Author: Acclime China

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Why protecting your trademarks is a top priority for doing business in China

Protecting your trademarks in China can be tricky, mainly where legal provisions differ from those in your legal environment. But this does not mean that you should refrain from bringing your trademarks to China.

When evaluating the opportunities for doing business in China, most entrepreneurs are more or less aware of the fact that the company’s intellectual property rights (IPR) will be exposed to an unstable legal environment that undergoes considerable changes to this day.

One may find that the level of legal protection offered to IPR in case a dispute arises is different from—and, admittedly, in some instances not entirely on par with—the standard of your jurisdiction. The stories where an “innocent” western company had its trademarks infringed upon in China and consequently learned its lesson the hard way, are all too familiar in western news headlines. Hence, brand owners must consider the available legal options available to pre-emotively strengthen positions and therefore optimise the opportunity to defend IPR from would-be competitors and IPR pirates.

Ultimately, not only does trademark infringement cause financial losses to the trademark owner, but the entire reputation of a brand could be severely damaged due to the low quality of ubiquitous and inferior counterfeits sold in China for a lower price. Or whenever the infringer engages in competitive business but delivers a low level of service quality, respectively.

As unbelievable as it may sound that a consumer would expect cheap counterfeits to match the original product in terms of quality, many examples prove otherwise. In one case, several enraged Chinese consumers contacted the hotline of a foreign manufacturer of golf clubs to make use of “their” warranty after their product broke after just a few months of use. Unbeknownst to the consumers, however, they had purchased inferior counterfeit products.

It is irrelevant if this disappointment goes on account of the consumers’ ignorance – the reputation of the brand suffers nonetheless, and the loser is the trademarks’ owner. It goes without saying that in an even worse scenario, sub-standard fake products like food, beverages and pharmaceuticals may even be harmful to the consumer’s health.

Together with the economic growth, middle-class Chinese consumers have developed certain expectations in terms of product quality, not to mention a level of brand consciousness which is at least on par with, if not exceeding, their Western counterparts. Consequently, protecting the image of your products and services by registering your trademarks is one of the critical aspects to success in the Chinese market.

Registering your trademarks in China

The first step to prevent competitors and counterfeiters from illegally using your trademarks is to identify the trademarks relevant for your business activities and register them in China to secure the exclusive rights.

China, as a member of the WTO, is obligated to ensure that applicable Chinese laws comply with the TRIPS agreement. Furthermore, China has signed several treaties on the international protection of IPR with the World Intellectual Property Organization (WIPO).

However, trademarks registered in one member state are not recognized by another member state. China applies a ‘first-to-file system’: the owner of the trademark shall be the first (legal) person to file its application with the Trademark Office of the State Administration for Industry and Commerce (SAIC). Upon approval, the owner of the trademark enjoys exclusive usage rights in the respective trademark class applied for, and they can enjoin other parties from violation of their rights.

In other words, only the owner of a trademark registered in China can institute administrative or legal enforcement actions against the violator.

This system has led to many cases where the ’rightful’ owner of the trademark found that another individual or entity had already registered their trademark in China.

In that case, the trademark’s owner in other jurisdictions may be prevented from using this trademark in China! Suppose you find yourself in such a scenario. In that case, you should immediately consult your lawyer to discuss whether an appeal with the Trademark Review and Adjudication Board (TRAB) can successfully reclaim your rights.

Besides the registration of the internationally used trademark, an appropriate Chinese translation should be considered, and the application must be filed separately. There are two different approaches to this task:

One possibility is to translate the meaning of the trademark (e.g., Germany’s Volkswagen translates directly to the Chinese equivalent of ‘Da Zhong Qi Che’), while the other is to make a phonetic transcription, preferably with a positive Chinese connotation (e.g. Coca Cola translates to ‘Ke Kou Ke Le’, roughly meaning “delicious and joyful”).

While this procedure may be uncommon or unheard of in Western countries (as usually the same brand name in roman letters is registered as a trademark), it can help to positively influence the image of the trademark, especially when a smart and elegant translation is created to appeal to the Chinese customer.

Moreover, considering that most Chinese consumers (and managers of companies, where the product or service is sold to businesses) do not speak English, it is perhaps not surprising that most foreign brands in China are known by their Chinese names – which therefore should be protected.

Navigation through the broad scope of enforcement methods in China requires knowledge and a sense for the reasonableness of means

Unfortunately, even registered trademarks are far from being safe from infringement. As one marketing expert put it, if your product is not being counterfeited in China, you did a lousy job. Enforcement may be unavoidable depending on the individual case and if the infringement interferes with the company’s business interest.

Several channels can be employed to protect trademarks and IPR in general in China, but which enforcement method is the most suitable for the case highly depends on the risks associated with it, as well as on the infringement and the opponent.

Sometimes the infringement will not inflict real losses to the rights-holder (e.g. when upscale counterfeit commodities are sold on streets and markets in underdeveloped regions with no target market for the product), and it should be deliberated about whether the extent of infringement is worth any legal action.

Not least factors like local protection and corruption of authorities should not be underestimated in the whole process. However, when the infringement directly competes with the plaintiff’s business or the reputation of the trademark may suffer, the situation is different. Therefore it is always inevitable to evaluate the case with a competent legal expert.

Trademark protection – enforcement methods demand letters

Preparing a demand letter with your lawyer sends a signal to the infringer that you are determined to take legal steps if they fail to cease the act of violation immediately. Depending on the circumstances, the infringer may conclude that the illegal business activities are not worth the struggle with courts and legal expenses as well as the publicity of the trial. On the other hand, a demand letter has no legal force. On the contrary, in some cases, it may even complicate the collection of evidence for a civil action since the infringer has been given enough time to “miraculously” let the evidence disappear.

Customs

The General Administration of Customs (GAC) offers two methods of protection from the import and export of fake commodities: A trademark owner may request the GAC to retain a shipment if the products to be shipped are suspected of violating IPR. A security deposit and relevant documents proving the applicant to be the rightful owner of the trademark must be submitted to customs. If it is determined that its IPR have indeed been infringed upon, Chinese law provides for seizure and destruction of the merchandise.

