk away.
We will charge considerably less to develop the term sheet than we would charge to draft a full-fledged contract. This means that If it turns out no contract is warranted, you will have saved quite a lot of money. If it turns out a contract is warranted, much of what we will have done to develop the term sheet will apply to what we will need to do to draft the subsequent contract.
The above is our advice, but obviously what you do is up to you in the end.
Please let us know.

China Law Professor Donald Clarke sent me a great article this week from New York Magazine, entitled, How China Drove Out Mister Softee. Professor Clarke’s email with the link said the following:

Thought you might like this. Interestingly, it is NOT a story of “guy skirts rules, naively trusts Chinese partner, gets screwed.” It’s “guy does everything absolutely by the book, has reliable Chinese partner who does not screw him, and still gets screwed by changing political atmosphere.” For him to get competition eventually is quite normal, and the competition wasn’t using a trade name similar to his. But the rules were not evenly enforced.

This is the sort of story I both love and hate. I love this sort of story because it is interesting and important but I hate it because I constantly and aggressively stress to my clients the need to follow China’s laws to the letter and with that I ought to be able to tell them that by doing so they will have no problems. I also hate this sort of story because it reveals the cynical truth that the reality is really more the opposite: if you do not follow China’s laws you will have a problem. If you do follow Chinese laws the odds of your having a problem will go way down, but hey, it is no guarantee. Truth is that as a foreign company doing business in China you will be a target and this means you must follow the laws to avoid being an easy and legal target but even if you do follow the rules you are still a target.

Quick aside. Why the Jim Carey clip about “messing with the doo?” Two reasons. One, It’s just a great clip. And two, I love soft-serve ice cream and I have fond memories of eating Mr. Softee ice cream when visiting my grandmother in New Jersey. So I see China’s messing with Mister Softee as the equivalent of “messing with the doo.” But I digress.

So if you read the New York Magazine article, you will learn that Turner Sparks brought New York’s iconic Mister Softee trucks for the first time to China” back in 2007 and eventually built his ice cream empire to ten trucks and 25 employees in Suzhou. You will also learn the following:

Mr. Sparks did local TV and newspaper interviews and was a fixture at school and corporate events, where he and his team doled out waffle-cone soft-serve to thousands. During one corporate party at Bosch, an international electronics company, he sold $9,000 worth of $1 cones in just two hours.

Competition was scarce, because he essentially invented the Suzhou ice-cream-truck market. “All these trucks were just going nuts, doing really well. Huge lines all the time,” he told me. “Everyone knew Mister Softee.”

He planned an ambitious expansion, and lined up investors to back it: He wanted to quintuple his fleet to 50 trucks, add more storefronts, and move into new territory.

More importantly, you will learn how tough it can be to do business in China, because you will learn that instead of expanding his business in China, Mr. Sparks ended up leaving China “with just enough money to reinvent his life as a New York stand-up comic.” and that “what happened to Sparks is an illustration of how the landscape has shifted for foreign businesses in China since current premier Xi Jinping has taken over the country, and the climate has become considerably less hospitable for foreign business — small ones, in particular.”

The article talks about how things began to change for foreign companies in China starting in 1978 and how Sparks was able to build up his ice cream empire:

They created a local supply chain from scratch, finding vendors for cones, straws and soft-serve mix at a Shanghai food-and-drink expo. Using secret blueprints from Mister Softee, the truck was built in Nanjing by a company that makes telecommunications trucks, armored vehicles, and ambulances. Workers were hired from a job fair, with many long-distance drivers jumping on the opportunity to work locally and try something different. To give the soft-serve the same taste as back home, they shipped the milk in from the U.S.

Suzhou officials worked with Sparks to create a new kind of business permit for their ice-cream trucks, called a Qualified Mobile Vendor License. It let them operate the trucks, but only as “delivery vehicles” for two stores. The license also required they have a staffed office and were restricted to operate at certain spots around the city. The solicitousness of Suzhou officials wasn’t unique. All around China, local governments were inviting in foreign businesses, easing the cost of doing business with tax breaks, and giving them friendly government liaisons to help them navigate the labyrinthine bureaucracy.

Then you will learn how the ice cream empire fell apart, for reasons that will likely not be unfamiliar to most foreign companies that operate in China — taxes and thieving employees who then go out and illegally and even violently compete:

The first inclination Sparks got that things were changing was around 2012, when a local official called him into his office and accused Sparks of not paying enough in taxes.

“Immediately, I knew it was a shakedown,” he said. “This guy was an idiot. He was like, ‘There’s money, I need some.’”

