China WFOE. Do it right or not at all.
If you are doing business in China without a WFOE (or a Joint Venture or a Rep Office) you are probably operating there illegally. And if you have what you think are employees or independent contractors in China and yet you do not have a business entity in China (a WFOE or a Joint Venture or a Rep Office) you are operating illegally. And what China does to those who operate illegally in China — on good days — is to have them pay all back taxes, plus interest, plus penalties, or it shuts them down and kicks them out. Simple. For more on this, check out the following:
- China’s Tax Authorities Want You
- Why Going Into China Half-Way Is All The Way Risky
- Dude, Just Form a China WFOE
But where there is a problem there will always be the con artists and the know-it-alls who purport to have an easy solution to solve it, and that is true in spades for those who seek to operate in China without a PRC business entity. And the biggest scam are those who profit from convincing people that having a Hong Kong entity is a faster and better and cheaper way to get legal in China. It isn’t.
Repeat after me:
- Doing business in China with a Hong Kong entity is no different from doing business in China with no entity.
- Doing business in China with a Hong Kong entity is no different from doing business in China with a New York business entity.
- Doing business in China with a Hong Kong entity is no different from doing business in China with a London business entity.
- Doing business in China with a Hong Kong entity is no different from doing business in China with a Sydney business entity.
- Doing business in China with a Hong kong entity is no different from doing business in China with a Frankfurt business entity.
- Doing business in China with a Hong Kong entity is no different from doing business in China via a Mexico City business entity.
The below is a fairly typical sort of exchange our China lawyers have with people on this subject. If you sense our frustration, please understand how unbelievably often our lawyers we get these sorts of emails and how unbelievably often those who send these to us just assume they are on the right track and want to fight us when we say they most emphatically are not. And remember, we respond to these emails strictly out of the goodness of our hearts.
Opening email from American individual: I read an article you wrote a couple years ago on incorporating a business in China and you mentioned at the end that you would be happy to discuss further if needed. I have an office in Portland, Oregon, where I am from, and I am currently moving to Beijing to start a _______ business.
I was informed that it is better for me to register my business in Hong Kong to work in Beijing, since the alternative would cost one million RMB to register a wholly foreign-owned enterprise [WFOE]. My question is after I get a company registered in Hong Kong, how do I get a proper visa to stay and work? I am currently on on a 10-year tourist visa, which isn’t suitable for the long run.
My first response: With all due disrespect, whoever is giving you this counsel has no clue. Having a Hong Kong company is no better for Beijing than having an Oregon company. If you do what this person is proposing you do you will be lucky if you are merely deported after your first year because if you get caught after that the punishments will only increase. Certainly you cannot get a visa under your plan and to even try would be about the worst thing you could do because that would alert the authorities and tell them that you are not paying your China taxes and that you are there operating illegally, neither of which are things the Chinese government is fond of these days. My advice to you would be to either do it right or leave the country. Either way, I wouldn’t wait to decide.
Next email from American individual: Thank you for letting me know, I was informed that my paying taxes to the Hong Kong Tax Bureau would protect me in China. It’s obvious I have got some wrong advice which is the reason I reached out to you. My goal is to get everything clean and clear as can be so I don’t have any issues with this in the future. If you were in my shoes, what would be the starting point?
My response: The Beijing tax police do not care whether you may or may not have been paying taxes in Hong Kong. I do not know what your starting point should be because I don’t have a good sense for exactly the sort of business you want to do in China (it sounds like it is a business blocked to foreigners and so may be illegal no matter what you do) and, most importantly, I have no idea what you have done so far. About all I can say is that if it were me I’d think seriously about returning to Portland and figuring out what to do from there.
The American individual: One thing I haven’t understood is if it’s illegal to register a business in Hong Kong to do work in China, why do so many business use Hong Kong as a base for doing business in mainland China?
My response: Having a Hong Kong company is not a substitute for having a PRC entity. Those companies with just an HK business that are truly operating in China or doing business in China are doing so illegally. There is nothing wrong with having a Hong Kong company and a PRC company and many of our clients have a Hong Kong company that in turn owns a PRC company. And by the way, the advice you were given on what it will cost you to form a Beijing WFOE is as worthless as the rest of the advice you have been given in that the cost can be all over the map and it depends on all sorts of factors.
The American individual: But if I sign up with a company, I am concerned the business won’t be “my” business so there is some risk associated with it. What are your thoughts? Would you recommend using another company that is already established in China?
My response: I do not know because I do not have nearly enough facts nor am I at all clear on your goals. And let’s not forget, what you are seeking to do may be illegal for WFOEs in any event.