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.
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.
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.