Alternatively, you may preemptively register and submit relevant information regarding the IPR to be protected with Chinese customs. Under this condition, customs officials can hold back shipments of counterfeit goods during spot checks, and report to the trademark owner who can then prepare for action. Therefore it is always advisable to register the trademarks with the GAC, as it simplifies the examination procedures and is the best way to circumcise export of counterfeit goods out of China.

Administrative authorities

In China, the holder of rights can apply to administrative authorities to carry out raids to confiscate counterfeits. Several different authorities are entitled to perform raids and seizures, depending on the kind of IPR involved.

If this method is considered, legal counsel should be retained to determine which administrative authority should be contacted, and to coordinate with such authority to ensure optimum results. Raids are arranged relatively quickly and can lead to quick results (i.e., immediate seizure of fake goods, destruction of equipment used to produce counterfeits, and imposition of a fine).

In some cases, however, the fines may be insufficient to de-motivate the infringers, in which case administrative actions will be inadequate as an effective long-term deterrent. Moreover, the plaintiff will neither achieve any compensation for the damages suffered nor for the legal and enforcement fees, as the imposed fines are administrative only. However, an administrative action is easy and fast to arrange to take immediate action. It can serve as a good and safe way to secure inculcator evidence, which then can be used in litigation.

Civil action

Another way to combat trademark infringement is to institute legal proceedings with the people’s courts. While some western companies may be reluctant to rely on the reasoning and impartiality of Chinese courts, it should be noted that China established special IPR tribunals in most of the higher people’s courts and the developed, wealthier regions.

Nonetheless, litigation demands for careful preparation, as the burden of proof lies on the plaintiff, and the legal system does not provide for discovery. Therefore it is essential to gather and provide the proper evidence and documentation such as notarised samples of the counterfeit products (oral testimonies are generally not sufficient). If the plaintiff wins the case, the compensation awarded is usually low compared to western standards.

Compensation is solely related to the losses suffered from the infringing act, while the imposition of punitive damages as an effective deterrent is unknown in Chinese law. Moreover, it is usually challenging to prove for the plaintiff to deliver an accurate estimation of the suffered damages. In this case, the Chinese court may impose a sum that it considers reasonable, and within a statutory limit of RMB 500,000 for trademark infringement.

In rare cases, the courts may evoke the infringer’s business license, but this probably does not impress a smaller company that does not have to worry about its reputation. Sometimes, the infringers just set up another business next door and continue with the infringement.

For a company of a decent size or with other business activities (besides the infringing ones) though, this could cause considerable damage. In any case, even though many foreign companies may find the statutory compensation to be insufficient concerning the scope of infringement, it should be noted that it may be deterrent enough to hamper the infringer’s activities since they often operate on a small scale.

Furthermore, it is possible to identify the infringer’s assets and bank accounts and then apply the court to freeze them while simultaneously filing the lawsuit. This makes sure the infringer does not have the chance to transfer their assets to defy any order from the court, and thus increases the likelihood that the plaintiff receives some compensation.

Criminal action

Criminal complaints should be filed with the Public Security Bureau (PSB). At least, in theory, the PSB then reports all criminally relevant cases for prosecution to the people’s courts. As powerful a deterrent a criminal suit may be (the maximum penalty for the unauthorised use of registered trademarks in severe cases amounts to 7 years imprisonment), the current liability thresholds for criminal prosecution are subject to harsh international critics.

The criminal liability thresholds are calculated on a base of illegal turnover and income. However, due to the high thresholds and the significantly low prices of counterfeit goods, criminal relevance is seldom given. Nevertheless, successful criminal action is gratifying and provides for the most robust deterrence, as in many cases infringers not only may be sentenced to up to three years in prison or be fined, but the holder of rights also can simultaneously file a civil lawsuit to obtain compensation.

Conclusion

Branding becomes increasingly essential in the world’s biggest consumer market, and one must make use of all available legal means to prevent others from illegal use of your property, the consequences of which could severely damage your brand’s reputation. To achieve the best possible degree of protection, you should register trademarks with the Chinese authorities as early as possible, and ideally BEFORE you intend to enter the Chinese market.

Sales channels for international retailers and brands in China

Reaching 1.4 billion consumers

Despite China remaining the sourcing capital of the world, most companies nowadays enter China to sell their products, rather than to source (or produce) them. This is not surprising given China’s demographics: for example, it is already the world’s largest luxury market as well e-commerce market, and according to one study it could have 630 million middle-class consumers by 2022 (McKinsey).

As the landscape is developing so quickly, it is time for a comparison between the different sales channels available to foreign companies today. No doubt, China’s e-commerce opportunities are getting the most press. Still, it is not just about e-commerce: the best strategy is made with an understanding of all the opportunities, and based on the model that fits best with your products, your prospective market, and the resources that you want to invest in making your China strategy a success.

We will share with you the good and bad experiences of over 100 international retailers and brands that we have assisted in conquering the Chinese market. We will also provide you with a useful framework for your China entry decision-making process, based on the entry models that we see most.

1. Selling via an import agent or distributor

A classic and low entry-barrier option is cooperating with a Chinese import agent or distributor, who will be responsible for the sale of the products in China. A distributor will buy your products and sell them on the Chinese market on its account, while an import agent is usually involved when you already have an end-buyer for your products.

These methods are prevalent when a company intends to distribute the product quickly and inexpensively, albeit ones that have several disadvantages as well.

Choosing the right distributor can be problematic, which some of our clients have learnt the hard way:

  • There is a lot of competition for the best distributors.
  • Most distributors tend to have their agenda, which means that their interests often do not fully align with yours.
  • Most distributors will want exclusivity in return for access to their China-wide network, will promise huge sales but are unwilling to commit and, in the end, may well underperform. Giving exclusivity should always be subject to clear conditions and restrictions (geographic, industry, market segment, minimum sales volumes, term, etc.).

