China is Difficult and Expensive (Especially for Small Companies) and if You Think you Have a Workaround, Stop. Just Stop.

China does not care about your company doing business in China.

I repeat. China does not care about your company doing business in China. If you think China is going to cut your company some sort of break because it will be employing five or ten or even fifty people, you are wrong. Yes, there may be some smaller cities that will try to woo you and act like you are important, but you are not important in Beijing’s eyes and China just does not care. China is way more concerned about its own citizens and about its own bureaucrats abiding by Chinese law than it is about your foreign company.

What do I mean by the above and why am I saying this? I am saying this because China remains a very difficult and expensive country in which to do business. It is easy and cheap for outsourcing your manufacturing and for outsourcing certain types of services and for selling expensive factory equipment from your facility overseas, but for pretty much everything else, it is neither easy nor cheap. Sorry, but this is just reality.

For most everything else you have all sorts of things you need to worry about. Things like whether or not you need a company. On this I urge you (heck, to the extent I have this power, I command you) to read Doing Business in China with Deportation or Worse Hanging Over Your Head. Now ask yourself whether you (who are likely not a China lawyer and not even all that experienced with China) have truly developed some workaround that will allow you to circumvent all or nearly all that makes China so difficult and expensive. If your answer is yes, the odds are overwhelming that you are wrong and you should keep reading. If your answer is no, the odds are overwhelming that you are right and you should keep reading.

I am writing this post today because as China gets more and more legalistic and as more and more American and European and Australian SMEs seek to make money off China (as opposed to saving money with China), our China attorneys are getting more and more emails and phone calls from companies that want our help with getting into China with methods that flat out will not work from a business perspective or simply illegal, oftentimes both.

And the sad thing is that our China lawyers far too often hear about these schemes after a company has spent many months and many dollars formulating them and setting them up, only to have us tell them that there is zero point in their having us draft the contract they want because even though the contract (standing alone) will work, the rest of the arrangement will not because it is illegal or unworkable or both.

These requests most often involve the following:

1. A foreign company trying to circumvent China’s tough and expensive laws relating to providing software as a service (SaaS).

2. A foreign company trying to circumvent China’s rules requiring companies that are doing business within China to do so through their own China entity, such as a WFOE or a JV.

3. A foreign company trying to circumvent China’s rules requiring companies that have an employee — or anything that looks like an employee, including what outside China would be viewed as an independent contractor — have their own China entity, such as a WFOE or a JV.

4. A foreign company trying to get investment money from Chinese investors even though China’s laws prohibit sending more than $50,000 outside China per year and generally prohibit them from investing in real estate overseas.

5. A foreign company trying to license its technology or other IP to a Chinese company without doing so through required Chinese government channels.

I could go on and on with what we see, but the above five are the most common and in a follow-up to this post I will go into more detail regarding all five of these, explaining the attempted work-arounds we see and explaining why they do not work and explaining what does.

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