The Growing Importance of WFOE Amidst US-China Trade War

With the growing US-China trade war and continuous slowdown in Chinese economy, US companies having business interest in China cannot afford to maintain a quasi-legal status in China. The value of forming a China specific WFOE has been stressed by the China lawyers time and again. And with the growing tension between the two countries, forming WFOE will take a greater significance.

The US has imposed three rounds of tariffs on Chinese products this year, totaling $250bn worth of goods. President Trump has warned even more could be on the way. Beijing announced it would retaliate against new US tariffs, with the commerce ministry saying that it would “immediately introduce countermeasures of the same scale and strength”.

China purchased roughly $130 billion in American goods last year — less than a third of what the United States ordered from Chinese enterprises. Now Beijing is poised to impose higher border taxes on a total of $110 billion in U.S. products. China’s $3 billion dollar counter punch to the US tariffs is just the first move from the world’s second largest economy, according to a Bloomberg report. One of the major retaliatory actions might be the cancellation of a $38 billion order to American aircraft maker Boeing, which China placed back in the year 2015. Agriculture and technology are other major sectors where the Asian superpower may plan to hit back US trade imposition.

China’s Foreign Ministry said it will respond to Trump’s latest round of tariffs with duties on more than 5,200 types of American imports and unleash a crackdown on the US companies operating in China without proper legal documents.

Beijing imposed a 25 percent additional tariff on imported American cars in response to U.S. tariffs on $34 billion in Chinese goods, including the automotive, solar panel. Electronics goods, furniture sector. US companies need to understand that the independent contractors are almost never legal in China and if US firm has Chinese employees, it must have a WFOE as a possible weapon for defending themselves from the wrath of the Chinese government.

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Trusted Counsel Required for Drafting WFOE & JV

Among other transitions, one of the notable developments observed in China is the country’s approach for getting more legalistic with the overseas companies operating over here. Often it is noted that, foreign companies pay very little attention to China’s growing legalization protocols. The consequence is they end up tangling in the legal battle that not only cost them money but also hampers their productivity and peace of mind.

In the view of the veteran China business lawyers, it is the negligence, sloppiness and the too trusting mindset of the foreign agencies are responsible for their bad luck. Take a look at the incidents that lead to it.

  • Foreign Companies Trusted Persons in China on their Face Value

A maximum number of overseas companies think by forming a WFOE is enough for gaining the legal status for continuing operations in China. Then comes a situation where the company wants to terminate one of its employees and come to the China lawyer for assistance. When the China lawyers look at the official Chinese government corporate records for the WFO so as to get a better handle on the employee’s authority at the company, they discover there is no WFOE.

Now the question is how does a company think it has a China WFOE but in actuality it has nothing. Most of the time the mistake foreign companies make is trusting the person the company now wishes to terminate. That person claimed to have formed a WFOE for the foreign company but never did or maybe this person never formed any Chinese entity at all. The money foreign corporates give to this person for forming WFOE, goes straight to his pocket and now the company cannot sack the employee from a company that does not exist.

  • Complications Regarding Joint Ventures in China
  • The complexity regarding Joint Ventures is to a some extent similar to the WFOE with the only difference is it is more complicated in nature. The putative JV partner is put in charge of forming a China Joint Venture and it either does never forms any company at all or it forms a company in Hong Kong that the foreign company believes to be a China Joint Venture. It is a case of a complete Joint Venture scam with the only exception that it makes you lose even a greater amount of money that you may lose in WFOE.

    Bottom Line

    It is advised not to trust your Joint Venture or WFOE employee without verifying the documents. Drafting WFOE and JV in China is a complicated task. In order to get everything in excellent working order, foreign companies need to seek assistance from the experienced and trusted counsel.

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