The proper structuring of sales, agency and distribution contracts is therefore crucial. You are highly advised to get legal advice before you end up like many before you did – having committed to a non-performing distributor without the option to terminate and either appoint a new distributor, or pursue other sales channels. Other disadvantages to watch for: profit margins of this channel will generally be small, while you will have limited control (if any) over marketing and branding.

2. Cross-border e-commerce or domestic e-commerce

E-commerce has taken China by storm. Taking TMall and JD as examples, we see that they offer two options for retailers and brands: TMall Classic and JD are for companies that are established in China (a domestic e-commerce), while Tmall Global and JD International give offshore companies the option to sell into China (a cross-border e-commerce).

Setting up a cross-border store seems like an attractive option for foreign companies because they do not need a physical structure in China. However, there are several significant downsides and challenges.

First, operating a store on a cross-border platform is quite expensive, with yearly operating fees of easily $10,000, a commission on every sale which varies between 3-6 % and a one-time fee of around $25,000. Add to this the fixed and commission fees of service providers who create, design, and operate your store, and margins will be limited.

Moreover, cross-border sales only account for a tiny percentage of the total China e-commerce market (some estimate around 5%). Finally, when operating from abroad, companies tend to refrain from or do not know how to engage in relevant marketing activities tailored to the Chinese consumer.

Operating a domestic e-commerce channels has many advantages. The main drawback is the requirement to set up a subsidiary in China to enlist with a platform, and sell goods domestically in China. A secondary issue, at least for some categories of products (e.g. cosmetics), is that the goods to be sold must meet local requirements.

Overall, and unless certain local restrictions prevent domestic sales in China, most companies now tend to use cross-border e-commerce as a stepping stone. Or they skip it altogether and directly focus on domestic e-commerce channels through a newly-established Chinese subsidiary.

3. Local China office to manage customers, distributors, franchisers, retailers, and e-commerce

Increasingly, companies decide to set up a China office to manage their sales channels more directly and effectively, while retaining various levels of involvement with and control over marketing, branding, customer data, pricing, distribution, and brand proposition.

A China entity offers the opportunity to hire permanent local staff, who can gather local knowledge and share this with headquarters, for a step-by-step development of the optimal sales channels and an overall China strategy. Some companies may still start with growing existing customer and distributor business, while opening new channels with retail, franchise, and e-commerce.

4. Brick-and-mortar retail stores

In the long-term, the most profitable channel – but also the costliest to run – seems still to be the brick-and-mortar, physical retail network. Traditionally foreign retailers and brands have often used a franchise model (less control over the marketing, branding, customer base, pricing, and brand proposition) or they set up joint ventures that will invest and help them in the process. But in recent years, many well-known international brands have focused on setting up a 100% Wholly Foreign-Owned Enterprise (WFOE) to open physical stores.

While the downside of this channel is the high investment and operational costs, there are several distinct advantages. First, the profit margins in retail are high (especially if the products are manufactured or sourced in China), as this means saving on transportation, import duties, and taxes. Furthermore, the retailer is in full control of sales, marketing, branding, pricing, brand proposition, and its omnichannel China operations.

Moreover, it presents companies with a unique opportunity to understand the Chinese market and its customers, and use this for a long-term approach to become an established brand in China. Some retailers invest heavily in obtaining brand recognition, and a critical mass (G-Star, Under Armour). In contrast, others choose strategic, affordable locations, and take time to grow their brand (Victoria’s Secret). With its middle-class ever-growing and a clear appetite for foreign products and brands, China is already a mature sales market that can hardly be ignored by Western retailers and brands.

5. Conclusion

There are plenty of ways to approach the market. Ambitious companies will usually want to combine their physical store retail network, including at least one or more flagship stores, usually connected with at least one major e-commerce channel to allow cross-exposure. More cautious approaches are to find the right distributor that will do the work for you, setting up a local company for domestic e-commerce, or taking an omnichannel approach. For those companies that cannot yet sell into China the cross-border e-commerce model may be the first step, but even then, they are wise to invest in structure, so that they can expand into domestic sales promptly when the time is opportune.

Normal vs simple company deregistration China

Closing a company in China is not always easy and the reasons for the closure are often different. A crucial factor for swift deregistration is ensuring the compliance of one’s entity during the deregistration process. Although tempting, it not advised to ‘walk away’ from an entity in China. Leaving an entity unclosed will surely lead to future restrictions for both shareholders and potentially for individuals involved in the company, such as the legal representative.

When it comes to the company deregistration, one of the most frequently asked questions is the time the deregistration process takes from start to finish. The timeline is dependent on several aspects of the deregistration process. It depends on the efficiency and communication of the service provider, the status of the company, and the speed of the client and the Chinese authorities. Based on our past experiences assisting clients with company deregistration’s, the fastest deregistration took 6 months and the slowest deregistration took 3 years.

Can a company deregistration be shorter and simpler?

The answer to this question is yes, however not for every company. In 2017, the Chinese State Administration for Industry and Commerce’s published the Guide on Comprehensively Promoting the Reform of Simple Deregistration of Registration of Enterprises which came into effect in March of that year. As the name of the legislation implies the Chinese government introduced a reform in the company deregistration process. Since March 2017 there are two approaches to cancel a company: a simple deregistration or normal deregistration. The simple company deregistration process was introduced to further promote enterprise deregistration facilitation and optimise the business environment.

What makes it simple?

In a nutshell, the company deregistration is composed of 5 major steps including liquidation committee organising, public announcement, tax deregistration, business license deregistration, and bank account deregistration. The simple company deregistration process affects 4 of these major steps. To provide a more detailed understanding of the company deregistration process, we will elaborate on the differences based on each operational step:

Liquidation committee

Normal deregistration: The Liquidation Committee needs to be organised and put on record in the Industrial and Commercial Bureau
Simple deregistration: The liquidation committee does not need to be put on the record.

Public announcement

Normal deregistration: After the establishment of the liquidation committee, at least three liquidation notices shall be published in civic or provincial newspapers approved by the Industrial and Commercial Bureau. Meanwhile, the length of the announcement’s time in print is usually around 45 days.
Simple deregistration: The announcement can be done through the national enterprise credit information system, and the announcement time is compressed from 45 days to 20 days.

