Chinese business law is complicated and dynamic. It’s also subject to times of intense scrutiny as can be seen in the current case of Crown Resorts Ltd. China’s unexpected detention of 18 employees of the Australian operated Crown Resorts LTD is viewed as a warning bell for all other foreign companies operating in China. The scrutiny of how each foreign business operates and complies with Chinese law is being ramped up.
In a conversation with NASDAQ, Dan Harris, a leading authority on legal matters related to doing business in China and in other emerging economies in Asia, had this to say about the ramifications of the Chinese Crown probe.
“Fifteen years ago, not many companies got caught. China didn’t have the forces in place to catch these people, and they probably didn’t have the desire,” he said. Now, China has begun to “step up its game.”
That statement refers to the practice years ago of foreign companies exploiting the weakness of Chinese law enforcement as foreign firms took on the attitude that since everyone else is doing it. Why not me?
Awareness is Invaluable
This is where the awareness issue comes to bear. The Chinese are short on details but big on action. Once you’re in their cross-hairs, you must take the extra steps to ensure compliance to remain on good terms with the government. You must have someone in the company or a consulting agency that follows Chinese law with a passion including keeping their ear to the ground about surprises that are just around the corner such as the Crown probe. If your business has taken every possible step to comply with Chinese law and considered every possible contingency, the odds of your company getting into trouble with the Chinese government are low. The perception of being noncompliant puts you under the microscope.
– Corporate Compliance – What did you say the company was going to do while working in China when you registered as a WFOE, Joint Venture, or Representative Office? Are you still operating within the bounds of the activities that you described? There is no splitting of hairs here. Either you are or you aren’t. It’s that simple to the Chinese government. Don’t delude yourself and say you are when you know full well you aren’t. It could be as simple of a problem of having moved your operation to a new business address without revising your registration papers. Are the same people still running the operation or have you brought in new workers? This opens up a whole new can or worms in employment, tax and contract compliance if you haven’t taken the time to update your registration papers.
– Employment Compliance – employment of people in China is no easy task. Chinese law is very pro-employee, difficult to understand and changes from one location in China to another. Employment agreements must be complete and I force with all your employees whether they be Chinese nationals or foreign workers. The use of competent employment legal counsel within your HR structure is an absolute requirement. Everything must meet Chinese Employment Contract Law. Offer letters, severance letters, employee manual, work permits, residence permits, local labor bureau approval of the working hour system and contributions to the social insurance accounts for each employee must meet the intent of the law. They must also be renewed at the proper intervals. It’s a complicated and localized web of intrigue that must be mastered and sustained.
– Tax Compliance – this is a two-headed beast and requires the knowledge of a local tax accounting resource as well as a competent tax resource in your home country. These two groups must work together to meet the requirements of Chinese tax law while maintaining the integrity of your tax reporting back to your home country. A specific issue to pay attention to is China’s transfer pricing laws and the related Enterprise Income Tax Law (EIT). They are new and are difficult to navigate but must be respected to keep China’s tax authorities in check.
– Intellectual Property (IP) Compliance – compliance can only be achieved if you know how China enforces IP registrations and challenges. Enforcement of copyright protections is still difficult in China but things are changing for the better with the setup of new courts and new laws. However, until these new courts and laws are exercised with known results and legal precedents, it’ also a smart move to understand how it has historically been handled. IP registrations must be in order and also must be updated as new products, services, and brands come into existence. Is common sense used in filing design patents before the new product is released? Is your enterprise search and discovery system compliant in keeping all evidence of trademark use available to legally defeat non-use cancellation judgments? Have you correctly prepared and registered all trademark license agreements? Do you have a strong corporate process that takes into account all Chinese laws and regulatory practices?
– Contract Compliance – this is another case of making sure the paperwork is airtight so you a legal leg to stand on when conflict arises. You must have written agreements, in Chinese, with all your suppliers, vendors and clients. Obviously, legal counsel should be drafting, reviewing and representing your company in all these legal matters. Are you? Are you minimizing supply chain risk?
The common theme across all these areas of compliance focuses on two areas. The first is to be aware of Chinese law in its current form while anticipating how those laws will be changed or interpreted over time. That awareness level must be detailed and well understood.
Second, your defense of your business and the means to stay out of the cross-hairs of the Chinese government is to have all your paperwork, registrations and plans filed with the appropriate government agencies, both national and local. Then, as things change about how your conducting your business in China, you must update all that administrative evidence so that it will stand up in a court of law, Chinese court of law that is. Ignorance of the law is no excuse for non-compliance.
So, invest the time to make all things correct and transparent to the relevant Chinese authorities. If you do, you can exist in that corporate environment and meet your revenue goals.
If you have any questions on HR/legal/administrative procedures in China, send us a form.