What Are the Legal Challenges of Doing Business in China?

China is a unique country, with a complex legal system that is quite different from the west. If you are looking to do business in China, you will need to familiarise yourself with this unique legal landscape. In this article, we’ll go over some of the common pitfalls faced by foreign businesses so that you can avoid them.

Challenges of Starting a Business in China

Running a business in China presents various challenges, including navigating a complex regulatory environment, cultural differences, and fierce local competition. One of the first hurdles many companies face is how to find suppliers in China who are compliant and reputable—especially when trying to enter manufacturing or product-based industries.

Investment Restrictions and Incentives

China has strict limitations on foreign ownership of businesses in China. This is particularly true in finance, automotive and telecommunications industries. These restrictions can include limits on percentage ownership, or can mandate a joint venture with Chinese partners.

On the other hand, the Chinese government offers incentives for certain industries. These incentives include tax breaks and subsidies, and they are intended to attract foreign investment into those industries.

It is worth familiarising yourself with some of the incentives on offer in order to get the most out of your business operations in China.

National Security Review

If you wish to invest in certain industries in China, you must undergo a national security review process. Industries that may require a national security review include AI, semiconductors, automotives, military, and energy sectors.

Completing a national security review can take a few months, so make sure to plan ahead.

Applying for Business (and Other) Licenses

Before you can begin trading, you will need to figure out what licenses and permits you need, this will vary by industry, however, all businesses will need to apply for an approval certificate, operating license, and business license.

To make things easier, you may wish to take professional advice, a good business attorney or even a sourcing company can guide you through the process.

We would also recommend that you get your documents in order as soon as possible. The longer you wait to submit your documents, the longer you will wait for authorization.

Choosing a Business Vehicle

Before you begin operating in China, you will need to decide which business vehicle to use. Let’s take a look at some of the most popular options.

Wholly Foreign-Owned Enterprise (WFOE)

A WFOE is a business that is completely controlled and owned by foreign investors. This option allows the greatest degree of autonomy and allows you to keep more of your profits.

The term WFOE originates from a time when foreign-owned businesses were subject to different regulations than Chinese businesses. Recently, these laws have changed. Aside from being restricted from certain industries, foreign owned businesses are now treated much the same as Chinese ones. As such, foreign owned businesses can now set up as a standard limited liability company.

Joint Venture (JV)

A joint venture is a partnership between a foreign investor and a local one(s). A key advantage of a JV is that you can take advantage of your partner’s local networks and knowledge.

Foreign-Invested Partnership (FIP)

FIPs are another model that allows investment in Chinese businesses from overseas.

Variable Interest Entity (VIE)

A VIE is a way for foreign investors to gain control over sectors where foreign investment is typically restricted. This is done through a series of contractual arrangements, rather than holding shares.

VIEs exist in a legal grey area. So far, the Chinese government has tolerated them, but there is no guarantee that they will continue to do so. For this reason, VIEs are considered a risky approach.

Representative Office

A representative office is a branch of a foreign company that is allowed to operate in China, with restrictions.

A representative office is free to engage in non-profit activities such as conducting market research or liaising with Chinese partners. However, they are not allowed to engage in profit-making activities such as signing contracts and charging customers.

Reporting Responsibilities

Reporting responsibilities in China encompass several critical areas that businesses must address to operate legally and transparently

Financial Reports

Foreign businesses have to submit yearly financial reports.

Tax Reporting

Businesses must file their taxes on time, and produce annual reports on their tax filings.

Employment Reporting

Businesses must report information such as number of employees, wages and benefits.

Compliance Certifications

Some businesses need to obtain certifications demonstrating compliance with specific regulations or standards. The specific certifications required will vary between industries.

Intellectual Property Reporting

Businesses must report on any updates to their intellectual property.

Sustainability Reporting

It is mandatory for businesses to report on their environmental impact, and what steps they are taking to minimise this.

Anti-Bribery Compliance Reporting

Businesses may need to report on how they are preventing bribery and corruption within their business.

Employment laws

As in any country, you will need to comply with local employment laws with regards to minimum wage, working hours, taxes, and more. China’s employment laws can differ substantially from western countries, and they are not always more relaxed. For example, in China, employees cannot be terminated without cause. To avoid legal trouble, consider hiring a HR professional who is familiar with local laws.

Conclusion

Navigating China’s business laws is a serious challenge for foreign businesses. The laws are complex, and ensuring adherence to them costs time, money, and energy. Nonetheless, it is essential to do so in order to avoid fines and legal penalties.

We recommend familiarising yourself with these laws before planning your Chinese business venture. That way, you won’t be hit with unexpected costs or delays. We also recommend seeking expert advice, to avoid any costly mistakes.

A good sourcing company, such as Easy Imex, can help with most aspects of setting up a business in China. We have 16 years of experience in the Chinese business space, and have facilitated over $180,000,000 in exports over the years. If you need expert advice, get in touch today!