Foreign companies always ask how to stay compliant in China. The short answer? It’s complicated.
Just because you were compliant last year (or even last week!) doesn’t mean you’re still in compliance today. Corporate governance laws change at “China speed” and sometimes at the whim of worldwide political and economic conditions. And today’s climate is constantly shifting, often in unpredictable ways.
China is expected to overtake the US as the world’s largest economy in 2020 and continues to lure foreign businesses to its booming cities. But there’s another side of the coin. China’s economic growth fell to a 28-year low in 2018. And the country is still finding its footing in the face of slowing consumption and trade tensions with the US.
When times are tough in China, the government often cracks down on foreign companies. Especially seeking out those that are non-compliant.
Here are a few areas to keep in mind when assessing your company’s compliance with local laws:
- Contract Compliance. Once upon a time, it was common to do certain business in China without a formal contract. But the story has changed. Foreign companies must ensure contracts are compliant – and enforceable – under Chinese law. This means using an experienced lawyer to draft all agreements in Chinese. Litigation in China is difficult under the best of circumstances. So, if your company’s contracts aren’t compliant, then you have no strong case or legal footing to stand on in court.
- Labor and Employment Compliance. China’s employment laws are complex, vary by region, and favor employees. Your company needs appropriate written employment agreements with both Chinese and foreign employees. And you need up-to-date employment documents, including employee handbooks. This doesn’t mean doing a “quick and dirty” Chinese translation of your home country’s documentation. If you have employees operating from Shanghai to Heilongjiang, you’ll need separate documents tailored to the local employment laws in each city or region. Another area of strict regulation involves work and residence permits for foreign employees.
- Audit and Tax Compliance. Companies doing business in China are subject to a variety of taxes, and demonstrating tax compliance requires several steps. You may need to submit an annual audit report, a corporate income tax (CIT) reconciliation report (annual tax returns), and reporting to relevant government bureaus. The requirements vary depending on the regions where your company operates and your entity type (wholly foreign owned enterprise (WFOE), joint venture (JV), or representative office (RO)). For example, companies in Shanghai must include a taxable income adjustment sheet in the audit report, but this isn’t required in Beijing or Shenzhen. It can be difficult to know what you need, so hire a professional who can help you succeed.
- IP Compliance (and Protection!). Don’t wait until you sell goods or invest in China to apply for intellectual property (IP) registration. Delaying registration – whether for patents, trademarks, or copyrights – can give copycats a head-start on profiting from your brand. Even if you registered everything correctly when you first arrived, the environment in China is most certainly different now. Especially in areas such as cybersecurity and e-commerce, to name a few. Regulations surrounding IP rights and compliance are constantly evolving.
Keeping your company in full compliance with Chinese laws is an ongoing challenge. But it is crucial to avoid penalties, a damaged reputation, or worse. Corporate success in China is built on compliance.