Running a business in China can be exciting and rewarding, but it does not come without its potential risks. Foreign companies operating in the country can easily stay out of legal trouble by seeking the right advice and ensuring the compliance of local laws and regulations.
Foreign businesses need to do their research before making strategic decisions. Starting a company in China is different than doing it in the United States or Europe. There are legal issues that should be considered, as well as a little more paperwork.
However, there are a few important steps that can minimize risks and ensure that a company operates legally in the country. Most problems faced by international enterprises in China, are related to a few issues.
China has many requirements for doing business. The first step is deciding which legal entity needs to be formed in order to operate legally in the country. This entity can be a WFOE (Wholly Foreign Owned Enterprise), a Joint Venture (JV), or a representative office. In China, businesses that are perfectly legal in the United States or in Europe may be illegal.
Another important document is a well written contract, preferably in Chinese. If the contract does not specify every detail of the business relationship, chances are that a Chinese court will declare it invalid. In order to force a Chinese party to respect the terms of the contract and resolve contractual disputes in the country, the document must be executed properly.
Protecting a company’s intellectual property (IP) is a must. Intellectual property (IP) registrations in a foreign country do not generally extend to China. To secure protection of trademarks and patents, they must be registered in the country. China is actually pretty good at protecting trade secrets covered by a contract (such as a China NNN Agreement) calling for their protection.
Bribing used to be a common practice in the Chinese business world, but not anymore. The United States vigorously enforces its Foreign Corrupt Practices Act (FCPA) by penalizing improper payments to foreign officials by US companies. In certain situations, American firms can be liable under the FCPA for payments made by their Chinese partners. Canada and most European countries have their own similar corrupt practices acts, as does China.
Some products (certain types of software) can be exported to China only with a validated license, while others require special approvals to be imported into China and some cannot be imported at all. Companies should be informed about China’s Customs Laws, before investing resources in importing or exporting products that are not permitted or that violate US sanctions (chips).
Doing business with China means knowing the laws and regulations of the country, such as the Antitrust, Tax, Environmental, and Employment Laws, among other. Rules and practices are well-established and are known to change frequently. It is crucial for a foreign business to keep up to date with the latest versions of the law.
Taxes are an important part of establishing or expanding a business in China. There are a few different taxes, like the Corporate Income Tax (CIT), which is 25% for all companies operating legally. If a company is selling products in the country, it will need to comply with Value-Added Tax (VAT). Some foreign businesses might be subject to withholding tax which can vary between 10% and 20%. There are also taxes related to certain documentation.
While China is known for cheap labor, the labor laws can be difficult to navigate for a foreigner, especially because of the language barrier and cultural differences. The first thing to consider are the labor contracts. Understanding the legal language, rights, and responsibilities of the employer and the employee, compensation, and benefits, legal cause for termination, and social security, is crucial. The laws concerning probation periods and leaves are also very specific.
China is a business-oriented country, and even though it’s not as open to foreign investors and capitals as it was in the past, it is still one of the most dynamic markets in the world. The language and cultural barrier could be the most difficult to overcome, but if you understand the culture or have trusted local partners that can help you navigate the local business landscape, you can draw amazing benefits from your Chinese business.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
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.