Tax deregistration

Normal deregistration: Tax deregistration is often the most tedious step in the whole deregistration process. There are a whole set of documents to be prepared and submitted to Tax Bureau, meanwhile, the Tax Bureau will check whether the company has paid the tax based on submitted financial statements, tax returns, etc.
Simple deregistration: During the period of public announcement, the tax deregistration can be carried out, and the documents and procedures are simplified. For instance, the enterprise does not need to submit the clearance certificate to the Tax Bureau.

Business license

Normal deregistration: During the liquidation period, the liquidation committee needs to prepare a liquidation report and submit to the Industrial and Commercial Bureau for the business license deregistration.
Simple deregistration: The liquidation report is no longer required. The deregistration of the business license can directly be submitted to the Industrial and Commercial Bureau

Other considerations you must not forget

Despite the fact that simple deregistration saves a lot of time, the following factors also affect the deregistration time in general, regardless of the type of deregistration process.

  • Taxpayer category: The overall efficiency highly depends on the taxpayer category. Less deregistration time is required for small-scale taxpayers compared to general taxpayers
  • Import & Export registration: If the company is engaged in the import and export business, and additional step in the deregistration process is required. The company must also go through a customs deregistration procedure with their local customs administration department
  • Social insurance and housing fund account: During the deregistration process, the social insurance and housing fund account deregistration is easily overlooked. If the company does not operate anymore, the account must be cancelled through the Social Security Bureau. It is worth noting that before the account deregistration the company needs to make sure there are no outstanding insurance and housing fund payments to their employees.

Feasibility of a simple deregistration

Compared to a normal deregistration, a simple deregistration saves a lot of time, however it is not always possible for every company. According to the Guide, the simple deregistration is only applicable to both domestic and foreign invested companies, including limited liability companies, non-corporate enterprise legal persons, individual proprietorship enterprises and joint ventures who have not carried out any business operations after obtaining the business license, or have no outstanding creditor’s rights and debts before applying for deregistration of registration.

However, if your company is in one the following situations, then the simple deregistration will also not be feasible. The situations include:

  • Foreign-invested enterprises that are involved in the implementation of special access control measures stipulated by the state
  • Enterprise listed in the abnormal operation or seriously illegal and dishonest behaviours
  • Enterprises with their assets frozen, or that have a pledge or chattel mortgage
  • Enterprise which is under investigation or administrative coercion, judicial assistance, or administrative punishment
  • The unincorporated branch of the enterprise does not cancel its registration
  • The enterprise with termination history in the simple deregistration process

For companies with the above-mentioned abnormalities, it is only possible to apply for the simple deregistration after these abnormalities have been resolved. Furthermore, it is not always clear how a deregistration will be carried out differently for the companies that operate in the fields in the negative list. The only solution is to check with the local government before a deregistration project gets started.

Conclusion

Based on our explanation on the process of company deregistration’s, we hope you have obtained a better understanding on the process of company deregistration and the difference between a normal and simple deregistration. It is worth nothing that the simple deregistration can only apply for companies which meet certain requirements. If you would like to learn whether your business is eligible to undergo a simple deregistration, please feel free to reach out to us. We can make an analysis of your company to see if you are eligible, and also support you throughout the deregistration process!

New policies impacting how non-resident companies employ Beijing staff

In Beijing, a new policy prohibits third-party HR agencies from filing social insurance in Beijing for employees of companies not registered in Beijing.Companies with employees based in Beijing that do not have a registered entity (incl. branch) must as soon as possible find an alternative solution to file social security for their Beijing-based staff.

Many international companies in China are based in one city, but may need to have employees based in another city. These employees will generally want social security in the place where they live and work, as this gives them crucial benefits in regard to medical care, schooling and housing. However, only locally-registered companies can make payments of social security premiums.

Establishing a branch, subsidiary or sister company is the optimal solution, but this brings additional cost and administration. Many companies have been able to avoid this by working with HR agents such as Fesco or CIIC, which are registered locally and can pay social insurance premiums (as well as housing fund contributions) even if the employee is employed by a non-resident entity.

Legally speaking this practice is a grey area, but practically it has been the accepted approach all over China for many years. Until now. Through an internal notice, HR agents in Beijing were informed last month that they would no longer be able to provide this service, i.e. for contribution of social insurance premiums in Beijing the employer of record must be a Beijing-registered entity.

Foreign-invested companies registered elsewhere that so far have used an HR agent for their Beijing employees, must immediately implement an alternative solution. The main options available are:

  1. Pay social insurance premiums for Beijing employees at the location where the company is registered (i.e. outside Beijing), rather than in Beijing. However very few employees will accept this solution as it could make their life very difficult.
  • Transfer the employees to a third-party employer in Beijing, which formally employs the Beijing staff on its behalf and dispatches them to the actual employer – a PEO structure. Besides the additional cost, indirect employment means less control / management over the employee, and can lead to problems with confidentiality, non-competes, termination etc.
  • Establish a branch (or subsidiary) in Beijing and transfer the employees to such branch. Though this results in some additional costs and administration, these can be limited through the support of a third-party law firm or corporate service provider.

Most companies are choosing the third option, though the final choice will depend on the actual circumstances of the business and – especially – the employees in Beijing. Key is to implement a solution in time, because a break in the social security of the employees in question could be hugely detrimental to their local benefits.

Meanwhile, the question remains whether other cities will see the same tightening of policies. This is difficult to predict, but based on our discussions with local departments in Shanghai, Shenzhen and Guangzhou it seems that at least for now, no changes are expected.

Key point to note that as in Beijing, once a policy change is announced companies will have only a few months to find and implement a solution, and so foreign-invested companies that employ staff based outside their registered location are strongly advised to keep abreast of developments, and be ready to make a quick decision.

