A few months ago, we did a post titled, Want to Keep Your Business in China? Do These Things NOW. We wrote that post because we were (and still are) seeing a massive uptick in foreign companies getting into legal trouble with the Chinese Government. China’s government has a long history of cracking down on foreign businesses whenever there are tensions between China and the West and whenever China is going through tough economic times. With relations between China and the West easily at its worst point in the last 20 years and with China’s economy growing at its slowest pace in nearly 30 years, China’s crackdown on foreign businesses has come as no surprise to our China lawyers.
In our “Do These Things NOW” post we recommended foreign companies doing business in China (or even with China) do some or all of the following:
1. Make sure your WFOE or your Joint Venture or your Representative Office actually exists and is still licensed to do the business it is doing in China. Make sure it is current on its capital obligations. See Doing Business in China Without a WFOE: Will the Defendant Please Rise.
2. Make sure your WFOE or your Joint Venture or your Representative Office is actually properly licensed to do business in every city in which it is doing business. It is shocking how often this is not the case.
3. Make sure your company is doing everything correctly with its employees. Consider an employer audit and note that our China employment lawyers have never done an employer audit without finding multiple problems.
4. Make sure your company is current with its taxes. If you think it may not be, it almost certainly is not.
5. Review your lease agreement and the relevant zoning rules. Are you renting from a real landlord? Is it really legal for your business to do what it is doing where it is doing it?
6. Have a trusted China contract lawyer review your contracts related to your China operations to make sure each and every one of them is legal.
7. Conduct due diligence on your suppliers/manufacturers, distributors, retailers, and e-commerce platforms. Your risk is going to be influenced by the company you keep.
8. Make sure your IP has been properly registered and that your company is not violating a China company’s IP rights.
9. If your WFOE or your Rep Office or your Joint Venture share is American or Canadian owned, consider forming a new company (“Newco”) in a country with good relations with China and selling the WFOE Joint Venture share or Rep Office package to that Newco.
Our China compliance lawyers have been going nearly non-stop in working to improve compliance for companies in China. About 75 percent of these companies have come to us proactively in an effort to avoid problems. About 25 percent have come to us after having discovered problems or having had problems “discovered” for them by a disgruntled employee (or in one case, by all employees) or by the government.
Our China compliance lawyers have mostly been focusing on the following five key areas of company compliance:
1. Corporate Compliance.
Are your company’s activities still covered by the scope of business used during registration? If you registered as an import/export company and you now own a factory, you should make some changes. Is your business in a different location from that listed on your business license? That requires a change also. Is the the person listed as your company’s legal representative still with your company and still the person you want in this position? What about the general manager? The supervisor? Have there been any changes to the parent company?
2. Employment Compliance.
China’s employment laws are complicated, localized, and pro-employee. Make sure you have appropriate written employment agreements with ALL of your employees in China, domestic and foreign. Review and update your employee manual (a/k/a Employer Rules and Regulations). Review and update all other employment-related documents, from offer letters to severance agreements and everything in between. Make sure you otherwise stay in compliance: are all of your non-Chinese employees’ work permits and residence permits up-to-date? Have you secured approval from the local labor bureau for any employees under a non-standard working hours system? Have you secured all necessary renewals for such employees? Are you paying into the appropriate social insurance accounts for each employee? If you have not had an employer audit done on your business in the last couple years, you are long overdue.
3. Tax Compliance.
It is essential to engage a competent local accounting firm. Your accountant must of course understand Chinese tax law, but they should also have at least a rudimentary understanding of your home country’s tax laws as well. For instance: make sure your transfer pricing is current and accurately reflected in your contracts and that your profit margins are high enough to keep China’s tax authorities at bay. Make sure you are paying all required income and employer taxes.
4. IP Compliance.
We constantly get calls from foreign companies doing business in China that have let their China IP registrations fall into disorder (or never organized their IP in the first place). Even if you registered everything appropriately when you first came to China, have you kept up with newer products/services or brands? Are you registering design patents before you release your products? Are you keeping sufficient evidence of trademark use to fend off a non-use cancellation? Have you properly drafted and registered any trademark license agreements? Are you taking full advantage of China’s trademark system?
5. Contract Compliance.
Many foreign companies do business in China in a way that makes it all but impossible for them to enforce their contractual rights. Do you have written agreements with all your major sources and clients? Are you using a lawyer to draft your design/manufacturing/licensing/purchase/etc. agreements? Are these agreements in Chinese? Are they enforceable under Chinese law? See Drafting China Contract that works. I cannot tell you how many times (three times already this week), our China dispute resolution attorneys have to tell potential clients that we are not interested in taking on their litigation or arbitration matter because we have little to no confidence in the contract on which they want us to base their case.
China has changed, especially for foreign companies, and there is no going back. You and your company must adjust accordingly. It is that simple.