China has become quite adept at spotting and hunting down foreign companies doing business in China without a required Chinese entity. What exactly constitutes doing business in China at a level requiring a Chinese corporate entity? That is too complicated to answer here, but suffice it to say the Chinese government has expansively defined that simply because such a definition increases its tax coffers.
I bring this up because as China continues/accelerates its crackdown on foreign companies doing business in China without a Chinese entity, my law firm’s China lawyers are seeing a concomitant rise in foreign companies setting up companies in Hong Kong and paying taxes there in the completely misguided belief that their having done so will bring them into compliance with Chinese law.
When a client asks whether setting up a company in Hong Kong will solve the problem of their operating on the Mainland without a registered China company, I tell them that they need to start thinking of Hong Kong as New York or London, because having a Hong Kong company makes you no more legal in Mainland China than having a company in New York or London.
Opus 2 Steps Up Its AI Game With Acquisition Of A Legal Tech Startup
With the addition of Uncover’s technology, the litigation software is delivering rapid innovation.
When it comes to business law, you need to think of Hong Kong as a completely different country than the PRC.
We most often see the Hong Kong company problem with foreign companies with Chinese “employees” in China but no company there. Though this violates Chinese law, it is very common. And it is also common for the Chinese government to catch such foreign companies and to come down on them like a ton of bricks. For a more complete explanation of this, check out China’s Slowing Economy Means Its Tax Authorities Are Coming After You. The reason companies with employees in China so much want to avoid having a China entity is because China employer taxes and required benefit payments are extremely high, and keeping your China employees off China’s tax grid means you can avoid paying those taxes and benefits, at least until you get caught.
Oftentimes, the “Hong Kong excuse” is generated by a Chinese employee who want its foreign “employer” to stay off China’s tax grid as well. The Chinese employee likes its foreign employer operating illegally in China because the employee’s pay can be higher (because there are no employer taxes) and the employee’s take-home pay too is higher, because he or she is not paying income taxes. So the Chinese employee convinces its foreign employer that forming a Hong Kong company will be both cheaper and equally effective as forming a PRC company.
But it isn’t. Sorry. If you have employees in China or if you are otherwise doing business in China at a level that requires an entity (there’s that vague line again) and you don’t have a registered PRC entity, you have a legal and a tax problem in China, and there are no two ways about that. All of the above is true of Macau and Taiwan as well.
Context Windows In Legal AI And Why Content Still Determines Quality
Legal teams ask a practical question. If large language models are so capable, why does legal AI still depend on curated content, and why does surfacing that content matter so much?
For more on the China/Hong Kong distinction when it comes to corporate entities, check out How to Form a China WFOE: What’s Hong Kong Got to Do with It?
And since we are discussing how Hong Kong entities do not satisfy PRC entity requirements, I should also probably mention another common legal misconception involving Hong Kong and the PRC: that having a trademark in Hong Kong (or Taiwan or Macau) gives you any trademark rights in the PRC and vice-versa. Again, you must think of these jurisdictions as legally separate, as that is the case when it comes to trademark rights as well. For more on this, check out China And Hong Kong Trademarks: Think Puerto Rico and China Legal. Not Hong Kong Legal. Not Taiwan Legal. Not Macau Legal.
We also frequently see confusion surrounding the differences between Hong Kong and China on contracts relating to manufacturing, especially with NNN Agreements and Product Development Agreements. Many Chinese manufacturing companies want their agreements with foreign customers to be with the manufacturer’s Hong Kong entity, not its China entity. This creates all sorts of complicated ownership and liability and jurisdictional and venue issues that must be resolved correctly to prevent a legally nonsensical or invalid agreement or — as we sometimes see — an agreement that makes perfect legal sense, but provides no protections to the foreign buyer. Again the key issue here is that Hong Kong and the PRC are legally separate when it comes to commercial transactions and enforcement by their separate court systems.
If any of your clients have Hong Kong/China problems, you must take steps to resolve them — quickly.
Dan Harris is a founding member of Harris Moure, an international law firm with lawyers in Seattle, Portland, San Francisco, Barcelona, and Beijing. He is also a co-editor of the China Law Blog. You can reach him by email at [email protected].