The 3 key factors when registering a foreign company in China

There are many articles about setting up a foreign company in China, often also called WFOE (wholly foreign-owned enterprise) or FIE (foreign-invested enterprise), but we want to focus on the three key factors that should drive the decision making process. Many investors get side-tracked by free trade zones and tax benefits, that often promise more than they can keep and simply don’t usually apply to most investors. Remember, there is no free lunch.

So let’s start with the most important question: What does the FIE want to do in China?

1. Business activities

FIEs have to register a business scope when they first start their business in China and this business scope will govern the kind of invoices the FIE will be allowed to issue to its clients. The tax bureau will determine the invoice categories based on the business scope during an initial check-in when the company is first set up. Therefore the business scope should focus on the business activities a company wants to invoice to its clients.

Naturally investors want the business scope to be expansive to cover as many activities as possible, but that may be challenged by the authorities. The key is be both unrestrictive and specific at the same time. This might be easier for some industries than others. The guiding principle is really the revenue source in China, i.e. the client, because they may only accept certain invoice categories, so check with them and also understand what potential future clients may require.

There are several business activities that FIEs are not allowed to engage in or face ownership restrictions. Many of them are in the area of media, education, internet technology and several others. It is therefore very important for investors to understand what exactly they want to do in China, who their customers are and will be in the near future and how they can serve that customer with an FIE in China.

It’s possible to amend the business scope of course, but it does take a few months as company documents need to be updated and filed with the authorities.

With the understanding of what the FIE wants and is allowed to do in China, it should consider financing:

2. Financing

Registered Capital

FIEs have to commit to invest a certain amount as capital into the company within a timeline that can be set by the investor, but needs to be filed with the administrative authorities. The amount of capital will depend on

  • Legal requirements that may exist for certain business activities (see above)
  • Legal requirement that may exist for certain locations (see below)
  • Operational requirements, so that the company has enough capital to generate positive cashflow through its business activities

Due to China’s tight regulations around foreign exchange, it’s important to note that currently registered capital will have to be contributed through a designated foreign currency bank account. Also, the process for increasing registered capital can take a few months as company documents have to be amended and filed with the authorities, so conservative cash-flow planning and knowing you’ll run out of money 3-6 months ahead of time pays off. FIEs running out of cash in China is not uncommon.

Debt financing

Debt financing for FIEs in China depends on the size and business activities in China, as Chinese banks tend not to lend to FIEs with few assets they can use as collateral and short operational term. Therefore FIEs may have to rely on their relationships with banks from their home countries. Such potentially cross-border financing may require filing with or approval from authorities, so documentation is crucial. Cross-border payments of any kind are scrutinised.

Services

FIEs may choose to generate financing from services they invoice to their headquarters or other related parties. This will require a valid contract specifying the kind of services that are provided and it will also incur taxes based on such service transactions. Transfer pricing regulations in China and the jurisdiction of the related parties should be considered.

Knowing now what the FIE’s business activities are and how to finance them, the investors can start considering locations:

3. Location

There are at least two dimensions to this:

Physical registration address

Until now, foreign companies are still required to have a physical address to register an FIE. There are some exceptions that depend on the administrative authority which varies between locations in China for specific industries, i.e. for leasing companies in parts of Tianjin, or authorities choosing not to enforce existing rules in some cities.

Administrative jurisdiction

The physical registration address is covered by the jurisdiction of an administration authority, that is responsible for issuing the business license and from where other government authorities, e.g. tax bureau derive their jurisdiction. Different authorities have different levels of experience handling foreign investors and may even have specific policies that can encourage and discourage investment in different industries.

For example, in Beijing the Chaoyang District probably has most of the FIEs registered in Beijing, which means that authorities are likely quite familiar with the necessary laws and regulations, but it also means that processes can take a while, because there are many companies that need to be processed.

A few years ago, a foreign investor wanted to register a company in a district that was on the outskirts of Beijing and although they probably didn’t have a lot of experience with registration of FIEs, they issued the business license within only a few days, which was much faster than the standard processing time. This is not a general rule, but goes to show how jurisdictions can differ and the situation at one jurisdiction shouldn’t necessarily inform about another jurisdiction. Getting good information can take a few days and some cross-checking by experienced professionals.

The location of the business should be chosen based on access to employees, customer, suppliers, regulators, logistics and potentially other factors depending on the business of the company.

Individual income tax (IIT) deductions for foreigners working in China

To create a favourable working environment for foreigners, the Chinese government has rules on tax-free allowances applicable to foreigners working in Mainland China. All foreigners and their employers should be aware of these rules, to ensure that they do not pay more individual income tax (IIT) then they have to.

According to the current effective regulations, the overview below shows the tax-free items, which allow foreign employees to minimise payable IIT:

Tax-free item Description
Rent
  • If in the form of non-cash (i.e. the rental contract is with the company, and the company remits rent directly to the landlord; or the rental contract is with the expatriate who applies for reimbursement of rent paid)
  • Rent amount must be reasonable and supported by valid fapiao issued to the company.
Relocation
  • If in the form of reimbursement to the expatriate
  • Expenses (e.g. flight, luggage, moving company etc.) must be real, reasonable and supported by valid fapiaos or receipts (if incurred outside Mainland China)
  • Fixed monthly relocation allowances are taxable
Home trip
  • If in the form of reimbursement to expatriate
  • Expenses (e.g. flight, train, taxi) must be real, reasonable and supported by valid fapiaos or receipts (if incurred outside Mainland China)
  • Up to two round-trips per year
  • Travel must be between the city in Mainland China where the expatriate works and the city where the expatriate / spouse / parents are from or currently live
  • Any allowance paid for the expatriate’s family will be taxable
School Fees
  • Expenses must be reasonable and supported by valid fapiaos and documents on school information
  • The school must be registered and located in Mainland China
  • Other fees (e.g. meals, school bus, uniforms) are usually deemed taxable
Business trips
Meals, groceries and laundry
  • Expenses must be real, reasonable and supported by valid fapiaos
  • Expenses must have incurred in Mainland China
  • Any fixed monthly allowance for expenses is taxable
Chinese Lessons
  • Expenses must be reasonable and supported by valid fapiaos
  • Language school must be located in Mainland China
  • Language courses provided to the expatriate’s family members are taxable

We have prepared a Q&A to deal with some questions that we frequently receive from our clients:

Can exemptions to individual income tax be applied for retroactively?

