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China WFOEs: Can't Live With Them, Can't Live Without Them

By Dan Harris and Steve Dickinson

Andrew Hupert at ChinaSolved did a post, entitled, "WOFE Managers & the Law: Know ?em, Live ?em, Love ?em," on a speech by Tim Lamb on WFOEs (Wholly Foreign Owned Entities, a/k/a Wholly Owned Foreign Entities) and on complying with Chinese law. Andrew's Cliff Notes version is "follow the law":

Tim spoke for a while and covered a lot of important topics, but I?ll break down the main idea for you right now: China has a comprehensive body of business law, and if you break those laws you stand a very good chance of having a very bad time. What about your old-hand friends who tell those hilarious stories about making buckets of cash without filing a form or leaving a corner uncut? Talk to them when it?s time to sell, move or cash out. Those stories tend to be a lot less amusing.

Tim/Andrew are absolutely right. More particularly, Tim had the following to say:

1) Not everyone breaks the rules. In fact, if you are a foreign business in China, you are going to be scrutinized by a wide range of governments, bureaucracies and regulators who all hope to catch you doing something illegal. Those fines, penalties and overdue fees show up on their P&L statements, so good luck trying to squirm your way out of them. Oh ? and if you are still having your receptionist negotiate with government officials, you may want to consider raising your game a little and investing in a relationship with a qualified lawyer, accountant or consultant. 2) It?s your responsibility to know the laws. If it is going to take 6 months to set up your WOFE or move the HQ from Beijing to Shanghai, then that is YOUR problem ? not China?s. You can?t win in court by claiming ignorance. You can?t claim that the contract shouldn?t be binding because you can?t read Chinese. You can?t say you didn?t know you needed permission or approval to do business here. Those days, unfortunately, seem to be over. 3) China?s new HR rules cover western companies AND WESTERN EMPLOYEES in China. Yes, that?s right ? all of your expat managers need contracts must receive some form of benefits, pay taxes and everything else listed in the new HR law. Will your Senior VP of Marketing who earns $150 k per year sue you for a badly worded contract? Probably not. Will the pissed-off salesman with the Chinese wife sue when you fire him for non-performance? Hmmm. Better make sure your paperwork?s all in order. 4) You have to spend your registered capital within a set period of time. Yes, I know how clever you felt when you started your WOFE and banked 75% of the required capital. That was great. Now invest the funds or plan on explaining to some VERY humorless bureaucrats why you didn?t. It won?t be a problem, unless you plan on expanding, moving, selling or getting audited by the government (which should be happening every year). 5) You need government permission to move, expand, open new branches or make significant changes to your business plan. Furthermore, if you want to dissolve your WOFE or rep office, you had best follow official procedures (which sound quite involved and time-consuming) if you ever plan on doing business in China again. China loves paperwork.

I agree with all of the above, but would add that doing things right early makes it much cheaper and easier than starting off incorrectly and then having to clean up.

Full post as published by China Law Blog on May 14, 2008 (boomark / email).