Guidelines for Doing Business with China

In advising clients who are doing business with China, either supplying Australian products, sourcing inputs from China or establishing a base in China, often the same type of questions arise on how to deal with this market.

Australian and Hong Kong admitted lawyer, Richard Kimber, and a Consulting Principal at Keypoint Law, has assisted over 400 companies to enter the Chinese market, advising on their China operations and trade compliance issues. Richard has prepared a list of common queries he receives and his responses to provide initial guidance on common queries he receives:

What are some specific legal and regulatory challenges that foreign investors face when setting up a business in China? 

Foreign investors face several legal and regulatory challenges when setting up a business in China.  The complex regulatory environment in China, with varying regulations across industries and provinces, requires a comprehensive understanding of local laws. . Additionally, extensive legal documents signed in Chinese must be filed. These challenges make it crucial for foreign investors to actively participate in decision-making processes and seek professional assistance to navigate the regulatory landscape effectively.

The recent amendments to the Chinese company law in 2024 (which now impose additional liabilities on shareholders and directors) highlight the importance of ensuring company compliance documentation is in order and that management authority limits are clearly spelled out.

What are the steps in setting up a business in China?

To set up a business in China, foreign investors typically need to follow these steps:

• Office / Factory lease contract negotiation: A valid legal address is essential for registration.
• Information and document preparation: Crucial decisions need to be made regarding Chinese and English business names, business scope, name representation on stamps, and other relevant matters.
• Online application with the Administration for Market Regulation: Initiate the registration process with all key information decided upon by the shareholders to be submitted to the Administration for Market Regulation (AMR).
• Document preparation for the AMR: Prepare documents for physical submission to the AMR, including articles of association, appointment letters for key positions, completing AMR application forms, and more.
• Company registration at the AMR: An incorporation agent in China will submit the original documents to the AMR and retrieve the necessary business licenses on behalf of the investors.
• Post-registration procedures: Arrange for stamp carving, facilitate tax registration, apply for any required special licenses, and complete import or export-related procedures if applicable.
• Bank account opening and capital contribution: Open basic and capital bank accounts, and contribute capital for start-up operations. Again recent amendments to the Company Law in 2024 now impose specific 5 year time limits foreign investors to make the capital contribution.

When establishing a business in China, what should foreign investors consider?:

1. Incorporation Process: Understanding the details of the incorporation process, including timelines, necessary documentation, and post-registration requirements.
2. Legal and Regulatory Environment: Navigating the complex regulatory landscape and comprehending local laws, which vary across industries and provinces.
3. Business Structure and Location: Making pivotal decisions about business structure, geographical location, finance, and personnel to align with long-term business objectives.
4. Financial Management and Outsourcing: Evaluating the significance of financial management, potential benefits of outsourcing finance-and tax related compliance functions, and choosing the right banking provider for long-term services. Ensure a local tax agent is appointed, resident in the place of incorporation.
5. Naming and Branding Strategies: Considering the significance of Chinese language names in relation to brand image, trademark registration and domain registration.
6. Keeping abreast of Regulatory Changes: Staying updated with the latest government policies to ensure compliance with the ever-changing regulatory environment.

What type of entities can be set up in China? 

In China, foreign investors can set up the following types of entities:

Wholly Foreign-Owned Enterprise (WFOE): This is a separate limited-liability legal entity owned by a foreign investor. It can directly employ local staff, conduct profit-seeking activities, issue invoices in RMB, and engage in consulting services, trading, distribution, franchising, import, export, manufacturing, and assembly.

Representative Office (RO): ROs are less complicated to set up than WFOEs and JVs. They are not a separate legal entity and cannot conduct profit-making activities. However, they can engage in activities related to the business of the foreign enterprise, such as market studies, exhibition and promotion, and liaison activities. RO’s are however taxed on their expenses so they may prove to be less tax efficient than a profit making enterprise such as a WFOE.

Joint Venture (JV): JVs involve cooperation between foreign investors and Chinese partners to establish a new entity in China. The activities and ownership structure of the JV are determined by the terms of the joint venture contract. These entities offer different levels of autonomy, control, and operational scope for foreign investors in China.

How to select and deal with distributors? 

Foreign investors should pay heed to the following issues to effectively deal with distributors in China:

1. Due Diligence: Conduct thorough due diligence on potential distributors, including checking their registration status, performing credit checks, and obtaining details of their experience and references from previous foreign companies they have worked with.
2. Network Analysis: Evaluate the distributor’s network and focus on the strengths of each location where the distributor operates, as well as the strengths of any sub-distributor links, rather than just concentrating on the number of points of sale.
3. Contractual Parameters: Establish clear parameters in the contract with the distributor from the outset, including exclusivity, sales targets, penalties for targets not met, the terms for the termination of the distribution agreement, return of product, confidentiality and non-compete provisions.
4. Intellectual Property Protection: Safeguard intellectual property separately from any potential distributor, and ensure registration of patents, trademarks, and copyrighted material before engaging in discussions with distributors.
5. Relationship Management: Effectively manage the distributor relationship by setting up regular communication, such as video calls and market visits, to strengthen the connection and gain a better understanding of the distributor’s capabilities.
6. Consider Exclusivity: Decide whether to pursue an exclusivity agreement with a distributor and carefully weigh the advantages and disadvantages of working with multiple distributors versus a single distributor.

What intellectual property protections are available in China? 

China offers several intellectual property protections, including patents, copyrights, and trademarks. Invention patents protect technical solutions, processes, or product improvements for 20 years from the filing date.

Copyrights automatically protect creative works upon creation, and ownership can be proven through copyright registration or contracts. Trademarks safeguard logos, names, and slogans, while also enabling their exclusive use.