Yes. The new Individual Income Tax Law that took effect on January 2019 introduced an annual personal income tax settlement system. This makes it now possible to apply for IIT deductions retroactively until 30 June of the following year.

Should IIT exemptions be approved in advance?

Although it is not necessary to obtain the tax bureau’s approval in advance, a detailed breakdown of tax-free items must always be provided during the monthly IIT filing. The tax bureau can at any time decide to audit supporting documents; and some tax bureaus still require submission of related materials at filing.

A lot of expenses must be “reasonable”. What does this mean?

The tax bureau has full discretion to determine whether or not an expense is reasonable. In some case there may be internal policies (e.g. in some Shanghai districts, the rental fee may not be more than 30% of the total salary) but in most situations, there are not. Note, however, that first and foremost the tax officers will pay attention to whether or not the expenses are real.

Do these rules apply to residents of Taiwan, Hong Kong and Macao?

Yes. Although Taiwan, Hong Kong and Macau are part of China, their residents enjoy the same benefits as foreigners.

Do these deductions apply to foreign individuals that work in Guangdong Province but who live in Hong Kong or Macau?

Yes they do, even if these individuals travel back and forth on a daily basis or if the expense was incurred in Hong Kong or Macau.

We heard that the rules will change after 2021. Is this correct?

The current deductions are in place until the end of 2021. If the arrangement is not extended, then expatriates in Mainland China will only be eligible to the same deductions as Chinese nationals, which are generally much less favourable. However, as this would have a very big impact on companies, there is at least a reasonable chance that the current rules will be extended.

I work for a small company that may not have the expertise to ensure that all deductions are applied in the correct way. What can I do?

Chinese tax laws are complex, and the penalties on tax evasion and non-compliance can be very severe. Therefore, we recommend that smaller international companies outsource the IIT tax filing work to an external agent or corporate service provider that is fully familiar with the requirements for deductions and staying up-to-date with all policy changes.

Acclime partnering with R&P China Lawyers to establish a presence in China

15 July 2020, Hong Kong – Acclime, the premier corporate services provider in Asia, announces today that it has signed a cooperation agreement with R&P China Lawyers (R&P) whereby the corporate services team of the law firm will be rebranded and operate as Acclime China.

With this partnership, Acclime builds a solid presence in China and extends its footprint across seven jurisdictions in Asia, including China, Hong Kong, Indonesia, Malaysia, Singapore, Thailand, and Vietnam, with over 200 professional staff.

R&P is a leading Chinese law firm that offers a full range of Chinese legal, tax and compliance services to international businesses. Founded in 2010, the firm has built a reputation for its high level of expertise and service. It has become one of the most trusted sources of legal support for international companies investing, operating, or doing business in China. R&P serves clients across different sectors, including retail & e-commerce, agri/horticulture, food, industrial & manufacturing, chemicals, automotive, technology, life sciences, real estate, media, and trading/sourcing.

“We are excited to form a partnership with Acclime. Our corporate services team can now tap into the expertise and resources of a well-established regional network,” Maarten Roos, Managing Director of R&P commented. “More important is that we can support our clients who wish to expand their businesses to other Asian markets.”

“We are very pleased to be affiliated with R&P which provides us with a strong platform to set foot into the China market,” Martin Crawford, co-founder and CEO of Acclime remarked. “Being the world’s second-largest recipient of foreign direct investment in 2019, and the first Asian market to re-open after the COVID-19 pandemic, China remains the most attractive market for foreign trade and investment in the region. In addition, other economic development initiatives such as the Belt and Road and the Greater Bay Area are shaping the growth of China outbound investment. This strategic partnership will not only strengthen our capabilities to assist clients navigating the complex regulatory landscape in China, but it will also solidify our presence in the country to support China clients wishing to expand globally.”

The corporate services team of 15 at R&P will join the Acclime family while Maarten Roos and Robin Tabbers of R&P will have dual roles, joining Acclime as Partners.

Download press release (PDF)

Running a company in China from a distance: 5 key elements

There are estimated to be over 700.000 different business books in the world, and a significant portion of those books are about managing a company. The amount of literature on management shows the importance and difficulty of managing a business. There are many different crucial components to running a business and being close to the operations of the company is definitely one. So how do you deal with management when you are not close, but thousands of kilometres from the office, the team and the business?

There have always been companies which have been managed from a distance, however since the widespread outbreak of COVID-19 the challenge has become more mainstream. Many borders are either closed or require a period of quarantine, as currently is the case in China. Some managers were too late in going back to the location of the office, and others are not allowed to leave their home country.

So how do you run a company in China from a distance, both literarily and figuratively? There is no solution which will completely mitigate the challenge, however there are some crucial ways to make the best of the situation. Acclime China has vast experience in management consulting in China, both nearby and on a distance. We identified five key takeaways on running a company from a distance.

Running a company in China from a distance: Local leadership

The first and most important takeaway for running a company from a distance is the need for local leadership. When managing a company on a distance, you need someone who is your partner in managing the company. The local leader could be a young talent you perceive to be the future leader of the organisation, the local leader could be your local CFO or an external management consultant. Besides being your eyes and ears in the organisation, the local leader helps you to maintain your control over the organisation.

Picking the right person for the job as your local leader is not easy. The local leader needs to be loyal to your collaboration for 100%, your goals need to align. You need to be able to fully trust the local leader. You need to be able to communicate clearly with the local leader. The local team needs to fully accept the person as the extension of your leadership and therefore as a leader. Finally, the local leader needs to understand the Chinese culture.

When you have proactively chosen to manage on a distance, the solution was chosen on the basis of a person suitable for the role of local leader. However, when suddenly forced onto such a situation, it is hard to select the right person. If no one in your office suits the role of local leader, there are two alternatives: splitting the role between several team members or consider hiring management consulting in China.

