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How’s Your China WFOE? Please Check

China WFOE formation lawyers

Not sure why (China government arrest quotas?), but at the end of every year, my law firm always gets a slew of emails and phone calls from foreigners in big trouble in China. In past years the trouble has mostly involved unpaid taxes, usually with the following sort of scenario.

Foreigner calls to say they are in their home country for the holidays and they have learned that Chinese tax authorities have come by to discuss the company not having reported all of its China earnings. The person wants to know whether it is safe for him (it has 100% of the time been a male) to return to China. Three more minutes of talking usually reveals this company has not come close to paying its China taxes and the person on the other end of the line “justifies” this by saying his Chinese accountant told him that “nobody pays these taxes.” I then tell this person that the Chinese government LOVES going after foreign companies that don’t pay all their taxes and that it has gotten really good at catching those that don’t. I then tell him that he absolutely should not go back to China unless and until his company has cleared up all back taxes, with interest and with penalties.

But this seems to be the year of the busted (pun intended) China WFOE, as we have received one email on this, one Facebook communication (on our China Law Blog Facebook Page), and three phone calls. Vaguely summarized, most of these are from people who were arrested and put in jail for about ten days and then released and told not to leave their city or people who were visited by the police and told not to leave the city. All are being “questioned” about doing business in China without a WFOE. Doing Business in China Without a WFOE: Will the Defendant Please Rise. Hard to tell exactly what is going on with any of the these yet. One vehemently claimed he had paid someone to form a WFOE for him and that person had said he had in fact formed the WFOE, and yet the police said he had no WFOE. So it appears he was scammed. The others are mostly claiming they “thought” they had formed a WFOE or that they were told by someone that they did not need a WFOE.

The most interesting is the person who insisted he had formed a WFOE with a “legitimate” entity formation company but it appeared that company had formed the WFOE as a consulting WFOE and this company (with 18 employees) clearly should not have been a consulting WFOE. I do not know if the entity formation company duped this person by forming the company as a consulting WFOE (this is not uncommon because these are typically the easiest and fastest WFOEs to form), knowing it did not really qualify under for that sort of WFOE, or if the foreign company had started out as consulting WFOE and then morphed into something else and then failed to alert the Chinese government, as required. This person who was not imprisoned. See Forming a China WFOE: Scope is Key.

Bottom Line: Check your WFOE. Now. And if you are going to form a WFOE, make sure you do it right. Oh, and one more important thing: many times foreign companies would be better off not forming a WFOE at all and not having their own people on the ground in China. For more on this, check out Forming a China WFOE: Needed or Not.

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