China’s IP environment has been strengthened, and penalties for infringement can be strict, including fines and custodial sentences. It’s important for businesses to actively protect their IP and consider legal options in case of violations. 

What are important issues to consider when sourcing from China? 

When sourcing from China, it is important to consider the following key factors:

1. 1. Intellectual Property (IP) Protection: Ensure that all IP is properly protected before signing any contracts with Chinese suppliers. It is advisable to work with legal firms specializing in supporting foreign companies in China from an IP protection perspective.
2. Communication and Relationship Management: Maintain regular contact with the Chinese supplier to establish and uphold standard operating procedures. Close communication facilitates the development of a dependable supplier and provides valuable market insights.
3. Due Diligence: Prior to engaging with a potential supplier, conduct due diligence by verifying the company’s registration credentials, contacting past foreign clients, and requesting samples.
4. Appoint a 3^rd party quality control inspection service to ensure product quality and adherence to agreed-upon terms.
5. Logistics and Shipping Considerations: Be aware of international incidents that can impact freight prices and lead times between China and Australia. Stay informed about potential disruptions and consider measures to mitigate their impact.

What data privacy issues do I need to be aware of when working with China suppliers or customers? 

When working with China, several data privacy considerations need to be taken into account:

1. Personal Information Protection Impact Assessment: This assessment must be carried out and documented, justifying the lawful, legitimate, and necessary processing of personal information. It should also detail the impact on the data subject’s rights and interests, as well as the security risks and protective measures during data processing.
2. Conditions for Transferring Personal Information: For personal information to be transferred outside of China, conditions such as obtaining informed consent from data subjects, passing government security assessments, obtaining personal information protection certificates, or meeting other conditions required by Chinese cybersecurity authorities need to be met.
3. Additional Procedures for Sensitive Personal Information: When transferring sensitive personal information abroad, additional procedures are needed to ensure compliance with data privacy regulations.
4. Personal Information Protection Law (PIPL): The PIPL, which came into force in 2021, focuses on the protection of personal information and applies to both personal information processed within China and personal data processed outside of China if it belongs to data subjects within China.
5. Data Security Law (DSL): The DSL concentrates on the security of the data itself, specifying how data should be categorized and classified, risk controls, response to breaches in data security, restrictions on exporting data, and precautions against discrimination through data usage.
6. Storage of Personal Information: The PIPL requires personal information to be stored within China under certain conditions, such as if it is processed by a state agency or if it is collected or generated by providers of critical information infrastructure within China.

What issues exist when engaging in E-Commerce activities? 

Some challenges and considerations related to E-Commerce in China include:

1. Platform Selection: Choosing the right online shopping platform is crucial, as it requires aligning with the target audience, brand, and suitable brand-building tools. Market data is essential for making informed decisions.
2. Merchandising: It’s important to go beyond simply listing products online. Pitfalls include offering misaligned product assortment and setting incorrect price points. Brands may benefit from focusing marketing investment on a single leading product to build a loyal customer base.
3. Logistics: The process of importing products after individual purchases can lead to longer shipping times in global markets. However, China has promoted E-Commerce through bonded warehouses in free-trade zones, enabling immediate shipment to consumers while products are only ‘imported’ after each individual purchase.
4. Banking Considerations: Selecting the right bank is essential, and considering long-term services over incorporation processes is crucial. Strategic banking decisions require comprehensive evaluations.
5. Relationship Management with Distributors: When partnering with distributors, it’s vital to establish clear parameters, including exclusivity, sales targets, and the management of unsold stock. Effective relationship management includes regular communication and market visits to strengthen the connection.
6. Properly vet contractual arrangements with 3^rd party Chinese e-commerce providers and compare rates for their services and their reputation in the market.

What type of dispute resolution methods are recommended in China? 

For businesses operating in China, it is recommended to consider international arbitration as a dispute resolution mechanism. This is because arbitration provides flexibility and allows the parties to make decisions specific to their unique circumstances. The parties can choose the arbitration institution, place, language, applicable law, and the constitution of the arbitrator(s) according to their preferences. Additionally, arbitration awards are generally final, and the process is more confidential compared to litigation. Chinese companies often prefer arbitration to be held in China, and it can be a non-negotiable precondition for some negotiations, especially with state-owned companies.

The China International Economic and Trade Arbitration Commission (CIETAC) is a reputable institution for handling foreign company-related disputes, and China has widely recognized arbitration courts in many major cities. It is important to ensure that the arbitration clause in a contract covers essential aspects such as applicable law, choice of arbitration institution, language, number of arbitrators, and place of arbitration.

Where a dispute is related to IP rights in may in certain circumstances be preferable to seek the aid of the IP specialist courts in Beijing, Shanghai and Guangzhou etc, especially where urgent injunctive relief is required.

What are the relevant taxes and tax rates when operating a business in China? 

The tax rates in China vary depending on the type of tax. For corporate income tax (CIT), the statutory tax rate is 25%. Individual income tax (IIT) has seven brackets, ranging from 3% to 45%. Value-added tax (VAT) rates for general VAT payers are 0%, 6%, 9%, and 13%, while small-scale VAT taxpayers have a fixed rate of 3%. These are the main tax rates in China.

In China, tax considerations for operating a business include the value-added tax (VAT) system, which allows general VAT taxpayers to credit input VAT against their output VAT. Small-scale VAT taxpayers (3%) who don’t meet the conditions of being general VAT taxpayers have a different tax rate.

China’s tax regime adopts industry-orientated and province-based tax incentive policies, allowing enterprises to enjoy incentives if they fall into encouraged industry sectors or are engaged in R&D activities. Additionally, China has signed tax treaties with over 100 jurisdictions, including Australia.

If you are considering doing business in China, we are well positioned to assist you with the process.