Running a company in China from a distance: Meeting & reporting rhythm

A very basic yet crucial part of running a company from a distance is a rigorous meeting & reporting rhythm. Perhaps when managing closely to the team, you prefer a loose rhythm and reporting upon request. This is the moment to adapt that towards a system with recurring meetings and reporting. Such systems provide structure to yourself, your local leader and your team.

Some examples of recurring reporting could be a weekly cashflow statement, a monthly profit and loss overview, a quarterly management report and a weekly project report. To increase your control even more, you could opt for management tools such as Monday.com, tracking status of projects, action items of the teams and outcomes for clients. Examples of meeting rhythms could be a daily call with your local leader, a weekly finance update and a biweekly management meeting.

Running a company in China from a distance: working on relationships

There is a big pitfall to having a great local leader in your office. Entrusting him with everything, including the relationships towards the other staff in your team. Working on those relationships is crucial for three main reasons: The potential day of your return, a change in local leadership and insights from different angles.

On the day you return, the team still needs to recognise you as their leader. Such recognition is based on an existing relationship. A received message for their birthday or a card in challenging times are simple steps to showing you are still part of the team.

When the local leader leaves you or you need to let the person go, it is important that the rest of the organisation stays intact. People are more likely to be loyal when the actually have a connection to a leader.

Furthermore, it is important to gain insights from multiple angles. If the local leader is the only source of information on what is happening in the company, you might miss crucial parts of the running business. A complete picture of your organisation is more challenging and more important on a distance.

Running a company in China from a distance: Vision and goals

No matter if you are close or far away, vision and goals are important to reaching results. However, such alignment is even more important when you are far apart. People need to understand the direction they are going and the goals they are reaching for.

A simple but effective way is to hold a digital strategy day/week. Allocate a set amount of time during that week on developing a shared vision and shared goals. Creating such a vision and goals together with a significant part of your organisation, will increase the support base for both.

Running a company in China from a distance: Software

You are fully dependent on modern technologies to manage your organisation from a distance. There are many different tools out there, with different prices and benefits. Some of the tools that we use as an organisation are:

Goal Tool
Cloud Microsoft OneDrive
Project management Monday.com
Online communication ZOOM
Time tracking Toggle
OKR Management Monday.com
Email Outlook
Digital brainstorming Miro

Support for running your company in China from a distance

The overall goal when running your company in China from a distance, is to maximise control and insights by implementing leadership, meeting rhythms, clear communication using the right tools. By doing so, you will be able to keep your organisation running smoothly, without being present.

We have helped many of our clients with setting up their “management from a distance” system, and even helped them with locally managing their staff. So if you finished with reading another of the 700.000 business books and are still interested in learning more about our services for Management Consulting in China, feel free to reach out to us.

8 examples of common mistakes when setting up a business in China

Stories are numerous about telling how Western companies conquered the Chinese market at lightning speed, seemingly without any hiccups. But what can you, as a reader, learn from such stories? We believe a moment of crisis and problems are the real source of lessons that can be learned. One of our most read articles was “8 Common Mistakes When Setting up Business in China”. This article was shared often, but still we get asked the same questions.

Therefore we have compiled 8 examples of lessons learned the hard way with companies that set up a WFOE. A WFOE, which stands for Wholly Foreign Owned Enterprise and known by most as a WOFE, is the limited liability enterprise for foreign companies. Having seen many WFOE’s being set up, we saw common mistakes which later created problems for the companies and its stakeholders. Without further ado here are 8 examples of mistakes to share with you:

Case 1: Registered capital

Case 1 wanted to set up their Chinese entity using the smallest amount for the registered capital allowed. Even though advised to reserve registered capital for 3 years overhead costs or until the company expects to run breaks even, they still went ahead investing the lowest possible amount. The company ran into problems when their costs turned out to be higher than expected, causing them to run out of cash. Getting more cash from their head office abroad needed approval of different governmental departments, which took a while. Before the cash arrived, the company was already in very heavy financial weather.

Case 2: Business scope

Operating outside a company’s business scope is one of the most dangerous things a company can do. Case 2 did not adapt their business scope to include their future plans. When the new business was being performed the profits naturally went up. When a company fails to comply with the business scope, they become liable for a fine. Such a fine can reach the equivalent of 1 years’ revenue. This was exactly what happened to the company and all time, energy and money of the previous year was lost.

Case 3: Address of company

When registering your WFOE there are multiple requirements for the address where your business will be registered. These can be found on our dedicated WFOE page. This particular anecdote is about an American company that wanted to set up in a residential building. The landlord promised this was possible at the address. Determining your company’s address is one of the first steps when registering the WFOE. When the company was almost finished setting up, the local government saw that the registered address was not legal. The company lost their lease and had to restart the process of registering. The amount of time lost was the biggest cost for the new entity.

Case 4: Appointing a random legal representative

The legal representative is the crucial person in the WFOE. This person is appointed by law as the responsible person for the company’s operations. Case 4 appointed a legal representative whom was not originally employed by the mother company. During operations they hired a low budget accountant to do their bookkeeping (see Case 5 later on). Once Case 4 got into an argument and received fines in China, they seized operations without closing the WFOE. The legal representative was still responsible for the fines and the whole ordeal got very complicated for the legal representative.

Another mistake that often happens is to appoint a legal representative whom has too much power. Once the HQ, outside of China, gets into a (small) dispute with their appointed legal representative employee in China, they might find out that the employee has too much power to be stopped. It is not unheard of that the legal representative gives itself a nice “yearly bonus” at this point and nothing can be done because the legal rep has all the power to do this.

Case 5: Penny wise pound foolish

We have companies asking us to support them to set-up their business in China, but who feel later that a low budget local agency is a better fit. These same companies quite regularly come back to us, because at a later point they find out there were mistakes in the company documents. This is due to the tendency of local agents not being bothered by seeing if the WFOE’s goals lines up with their clients’ wishes. For people with limited China experience working with a local agent is a challenge. The challenge lies in is not knowing how to deal the culture & communication differences. If you find a local agent who you trust, we can of course only tell about these cases as a fair warning.