Sparks declined the man’s offer and left, but says that meeting was his first experience with the corruption he’d often heard about in China. Soon after, two new drivers alerted Sparks to a longtime scam by his eight other drivers. They were quietly making extra soft-serve sales and pocketing the money for themselves. Because Mister Softee was a cash business, office workers would count drivers’ ice-cream cones at the start and end of their shifts to make sure they weren’t stealing. To circumvent that control, drivers bought their own cones. When Sparks started measuring the ice-cream mix instead, the drivers would buy extra cones and mix, too.

Eventually, he instituted random checks on drivers and fired several on the spot when they were caught with more mix in their trucks than they had at the start of the day. Soon after, his tires outside his apartment were slashed. Then a fired driver showed up at Mister Softee’s office and threatened to kill the workers there.

Things got more bizarre. In early 2013, just a few weeks after they were fired, Sparks’s former drivers resurfaced with their own unlicensed ice-cream trucks, with knockoff names including Baby Bear, Snow Princess, and Mr. Big. These drivers would park along Mister Softee trucks’ routes to poach customers. Plus, they didn’t have the special city license, which allowed them to operate without having to open storefronts or an office, and they could sell wherever they wanted.

Conway was too far away to help out as problems started cascading. Cai, meanwhile, had moved to the suburbs about an hour away and was starting another printed circuit board business, so had no time to lend a hand.

*   *   *   *

Perhaps the slashed tires and death threats were unique to Mister Softee, but local officials’ deciding to yank support was downright typical of the changing times.

For the record, nothing that happened to Mister Softee in Suzhou is “unique.”

The article then goes on to rightly note that foreign companies that bring technology or know-how that China hasn’t developed on its own are still very much welcome in China, but the others not so much. “One in four foreign businesses are scaling back in China or say they plan to, and most say they feel increasingly unwelcome, according to a 2018 survey from the American Chamber of Commerce in China.”

The article extensively quotes Anil Gupta, professor of University of Maryland’s Smith School of Business, “who’s been researching and writing about China for 25 years” and who has this to say:

Gupta added that blatant knockoff enterprises are so common in China that it’s almost a wonder Mister Softee’s easily replicated business wasn’t copied sooner. Plus, local officials and courts are more likely to back the local knockoffs to support Chinese businesses — to hell with the permits.

“With 99 percent confidence, I would say this was destined to happen,” Gupta said of Mister Softee’s fate. “I would say that God couldn’t even save this business.”

What or who exactly killed Mister Softee. China:

After receiving one-year permits for his trucks without fail from 2007 through 2012, Mister Softee’s permits were withheld without explanation and Sparks couldn’t reach government officials for months to clear up the issue. When Sparks finally heard back from government officials in mid-2013, they told him they would figure out a way to regulate the new trucks. Nearly a year later, with Sparks still operating without a new permit, officials proposed holding a lottery to dole out Suzhou permits to Sparks and the knockoff trucks. Around that time, police started ticketing Mister Softee trucks for parking illegally in spots they’d been working for years.

By 2015, it became clear the lottery would never take place and Sparks’s new round of investment crumbled.

“Part of it was a relief, to know it was over,” Sparks told me. “You feel, obviously, helpless.”

Over the next year, he wound down the business, paid his remaining staff and sold off the trucks so some others could spread the gospel of neighborhood soft-serve to nearby cities.

In early 2016 on a Friday, Mister Softee’s tumultuous foray into China quietly ended with Sparks, his lawyer, and accountant filing liquidation papers and figuring out who they still owed money to. Sparks had already sold off the office furniture to his ice-cream cone supplier.

Ignoring for a minute whether any deity could have saved Mister Softee, was there anything it could have done to survive China? Maybe. Were a company like Mister Softee come to me today, I would likely recommend that instead of going into business in China, it seek our a licensee in China for its name and its ice-cream know how and its trucks look and feel. Indeed, my law firm a few years ago did a licensing deal on behalf of a regional American ice cream that has worked out very well for the American company. I constantly find myself trying to steer clients away from what I call “theoretical massive profits” that can allegedly be realized by going into China as a WFOE or a Joint Venture in favor of a licensing or distributing deal. See Forming a China WFOE: Needed or Not. See also my Forbes Magazine on this: Want Your Product In China? Try Using A Local Distributor.

Welcome to China 2018 people.

What are you seeing out there?

UPDATE: Literally minutes after I wrote this I received an email from a China lawyer friend who said I should have talked about how Mister Softee could have prevented “at least some of its problems” by having made its employees sign non-compete agreements. I don’t think those would have worked because China’s courts generally will not enforce those against any but high level employees and I do not think ice cream truck operators would qualify as high level employees. See

China employment lawyers

As promised in my post from last week, China Employment Contract FAQs, I am back to write about some of the most commonly asked questions we get about China employer rules and regulations with short answers to each of them. The below are the questions that we field most often when doing our China employer audits.

