China Foreign Company Compliance in These Tough Times

You’ve heard the message. As tensions continue rising between China and the West, now is the time to get your China house in order.

Why? Because doing so will result in one less huge weakness for the Chinese government to exploit against you. You can count on it because when the Chinese economy or society is in a state of stress — which it is right now — the fall guys will be the foreigners and their China enterprises, especially those from countries that are at odds with China.

Get Legal. Now.

Recent history illustrates how this works: For those of us with a long history of working in China, we remember a time when almost no one paid certain types of taxes. The tax laws were on the books, but they were rarely enforced by the various tax bureaus. For a long time, local governments received a large portion of their income from selling land rights, re-zoning agricultural land to land that could be used for commercial, residential or industrial land. The central government gradually put the brakes on this out of an understandable concern to preserve essential farm land and limit excessive development. With this revenue stream drying up, the local government turned to enforcing its existing tax laws to try and replace this lost income. And guess who they came after first (and who did not have a relative working at the local tax bureau)? Foreign businesses and organizations, who, under the advice of their local staff, were not running compliant operations. We have clients that had to pay large fines and some who were detained in Chinese hotels or even jails until they did so.

When you first established your operations in China, you probably had many challenges you needed to solve to operate in China, some of which were not completely legal.

These are the areas that should concern you during these tough times and now is the time to be asking the following questions about your China operations:

  1. Are you compliant with China’s employment laws? Is it legal to layoff local staff? Foreign staff? Because of COVID-19, layoffs are really tough right now, but you may actually have more than the usual flexibility for certain employee time reductions. How about demotions, or reducing full-time staff to part-time status? What are severance pay considerations when terminating staff? Do all of your employees have employment contracts in Chinese? Are your employer Rules and Regulations also in Chinese and, equally importantly, are they up to date and fully localized so as to comply with each of your company locations in China?
  2. Do you have good enforceable contracts? During tough times, some contracts will inevitably need to be renegotiated and some will be breached. In these contract disputes, a poorly drafted contract gives away any bargaining position or rights you could have had. Does your contract make the best choice for language, law and jurisdiction? Does it include the appropriate amount of contract damages?
  3. Are you financially compliant? As mentioned above, you want to make sure your company (and you as well if you personally should be paying personal income taxes in China)are  paying all required taxes and doing nothing that could be construed as money laundering or otherwise circumventing foreign exchange controls. Should local and expatriate staff’s tax and social insurance treatment be different or the same? This requirement varies by the locale. Are you still paying some of your foreign (or even Chinese) staff part of their salary off-shore? Are you having your customer payments routed to your Hong Kong or Singapore bank accounts? Are you paying your Chinese vendors to their Hong Kong or Singapore bank accounts without proof that they have Chinese government authorization to have such accounts? In rare instances, foreign legal representatives have been prevented from leaving China for these sorts of things or, even worse, jailed

If you have any concerns about the above or anything else regarding China compliance, consider having an unbiased third party conduct a substantive review of all legal and tax aspects of your business and provide you with clear instructions and/or assistance on how you can get into compliance fast. At minimum, you should consider an employer audit.

The best practice (by far) for this is to use people fluent in Chinese and knowledgeable about Chinese regulations for any audit or company compliance review. Using your local staff is invariably a bad idea because they usually lack sufficient knowledge about either foreign company requirements or the standards to which the Chinese government holds foreign companies. Most importantly, if they actually had the necessary understanding of compliance, they would have already fixed the situation and in nearly all of the problem cases that have come our law firm’s way, the staff deliberately set things up to skirt Chinese law and they often did so to pad their own pockets.

And then, make sure you follow through on the recommendations you receive. We have had clients who paid us good money for advice and then ignored it. Don’t be that person.

When times get tough, the tough get their legal house in order.