Case 6: No Market Insights

Over the years this has been of our most often given advice: know what to expect. Our clients agree that is very important to know the market before setting up in their country, but often disregard this themselves when they come to China. Case 6 heard through the grapevine that Beijing would be a great place to start, before they contacted us. After setting up the Chinese branch for Case 6, they found out that their market lies in Shanghai. The distance of more than 1000 km would make doing business for them very hard and they had to set up a new subsidiary.

Case 7: Not Sticking to the Labor Law

Just like in most of the developed Western world, China has binding labor laws. It is important to know that these laws are in place to protect the interests of both employer and employee. Having set up a WFOE is not enough just to hire employees. Labor contracts should be signed for each employee hired. It is advised that the company drafts all of the labor contracts with a lawyer. Case 7 asked us for advice on improving their business in China. After a company scan, Case 7 got pointed out that a number of employees were not even officially on the payroll. This resulted in their staff not feeling involved in the company and even worse: the company being at risk for fines. Shortly after solving this problem the company got warned by us, this issue was resolved and luckily enough Case 7 was not fined.

Case 8: Unclear Phrasing of the Articles of Associations

The Articles of Associations (AOA) is one of the key documents during WFOE set-up. The document regulates the structure, business scope and framework of the WFOE. Having vaguely phrased their taxation and insurance chapter, Case 8 did not realise their Chinese branch fell in a different tax bracket. After paying too little VAT over their yearly revenues, the company was given a hefty fine.

Unfortunately our work sometimes exists out of crisis management, solving problems for companies who ran into the Chinese market without obtaining any advice or help. These companies, accustomed to the business culture of the West, had to run into these problems before realising they needed help. Make sure you prepare yourself, either through external help or extreme thorough research on the rules and regulations when doing business in China. As Lao Tzu said“Anticipate the difficult by managing the easy”.

Tips for signing a MOU in China

We have all seen the pictures on LinkedIn or company pages. The official signing ceremony of a Memorandum of Understanding (MOU) between a Western and Chinese firm. Usually there are some high-ranking government officials present, ceremonially co-signing the MOU on a stately desk. What role does such an MOU play in doing business in China? Is it a vital part of business in China? Should you take it seriously and what ceremonial aspects play an important role?

A memorandum of Understanding (MOU) is a legal document indicating the intended start of collaboration of two parties. This international legal document is globally used to signal the willingness of parties to move forward. An MOU can be between two or more parties.

The importance of an MOU in China

Businesspeople from common law countries like the United States, tend to consider MOU signing as an unimportant but necessary first hurdle. This perspective originates from the fact that common law countries do not consider the MOU as a valid contract. Only the real contract will have meaning. However, when an MOU is signed under Chinese civil law, the importance of the document becomes much higher. For example, when the foreign party is acting in bad faith, the MOU can be enforced under the Chinese legal system. This is different from any common law MOU.

Therefore, a common mistake is that companies originating from a common law country will not fight too hard on the details of the MOU. Their reasoning is that the MOU is just a prelude to the real contract. Since a MOU in China has a more binding character, Chinese business people view the MOU already as a real contract and thus have no interest in renegotiating the deal in a second contract.

Besides such legal basis creating importance to a MOU in China, it is also the starting point of a future collaboration. Therefore, it is important to make sure an MOU fully covers the desired strategic direction a company has for the future. Lack of strategic direction in the MOU, or unclear parts of the MOU might be cause for future disappointments. When either party discovers the real intent of the prospected partner differs from the original expected intent, the whole potential partnership might fail.

Preparation of an MOU in China

Having established the importance of an MOU in China, it is important to carefully consider the contents of an MOU. When establishing the MOU together with the prospected partner, let the partner start with the initial draft. This will give you insights in their expected approach. Their draft version of the MOU provides a solid basis for further discussions. During the feedback phase, your clarifications, insertions and cancellations will further create clarity in the collaboration.

In preparation of setting up a MOU, the western organisation should check the contents of the MOU with a company knowledgeable about Chinese law. Furthermore, making sure the document is translated into Chinese or English by a third-party professional translation company is very important. The quality translation will help to guarantee the writing and reading party are on the same page. Good Chinese law firms will be able to produce quality bilingual contracts.

The actual signing

There is a huge ceremonial importance to signing an MOU. In the hierarchal Chinese business society, it is a moment where the highest involved persons from both companies are present and meet. Making sure the level you present fits to the level the Chinese counterpart presents at the MOU signing. When there is a discrepancy in levels present, this could cause either loss of face to your Chinese counterpart, or to the western organisation. For example, when the western sales manager would meet with the Chinese CEO, the Chinese CEO might lose face. More importantly the Chinese party might consider that the Western company takes the partnership too lightly.

To really spice up the MOU signing, high placed government officials are also valued to attend. Government in China has much more value than in many western cultures. The attendance of high placed government officials will give face to the MOU signing. Because of this fact, Acclime China advises non-Chinese companies to keep a good relationship with their respective Embassies. The Embassy could provide high level diplomates, or access to high level Chinese officials.

After the MOU in China is signed

After the MOU is successfully signed by both parties, the build-up to the real collaboration starts. At that moment it is imperative not to lean back and relax. You will have to follow up on the strategy formulated and the joined direction taken. Furthermore, it is still crucial to build upon the newly established relationship.

A MOU is an important document to get right in China. After doing so, the MOU can also function for external and internal marketing purposes. Publicly through marketing channels, or internally to the stakeholders within the organisation. The process of becoming successful in China can be painstakingly long. Therefore, such significant steps could change public and internal opinions about the efforts taken in China.

Example of MOU signing

Mid-September our client Prime Vision signed a Memorandum of Understanding with Guangdong Tengen Industrial Group Co., Ltd; the Dutch Embassy in Beijing hosted the ceremony. “This is the start of close cooperation to extend the presence of Prime Vision in the Chinese market”. At Acclime China, we are very proud of Prime Vision’s accomplishment, and we trust in their future in China.

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