Maintaining Good Standing Status is crucial for your China Business Compliance
As a foreign professional planning on starting a business in
China, it is critical that your corporation maintains a good standing
status in its place of origin. The Chinese government will require
a Certificate of Good Standing from you before letting you register
your company in the country. Maintaining this status is fundamental
for the future success of your business.
This is relevant as well when it comes to lenders, investors, and vendors, who will request a Certificate of Good Standing before doing business with any company.
A Certificate of Good Standing is a document issued by a state’s business entity filing office (often called the Secretary of State) where you formed your company (the formation state). It serves as official proof that your corporation was validly formed, still exists, and is in good standing according to the state’s records.
A Certificate of Good Standing, depending who issues it and other circumstances, may be called a Certificate of Existence or Certificate of Status.
The Companies Registry in China records all the companies that have been officially registered for business in Mainland China and it is managed by the State Administration for Industry and Commerce. The Administration for Industry and Commerce is the authority in China responsible for legislation concerning the administration of commerce and industry.
If you wish to incorporate your business in China, you must file the proper formation documents with the local authorities. The government then essentially grants the right to conduct business as a statutory business entity with all the advantages this brings.
To maintain this right, the corporation must comply with a series of laws and regulations. These include appointing a registered agent, making timely filings of required forms, and paying fees and/or taxes, among others.
As long as the corporation complies with all these requirements, it is designated as being in “good standing” on the state’s records and keeps all the rights and privileges of doing business as a statutory entity.
However, companies that are careless about their compliance obligations can lose their good standing status and be considered “delinquent,” “void,” “suspended” or “dissolved.” Losing this status can seriously damage your ability to do business.
The Chinese government has a long history of cracking down on foreign businesses whenever there are tensions between China and the West, or when the country is going through tough economic times. With relations between China and the US at its worst point in the last 20 years and China’s economy growing at its slowest pace in nearly 30 years, ensuring your company’s compliance is more important than ever.
There are a few things that foreign companies doing business in China (or even with China) can do to avoid losing their good standing status.
The first step is to make sure that your Ltd, your Joint Venture or your Representative Office is licensed to do the business it is doing in China and is current on its capital obligations. It is important that your company is properly licensed in every city in which it is doing business.
If you registered as an import/export company and you now own a factory, you should make the necessary changes. This goes as well if the current location is different from the one recorded on your business license. You should also update the names listed as your company’s legal representative, general manager, and supervisor.
Make sure your company is doing everything correctly with its employees. China’s employment laws are complicated, localized, and pro-employee. Having the appropriate written employment agreements with all your employees in China, domestic and foreign, is fundamental for maintaining compliance.
Review and update your employee manual and other employment-related documents, from offer letters to severance agreements and everything in between. Check that you stay in compliance: are all of your non-Chinese employees’ work permits and residence permits current? 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?
You can consider doing an employer audit to identify any problem that you may need to remedy to avoid losing your good standing status.
Taxes is a key area for compliance and one that the government authorities will go after first. Make sure your company is current with its taxes. It is essential to engage a competent local accounting firm. Your accountant must understand Chinese tax law and should also have at least a rudimentary understanding of your home country’s tax laws as well. For instance: your transfer pricing should be current and accurately reflected in your contracts and your profit margins should be high enough to keep China’s tax authorities at bay. Certify that you are paying all required income and employer taxes.
Many foreign companies doing business in China let their 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, you need to maintain newer products/services or brands.
Design patents must be registered before you release your products, and you should keep sufficient evidence of trademark use to fend off a non-use cancellation. Any trademark license agreements should be properly drafted and registered.
It is crucial to have a trusted China contract lawyer review the contracts related to your China operations to check that each and every one of them is legal. Many foreign companies do business in China in a way that makes it impossible for them to enforce their contractual rights. You should have written agreements with your major sources and clients, they should be in Chinese and enforceable under Chinese law.
You should also conduct due diligence on your suppliers/manufacturers, distributors, retailers, and e-commerce platforms. Your risk is going to be influenced by the business partners you work with.
Businesses tend to lose their good standing status due to various compliance issues such as a lapse in annual report filing or non-payment of taxes. These issues sometimes remain undetected until the worst possible time, such as closing a financing deal.
A company’s responsibility for maintaining good standing is often spread across different departments such as legal, tax and finance. Even businesses with compliance teams often struggle to keep a company in good standing due to outdated or substandard tools and/or processes that don’t continually monitor company information and state requirements.
In China, laws and regulations related to foreign business are often modified to keep up with the fast-changing nature of its markets. Companies may not know about the changes, but they are not exempt from following them. Sometimes notifications are not sent or are directed to the wrong person.
An entity’s status often changes during its business lifecycle. Mergers, acquisitions, expanding into new locations or converting entity types can trigger new compliance requirements. It is important to file dissolution or withdrawal forms when closing a business, as the company will remain liable for all required filings, taxes and penalties until that happens.
Compliance should be a priority in every business. A certificate of good standing will help your company access to financing, and for other transactions, requests for proposals (RFPs) or contracts. You may need one to sell the business, for real estate closings, or for mergers, acquisitions, or expansions. If a business cannot provide a Certificate of Good Standing, it raises a compliance “red flag” that indicates something is wrong with the company.
If your company loses its good standing, it will be very costly to revert the situation. Returning a firm to good standing requires the payment of fees, interest, and penalties. And if it has been administratively dissolved or revoked there are additional reinstatement fees. Continued non-compliance can also cost your company its name.
The best way to maintain your company on track is to have a proactive compliance approach. There are many options at your disposal, from web-based tools that support a do-it-yourself strategy, to partnering with an expert to create customized best practices. Evaluate the complexity of your compliance situation.
China offers great opportunities but can be a difficult country when it comes to compliance, especially for foreign companies. You and your company must adjust accordingly and seek the necessary professional assistance to help you guarantee the health and longevity of your business.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.