Chinese Lawyers Advice on WFOE in China Paying Non-Chinese Employees

The question of paying a non-Chinese employee from the original company established outside China has been making rounds since a long time. Chinese lawyers often face this question from the foreign and parent company. They reply in affirmative because it is legal to pay the non-Chinese employee by the parent organization and also by the Wholly Foreign-Owned Enterprise (WFOE) located in China. However, there are tax hassles regarding this payment issue.

An American employee can pay its American employees from both the USA and also China. That is legal. However, if the American employee stays back in China for over 183 days in a calendar year or is a permanent resident, then that payment comes under tax deductions. Paying taxes and producing a report is obligatory by the Circular of the State Administration of Taxation on Income Tax Paid by the Enterprises with Foreign Investment and Foreign Enterprises for Their Employees on Behalf of Their Enterprises Abroad.

The Circular on Questions Concerning Tax Payments for Wage and Salary Income Gained by Individuals without Residence within the Territory of China (Guoshuifa [1994] No. 148), commanded that if the employee is working in China for less than 183 calendar days, then that employee should pay taxes only on a part of the salary received from WFOE in China during his/her tenure in the country. However, if the employee works for over 183 days but less than 365 days, he/she must pay taxes during their stay in China. If he/she was receiving salary from China WFOE, then he/she must pay taxes. This means, whenever employees are paid salary in China, that comes under taxation.

The employee will be taxed doubly, if he/she has stayed in China for over 1 year but less than 5 years. His income will be taxed twice on what he is paid by the original parent company and also on the amount he is paid by the China WFOE. Tax payment must be done by both the employee and the employer. There is no way that this obligation can be avoided by either of the parties. The Chinese business lawyers always advise their clients to comply with these regulations, failing which can lead them being penalized.

There is a loophole in this practice. The problem is that foreign companies have conventionally ignored this rule. On the other hand, the Chinese tax authorities have taken steps to enforce the rules more aggressively. Visa renewal time poses a great challenge for the employees residing in China. In case, the employee has resided in China for over 183 days, the local tax authority demands a copy of the employee’s US tax return documents. In case, the employee fails to provide it, his visa will be denied whereas, if the employee provides the tax return documents, the authorities will assess tax along with penalties and interest.

There have been several instances of visa denial in China after 183 days of sojourn for the WFOE employee. This happens to employees who fail to report their combined salaries. Also, there have been several instances where the Chinese tax authorities penalized the WFOEs aggressively when they failed to report and pay taxes on combined salary for Chinese managers. Therefore, there is a lot of risk involved in noncompliance.

What is then the best practice for WFOE? Whether they should report combined salary and pay taxes or they should make sure that their employees do not stay back for more than 182 days in a year. This will be taken up in the second part of the blog post.

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China Business Lawyer Advising on Stealthy Translator for Foreign Companies

All kinds of business documents must be done in Chinese- that is an unwritten rule in China where the foreigners have been doing business. Chinese business lawyers often get asked on this topic by their clients and they have to reply in a proper way so that the business clients do not get disillusioned badly while doing business in China. Many business organisations desiring to do business with China contemplate on making a request to the Chinese government regarding hiring a Chinese translator since all the business documents must be drafted in Chinese so that they can be enforceable.

Sometimes, the government does not want the foreigners to get a translator from outside because they do not trust these people and feel like they will bust their system. They provide the excuse of having confidential information and therefore they need trustworthy people involved in the business and not someone that they cannot trust. Any kind of contract, particularly the NNN contract must appear in Chinese to make it enforceable under Chinese law. But the Chinese party most of the times ignore the plea.

When the Chinese party ignores the request, the obvious question that arises is whether they can be trusted by the foreign party because in absence of a translator the Chinese counterpart can do anything to the foreign business party. Since, they will not understand anything the Chinese people include in their contact, it will be easier for them to cheat on the foreign company. When asked why they do not want any Chinese translator, they provide reasons which sound more like excuses. There are lot of down sides to this practice. More often than not, foreign companies are being played here.

Some Markers Proving Foul Play:

While the situation might be different in different cases, still some common markers exist which can make the situation and their intention clear. The markers are:

  • Close Relationship with Government- This has necessarily got nothing to do with the demand or need of a Chinese translator. However, this is their subtle way of threatening the foreign company. If they mention the government, it straight away means that they can use their close relationship with the Chinese government to prevent the foreign company from doing business in China. This is misuse of power, but that is validated in China.
  • The Real Reason- The obvious question comes to mind regarding this. Why are they afraid of letting in a translator? The legitimate and honest Chinese companies generally clarify on this matter whereas the fraud ones do not. Well, this is a valid litmus test for Chinese companies before you want to work with them. This is a real problem situation and it is clarified when you approach Chinese manufacturers to work with them. The real standard fo a Chinese company is often displayed when it comes to bringing a translator along to do business.
  • Scary Situation- Yes, this situation is particularly scary for you because the Chinese companies only tend to translate what they think is right for you to know and the rest is kept unknown. This definitely increases the risk of doing business with them. The fact that the Chinese company will translate the terms of the contract for you is frustrating and scary too.

However, the situation is not so bleak after all. You can definitely do something to counter this malpractice. You can hire someone and take him/her with you to China and introduce that person as dealing with your business on your behalf. This will make the Chinese company listen to you and the translator as well. This person should neither look Chinese nor speak Chinese in front of the Chinese company. Instead of that, he/she should only speak Chinese in your presence. This is generally the advice provided by the Chinese lawyers to all their foreign companies. They are referred to as the stealth translators and they are quite helpful in saving the business. They often bail out the foreign companies in rough situations and explain the provisions contained in the contracts which are extremely important while doing business in China.

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