Written in conjunction with KLR China affiliate Sabrina Zhang, National Tax Partner, Dezan Shira & Associates

The legal atmosphere in China is vastly different than that of the U.S., and it is critical for companies working to set up shop in the country to not only understand this fact, but to be legally prepared. Many of the legal processes associated with operating a business in China are far more complex, and a number of the protections afforded to U.S. entrepreneurs and businesses are less pronounced in the Chinese market.

China’s legal system started to develop in 1978 when China began its gradual transformation into a market economy. Today, it is still evolving at a quick pace and is in the process of developing into a truly sophisticated system. Investors should keep in mind that the interpretation of broad tax and legal rules can vary by tax bureau and location. China ranks 91st out of 185 economies in the World Bank’s 2013 ranking for ease of doing business.

Listed below are several legal challenges U.S. business owners should recognize and prepare for before engaging in any contractual obligations.

Intellectual Property

U.S. intellectual property laws provide individuals exclusive rights to their registered trademarks, copyrights, patents, industrial design rights and trade secrets, and prevent other individuals from making money or otherwise profiting from these assets. These protections are not as stringent in China, with intellectual property rights essentially being assigned on a “first come first served” basis, as opposed to being extended to the individual who actually established the asset. Even with these laws in place, enforcement is often substandard and inconsistent.

Listed below are several steps U.S. companies can take to better protect intellectual property:

• Take early action to register patents and marks with Chinese authorities before launching operations
• Register marks with both U.S. and Chinese governments
• Utilize confidentiality agreements
• Restrict access to sensitive information
• Develop protocols to protect sensitive data from unintended disclosure

Many companies attend trade exhibitions in China to assess market potential and meet with potential local distributors who might be interested in their products and services without first registering their trademark(s) in China. This exposes them to the risk of one of the distributors or customers attempting to register the trademark themselves, especially if the foreign company already has strong brand penetration in other markets and therefore may already be known in China.

Foreign Exchange

China has stringent foreign exchange regulations governing the movement of currency in and out of the country. Foreign transactions generally trigger a settlement, registration or approval requirement, all of which vary depending on the type of transaction performed. For this reason, securing legal representation before the contractual phase of beginning operations is critical, as the beginning of contract negotiations may also require a number of financial transactions to take place.

A foreign-invested enterprise must receive approval from China’s State Administration of Foreign Exchange (“SAFE”) to open a foreign currency capital contribution account to receive capital injections from the foreign investor.

Registration

Unlike the U.S. where companies register products with a single federal entity, Chinese authorities require that foreign companies register with several relevant entities, many of which may vary by region or state. This can be confusing for business owners, who run the risk of registering products with the wrong party, and then lacking the documentation they need to move forward. Working with a legal professional to learn about which products must be registered or licensed with certain agencies can help owners avoid this issue.

Any required product or service certification will need to take place prior to commercialisation in China. The China product certification standards are not vastly different than those in Europe as the Chinese are pretty much in alignment with the European International Standards Organization (ISO) and American Standard Test Methods (ASTM), but have their own applications for testing procedures that must be conducted in a licensed Chinese laboratory.

Coming in with UL, ISO or ASTM certification will not be allowed. For services, such as engineering and architecture, there will be verification of home country documentation and may require having appropriately licensed Chinese staff within the applying company.

Labor laws

China recently updated its labor law compliance rules in 2008, requiring all employers in the country to extend employment contracts to all workers. These contracts are a complex and multifaceted document that must incorporate specific information in order to be legitimate. This will make it necessary for foreign business owners to understand both the legal and the cultural guidelines that govern such factors as salary, paid time off and terminating a contract. Read more about labor laws in our previous blog Considerations When Setting up an Employment Contract in China.

Additionally, U.S. owners and Chinese authorities may differ in their understanding of compliance and ethics, making it important that foreign business operators seek the assistance of a seasoned labor law professional.

Download our latest Resource Center Article: Q&A Interview with KLR and Dezan Shira on the advantages and disadvantages of doing business in China.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.