The Most Common China Law Issues

Clients, potential clients and the press are always asking our China lawyers what foreign companies that do business in China need to know to stay out of legal trouble.

Next time I get such a question, I will refer them to the list below as it sets out the most common legal issues foreign companies face when doing business with or going to China. This list is not meant to be exhaustive.

Are You Operating Legally? China has all sorts of requirements for doing business in China. The basic (non-technical) rule is that If you are going to be doing business in China for anything more than a few weeks at a time, you should form a legal entity to do so. This entity can be a WFOE, a JV, or a representative office. It is important to note that some businesses that are perfectly legal in the United States or Latin America or Australia or the EU are illegal in China.

Are Your Contracts Enforceable?
It almost always pays to have a written contract and it is usually best to have that contract be in Chinese. Very generally speaking, if it is not spelled out clearly in your contract, there is a good chance the court will find it does not exist; Chinese contract law is far less willing to imply things than western law.

Are You Protecting Your Intellectual Property/Trade Secrets?
 IP registrations in your own country will not typically extend to China. To secure protection of your trademarks and patents in China you must register them in China.

Are Those Payments Legal? 
The United States vigorously enforces the Foreign Corrupt Practices Act (FCPA), which penalizes improper payments to foreign officials by U.S. companies. In certain situations, U.S. companies can be liable under the FCPA for payments made by their Chinese partners. The most common situation is when the U.S. company uses the Chinese company as a distributor of the U.S. company’s products. Know these laws and know how to avoid running afoul of them. I understand Canada and most European countries have somewhat similar corrupt practices acts. China even has its own ant-bribery statutes.

Is It Legal For You To Sell It?  
At least twice, companies have called me to draft sales contracts for their technology product sales to China where what they were selling would probably be illegal to export to China. U.S. export control laws prohibit the sale of certain products to China at all and other products (certain types of software are a good example of this) can be sent to China only with a validated license

What Happens If Your Product Injures Someone? 
This would not have made the list a few years ago, but in light of the recent issues surrounding toxic foods and dangerous products coming from China, it deserves to now. There are two main ways you can protect yourself from this: by contract and through insurance.

Antitrust/Labor/Tax/Termination of Business Issues. If you are going to be doing business with China or, even more so, within China, these issues are often relevant, particularly since Chinese laws on these can be so different from those to which you are accustomed.

Anything else?

4 responses to “The Most Common China Law Issues”

  1. Cool article! I hope people take it to heart – China has completely different laws than many other countries and it can really throw businesses for a loop when they try to head overseas and open up shop.

  2. Just a brief thanks for your articles and insights. I really look forward to and enjoy reading things here. Your blog has helped me immeasurably in my dealings with China.

  3. Payroll tax is also pertinent to setting up
    an entity in China.
     
    I have been asked about e.g. whether a managing
    director of a WFOE should be paid by the WFOE in China or by the investor’s headquarters
    in the US. This issue concerns essentially tax planning.
     
    In practice, there are a lot of techniques
    in tax mitigation. The tricky part is that expats usually work hard to handle
    their payroll tax perfectly legally in their home countries, but not necessarily
    so in China.  By Chinese laws, expats are
    obliged to inform the Chinese tax authorities of their incomes earned outside
    of China and to present original receipts of tax payments in their home
    countries, if they wish to deduct their taxes paid in their home countries from
    the taxes payable in China. Widespread practices adopted by expats or by their
    agents in China are de facto tax avoidance (if not tax evasion) from the
    perspective of Chinese authorities.
     
    The Chinese tax authorities hardly know
    expats’ incomes earned outside of China, unless the expats inform the authorities
    of such income. The weakness in the enforcement of tax regulations and
    information asymmetry leave room for tax evasion by expats. Their agents in China
    often feel too time-consuming to declare the expats’ incomes earned in their
    home countries to the Chinese tax authorities. The agents quite often don’t
    declare the expats’ incomes earned outside of China to save all the trouble and
    perceive the risk of being caught as very low.
     
    It’s a choice of ethics whether to be 100%
    legal.

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