China Law: Do Not Try This at Home

Got an email yesterday with a link to an old discussion on a Reddit group regarding the cost of setting up and doing business in China. The discussion began with someone seeking information regarding the best way to set up a business in China and information about what that will cost. I am not going to link over to the discussion because I have seen these sorts of things a million times before and I do not want to single out this particular group.

The reader sent me the link and requested I make a comment to the discussion that would “set the record straight.” I kept my silence on the discussion itself but I am going to rant about it now. I have no interest in getting involved in a discussion with a bunch of non-lawyers talking about how to set up business entities in China who know nothing of whereof they speak.

The comments that really got to me were the following:

You also might want to consider setting up your office in Hong Kong which offers the name recognition you’re looking for and gives you good access to mainland China. There are lots of benefits to choosing HK both from an ease of doing business aspect and because it is so much cheaper to do so. You can have a branch office in China if you need to.

There is no good way to set up a small company in China considering Rep. office vs. WOFE; neither gives you much legal authority to do very much. The rep. office is much less money though and you can conduct business utilizing Chinese IE agents to do the legal part.

WRONG. Really wrong.  Setting up a company in Hong Kong is not the same thing as setting up a company on the mainland. Legally, setting up a company in Hong Kong is much closer to setting up a company in Tokyo or New York (at least with respect to the PRC) than it is to setting up a company in the PRC. See A Hong Kong Company Is NOT a Mainland China Company and a Hong Kong Trademark is NOT a Mainland China Trademark.

But probably the most ridiculous statement is that of how a WFOE does not “give you much legal authority to do very much.” Actually, under Chinese law, once established, a WFOE is a Chinese company and it has the same authority to do pretty much whatever wholly domestic Chinese companies can do.

Someone else said that 20,000 Yuan is enough for a small company. It is not. That’s around $3,000.  The minimum capital requirement is around $14,000 (it is way more in most places where foreigners want to go) and on top of that, and in many parts of China, the company must rent space appropriate for a WFOE and then it must pay an employee, including employee/employer taxes. It typically takes at least $50,000 to form and run a business in China for the first year.

What is most troublesome about the proliferation of amateur China lawyers is that there are actually people who follow their advice. I just hope you are not one of them.

The problem with listening to people on these forums is that they are often right and often wrong and there is usually no good way to tell the difference. I spent much of 2017 and 2018 living in Spain and working with our lawyers there. For that I needed a visa and I the more I read about the various visas (in both English and in Spanish!) the more confused I got. I had a strong sense that I understood 95% of what I needed to know, but I also had no idea what 5% I was wrong on.

So I hired a really good and relatively expensive Spanish immigration lawyer and my wife and I met with her and in two hours she explained it all to us. I had read that it takes months to get a visa after meeting with the Spain consul in the United States and that would be a huge problem for us because it would have meant we would need to park ourselves in the United States while waiting for the visa. This lawyer told me that it would almost certainly take less than a week and she also gave us a ton of tips that would all but ensure this. It took two days, largely thanks to her.

Much of what is online regarding legal matters has been wrong since the day it went up and much which was initially correct has changed. Also, some of what is online applies to some cities and some industries and not others. This is as true for Spain as it is for China.

Bottom Line: Reading about how to operate legally in China is a good thing but making real life decisions on that is not.

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