Question 1: I have several separate company policies that deal with different topics such as overtime, employee leaves and discipline. Do they need to be in one document called employer rules and regulations?

Yes. You need a comprehensive employer rules and regulations document that includes all your employer policies/rules. First, this is what Chinese authorities like to see. Second, the fewer documents you have, the easier it will be for your management to enforce your company polices and for your employees to learn about and follow them. Third, by including all the policies in the same document, it will be easier to search out and eliminate any potential inconsistencies. Fourth, this makes it easier for you to be sure to keep everything updated. Lastly, having all employer policies and rules in one document and then getting each of your employees to sign a receipt proving they received it will give you added protection.

Question 2: I have more than one office in China. Do I need a different set of employer rules and regulations for each of my offices?

Yes. China’s employment laws are highly localized and this means employment rules/practices can and usually do differ by city and even by district within the same city. The differences between your various rules and regulations will depend on where your offices and your employees are based. For example, if you have an office in Beijing and an office in Shanghai, you will likely have a very different set of rules and regulations for these two cities. On the other hand, if all your offices are located in Guangdong Province, you likely will have quite similar employer rules and regulations among your offices.

Question 3: I have been operating in China for a long time and I’ve never had a set of rules and regulations. Is it too late to start doing it now?

Absolutely not. Having a well-drafted set of employer rules and regulations will not solve past problems but it will certainly go a long way towards preventing future problems.

Question 4: The rules and regulations seem negative in tone. Will my employees accept them?

Your rules and regulations need to be reasonable to be enforceable in China. But so long as they are reasonable and enforceable, and you implement them according to Chinese law, your employees need to abide by them. One thing you as employer need to do is to get an acknowledgement of receipt signed by your employees proving they received a copy of your rules and regulations. Their signing that acknowledgment also means they have agreed to follow your rules and regulations. It is true that a big part of the standard China employer rules and regulations relates to employee discipline and terminations, but a well-drafted set of these rules and regulations should also provide detailed explanations regarding employee rights and benefits, which will give your employees clarity and protections. Well-written employer rules and regulations are good for both employers and employees and most China employees recognize this and they virtually always are willing to sign off. See China Employee Rules and Regulations: Use Them as a Talent Magnet.

Question 5: Can I just use a template set of rules and regulations from the Internet? 

Only if you do not care at all about preventing all sorts of future employee problems and setting yourself up for difficult and costly employee litigation. Your rules and regulations should match your specific situation, your industry, your locale, and, most importantly, your specific issues, goals, and concerns. Every employer client for whom we have drafted rules and regulations has had their own unique programs/policies/rules and the job of our China employment lawyers is to work with our clients to determine whether what they want is workable and legal for their specific situation and locale.

 

 

 

 

China employment lawyers
China employment contracts: the questions we get

With the end of the year fast approaching, our China employment lawyers have been handling an onslaught of China Employer Audits and with those audits comes an onslaught of China employment law questions. The below are some of the most commonly asked questions we get about China employment contracts with short answers to each of them.

Question 1: I have an English version of the employee agreements our parent company uses around the world. Can I put that into Chinese and send it to our China employees to sign?

Not a good idea. When it comes to China employee agreements, localization is key and I have yet to see a single non-Chinese style employment agreement that does not contain at least one thing that is completely unenforceable under Chinese law. You need a China-centric contract because that sends a strong signal to your China employees and to China’s labor authorities and arbitrators/courts that you understand how China’s employment laws work and you have made the effort to comply with those laws. Using China-centric employment contracts will greatly decrease the odds of your having China employment law problems and greatly increase the odds of your prevailing in any China employment law dispute.

Question 2: The labor authorities in my locale provided me with an employment contract template. Is it okay for us to just use that?

Not a good idea. First off, these templates are often outdated and often fail to keep up with national (and even local) law changes. Second, they completely fail to account for your specific situation and goals or for the situation of your employees. Third, they virtually always favor the employees and fail to sufficiently protect the employer.

Question 3: Our China employment contracts are just in Chinese. That’s okay, right? 

Not really. Legally, this makes complete sense in that you really do need to have all of your China employment contracts in Chinese. But if you also are going to want all of your China employment contracts to be in English as well if anyone in your company who might be making what even looks like an employment decision cannot read Chinese. We always draft our Chinese employment contracts in both Chinese and in English because that works best.

Question 4: How easy it is to terminate an already signed China employment contract?

