Legal News

I Know Mainland China: Hong Kong, You are no Mainland China, Legally That Is.

China WFOE Formation lawyers

As a lawyer, I have to appreciate a great burn and one of the greatest of all time, has to have been Lloyd Bentson’s smoking of Dan Quayle during the 1988 vice-presidential debates:

Tom Brokaw: Senator Quayle, I don’t mean to beat this drum until it has no more sound in it. But to follow up on Brit Hume’s question, when you said that it was a hypothetical situation, it is, sir, after all, the reason that we’re here tonight, because you are running not just for Vice President — (Applause) — and if you cite the experience that you had in Congress, surely you must have some plan in mind about what you would do if it fell to you to become President of the United States, as it has to so many Vice Presidents just in the last 25 years or so.

Dan Quayle: Let me try to answer the question one more time. I think this is the fourth time that I’ve had this question.

Brokaw: The third time.

Quayle: Three times that I’ve had this question — and I will try to answer it again for you, as clearly as I can, because the question you’re asking is, “What kind of qualifications does Dan Quayle have to be president,” “What kind of qualifications do I have,” and “What would I do in this kind of a situation?” And what would I do in this situation? […] I have far more experience than many others that sought the office of vice president of this country. I have as much experience in the Congress as Jack Kennedy did when he sought the presidency. I will be prepared to deal with the people in the Bush administration, if that unfortunate event would ever occur.

Judy Woodruff: Senator [Bentsen]?

Bentsen: Senator, I served with Jack Kennedy, I knew Jack Kennedy, Jack Kennedy was a friend of mine. Senator, you’re no Jack Kennedy. (Prolonged shouts and applause.) What has to be done in a situation like that is to call in the —

I am hoping my linking Hong Kong to this famous Bentson put-down will serve as a memory trigger so that everyone starts disassociating Hong Kong from the Mainland. Let me explain.

The other day, a non-lawyer blogger emailed me to point out his post in which he nonchalantly listed “forming a Hong Kong company” as one of three ways (forming a WFOE and a Joint Venture were the other two) foreigners can legally operate their business in the PRC.

Probably every month (and it happened today), someone already “in China,” calls on a legal matter and tells me they are operating in China as a Hong Kong entity, as though that grants them some sort of legitimate legal status on the Mainland.

Probably every month, someone calls me and mentions or asks about forming a Hong Kong entity as an option to avoid having to form a WFOE in China.

I find it strange that for many years Hong Kong had seldom merited mention for anything other than as a method for reducing taxes, but it is now back on the table, front and center, as an alleged option for China entry, even though it really is not. And the weirder thing is that I think I know why, and I think it is a great example how something legally correct/true in one area can so quickly be misunderstood by non-lawyers.

Here goes.

When foreign businesses first started entering China during China’s opening up period, going in through a Hong Kong entity made sense for countless reasons separate and apart from tax relief. The foreign company would set up a Hong Kong entity and that entity would, in turn, own a Chinese entity (usually, at that time, a joint venture).

Earlier this decade, the non-tax benefits of forming a Hong Kong entity to own a Mainland China entity pretty much disappeared. Forming a China WFOE owned by a United States company become pretty much the same as forming a China WFOE owned by a Hong Kong company. Early on in this transition period, however, many businesspeople believed they needed a Hong Kong company to go into China. This was not true and eventually, my firm pretty much stopped getting calls from people who believed this.

Earlier this year, China made a few fairly minor changes in its foreign company formation regulations that made it a tad easier (logistically, not really substantively) for Hong Kong companies to form a company in China than, let’s say, an American company to form a company in China. These changes did not in any way restrict American companies from going into China by way of forming a China WFOE, but all of a sudden, my firm started getting calls again from people under the impression they needed to form a Hong Kong company to form a China WFOE. Not true.

And then an even stranger thing started to happen. People started to think that forming a Hong Kong company would allow them to operate in Mainland China legally. This is completely untrue. Having a Hong Kong company gives you no more right to operate legally in China than having a United States or Canadian or British or Nigerian company. None are China companies.

Do not be fooled…..

Leave a Reply

Your email address will not be published. Required fields are marked *