Mitigate the Legal Risks of Doing Business in China

Overseas companies with business operations in China require to stay out of legal troubles. Unlike the US and Europe, the business environment in China is entirely different. It’s a realization all foreign business owners entering the Chinese market have to face. Foreign businesses need to forgo all their Western sensibilities. In China, a company that is controlled by a quota equal or superior to 25% by foreigners is considered a Foreign Invested Enterprise (FIE).

According to Investopedia, FIEs tend to have tight government regulation at several important junctures, which can limit how much a company can profit from foreign ventures, as well as the amount of control that a foreign parent has over the FIE. The most common FIE is the WFOE (Wholly Foreign Owned Entity), that is, as the name suggests, a legal entity completely owned by foreigners. The type of WFOE used in the great majority of cases is the LLC (Limited Liability Company), where the responsibility (or “liability”) of each partner is limited to the capital they themselves invested in the company (as in the US or in Europe).

A few years ago China has streamlined its foreign investment regime by replacing the original approval process for the establishment and alteration of foreign investment enterprises (FIE) in most industries with an online record-filing system. To co-ordinate with the record-filing system, the 2017 Catalogue introduces a negative list. All industries unlisted in the negative list are presumed permitted to foreign investment and are subject to online record-filing only.

China has all sorts of requirements for doing business within its territory. Surprisingly, there are many businesses that are considered legal in Europe and USA, maybe termed illegal in China. In order to avoid legal impediments, foreign businesses need to pay attention to so many aspects. We are highlighting some of the key points to mitigate the legal risks of doing business in China.

  • A U.S. company needs some form of representation in China before it can distribute its products. Depending on the distribution structure, there may be tax consequences under both U.S. and Chinese law.
  • Make sure your IP has been properly registered and that your company is not violating a China company’s IP rights.
  • All business entities need to maintain records of corporate documents with local branches of State Administration for Industry and Commerce (SAIC) including basic information regarding registered capital, directors, shareholders and the constitutional documents.
  • Foreign enterprises must be careful to exam and verify the legal status and financial capacity of their Chinese parties before signing any business contracts with them. Conduct due diligence is perhaps the most important step before taking your business to China.

Careful preparation is required to avoid any legal problem and potential risk. Setting up and smoothly operating a business in China isn’t that complicated, it just requires patience and research.

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