Not easy at all. Since China does not have employment-at-will it is generally difficult to terminate an employee during his or her contract term and, contrary to popular belief, this includes employees on probation. Under Chinese law, a probation period is part of the contract term and so probationary employees are also not at-will employees. Once you bring someone on as your employee in China it is difficult to terminate them. See Terminating a China Employee: Why YOUR Rules and Regulations are Key.

Question 5: Will an open-term employment contract mean that I will not be able to terminate the employee until his or her statutory retirement age? 

Not exactly. Open-term employees have greater protections against termination than employees on fixed-term employment contracts, but they can be terminated. For example, an open-term employee can be unilaterally terminated without severance if the employer can prove that the employee engaged in serious wrongdoing in violation of the employer’s rules and regulations. But it does often make economic sense to try to work out a mutual termination even with your most troublesome employees.

Despite the issues that arise from open-term contracts, they are sometimes all but required for business reasons. We see them most often in situations where our client is intensely competing for a particularly desirable job candidate and offering this candidate an open-term contract is necessary to get him or her to work at their company.

Question 6: Does not this offer letter constitute our employment contract?

It most certainly does not. An offer letter is not an employment contract and no offer letter I have seen even comes close to including all that is necessary for a good China employment contract. We regularly take our clients’ offer letters and incorporate the relevant terms from those letter into employment contracts, but doing so always requires we get additional information from our clients for the employment contract.

Question 7: We have been using this same employment contract template for years and no employees have complained about it. Why then do I need to have you review it?

There are many benefits in our reviewing your employment contracts, especially if they were drafted years ago. The mere fact that no employees have complained about your employment contracts does not mean they do not need to be improved. Most importantly, China’s national and local employment laws and enforcement policies are constantly changing and you want your employment contracts to reflect those changes. See China Employment Law: Local and Not So Simple. Not only that, your own situation may also have changed over the years and you want your employment contracts to reflect that as well. We often review employment contracts that made sense for a company that had 20 employees in one city doing one thing and now make no sense at all for the same company with 200 employees doing ten different things in three different cities. You do not want your company to get ahead of its employment contracts.

Next week I will write about the questions we get about Employer Rules and Regulations.

China lawyer

Our China lawyers had a team meeting yesterday and as is so often the case at such meetings, much of the meeting involved our talking about what we have been seeing lately. We mostly focused on the following trends:

  1. Six months ago, we rarely worked with our firm’s international trade lawyers. Sure, we would occasionally call one of them in to help with a sticky customs issue or a client concerned about getting hit with antidumping or countervailing duties, but these days we find ourselves working with them constantly. Companies that are getting hit or will soon be hit with having to pay 25% tariffs are looking for help in figuring out how to have their Made in China products made elsewhere so that they can legally avoid having to pay the tariffs. See China Tariffs and What to do Now, Part 1 and China Tariffs and What to do Now, Part 2.
  2. Six months ago, about 90% of the international contracts we drafted involved China or the EU. That number is now nearing 60% as our existing and new clients are diversifying outside China.
  3. International litigation is on the rise. We are reading about this we are seeing it. This is happening because of the uncertainty and the disruptions stemming from the tariffs. With disruptions and uncertainty comes disputes.
  4. China is more open to foreign businesses than it has been in years. Forming a WFOE is a bit faster, cheaper and easier than it was just a few years ago, especially if your WFOE will be operating fully legally. Check out The NEW Steps for Forming a China WFOE.
  5. Chinese factories are copying and selling their foreign customers’ products faster than ever before. Almost every week we hear of a Chinese factory that sold its foreign customer’s product before or right after shipping out the foreign customer’s first order. The tariffs are causing Chinese factories to question the viability of a long-term relationship with their foreign buyers and they are simply calculating that they can make more by selling their customers’ products online themselves. In the past, our lawyers did not push back when start-up companies wanted to test their product in the marketplace before spending for a contract to protect against their Chinese manufacturer competing with them. Now though we make very clear that this a very bad idea because by the time market strength has been determined, there may no longer be a product to sell. See China Trademark Theft. It’s Baaaaaack in a Big Way, China and the First to Market Fallacy, and Protecting Your Product From China: The 101.
  6. Following the law makes sense if you are going to be doing business in China. The number of companies coming to us with big China legal problems has gone way down but the number of companies coming to us to proactively present big and small China legal problems has gone way up. This is a good thing because it means foreign companies have come to realize China has gotten both serious and effective at enforcing its laws as against foreigners. See Doing Business in China Without a WFOE: Will the Defendant Please Rise for a good example of where China has really cracked down against foreign companies and see China Employer Audits: The FAQs for a good example of the sort of thing foreign companies are doing in China to avoid future legal problems.

What are you seeing out there?