China Law Trends in 2015
December 9, 2014
As we move into 2015 and a Chinese Government that has pointedly singled out “Rule of Law” as a key point for debate, what are the major challenges foreign companies are likely to face in China next year? We put this question to Dezan Shira & Associates US attorney Chet Scheltema, Australian lawyer Richard Cant and the firm’s Chairman, Chris Devonshire-Ellis. Their replies are summarized as follows:
Foreign Law Firm Operations
There are proposals to tighten restrictions on “legal consulting” at the same time as more opportunities for legal partnership between Chinese law firms and foreign law firms, indicating that for foreign lawyers operating in China, there will be a loosening on the one hand and tightening on the other hand. Dealing with China legal matters from purely overseas or from a Representative Law Office can be expected to become more problematic, while JV’s between foreign and Chinese law firms will start to become the norm. This is one of the services that the Shanghai Free Trade Zone is offering (Foreign-Chinese law firm JV’s), and in time we expect to see the local Chinese industry as concerns foreign legal participation restricted to such vehicles. On a more global scale, the partnership between King & Wood, a Chinese firm, and Mallesons of Australia is likely to become a trend.
Larger foreign MNC’s with good sized chunks of the Chinese market can expect to come under investigation for anti-monopoly practices. This is partially related to protectionism but also a tightening of regulations on a national basis that have encouraged foreign businesses to expand across China’s provinces in a manner in which the Central Government had not anticipated. Legal counsel will need to be aware of Central Government policies as opposed to a collection of Provincial Government welcome mats.
Bribery & Corruption
China will continue to clamp down on this, and foreign businesses that have gained commercial advantages by engaging in such practices will be punished, as will their executives. It is no longer an excuse that just because an entire industry is corrupt – such as payments to doctors in pharmaceuticals – that it will be tolerated.
Scope of Business
The scope of business printed on your business license in China determines exactly what can and cannot be done by the investor. Local governments, keen to attract foreign investment, have often taken a ‘live and let live’ approach to these, but are now at odds with stricter interpretations by the Central Government. Foreign investors may also adapt their business to include other new services. It is a good idea to regularly review your official scope of business in China and ensure it is in compliance; and if not, to apply for the relevant additions or changes.
HR Related Litigation
China is not keen on employees being dismissed. Given that the Chinese economy is slowing, and pressure is on companies’ bottom lines, we can expect more employment disputes when it comes to downsizing or letting staff go. This can be an expensive process, even on an individual employee basis. We recommend regular reviews of your HR operations, including employment contracts, as both an employment compliance strategy and some measure of protection should disputes arise. We think such disputes will increase during 2015 and it is wise to be prepared.
Increasing Cross-Border Asian Litigation
China’s trade with ASEAN in particular is booming – there was a huge 20% year on year increase in growth last year. While bilateral trade between China and the U.S. and China and Europe has been strong for many years, and many firms are familiar with related arbitration and contractual disputes, this is less true of the China-Asia legal dynamic. Clients will be demanding more China-Asia trade route protection in the future.
Double Tax Treaty Awareness
China has been especially active in pushing through a large volume of double tax treaties with many countries worldwide. These can reduce profit taxes significantly in several areas, yet international awareness of them remains low. Eagle-eyed counsel will be examining their respective country’s DTAs with China to see what additional profit margins can be obtained through the preferential policies available, and applying for these in China. The tax bureau won’t automatically grant them unless foreign investors in China make a case to have the DTA applied to their trade contracts.
Transfer Pricing Strategies
TP is a complex subject and driven by both national regulatory and OECD guidelines. The growth in China trade volume will necessitate greater awareness of TP mechanisms so as to avoid non-compliance – and China will particularly be on the look-out for tax offenses next year. A TP strategy, backed up by strong professional knowledge must be part of your business’ China profitability and compliance strategy – the two are totally interconnected.
The Shanghai Free Trade Zone
Many interesting initiatives have come out of the Shanghai FTZ over the past year, and we can expect more of these be rolled out on a national basis in 2015, possibly including liberalization of the IT, finance and entertainment industries. But this will require more detailed legal knowledge of specific industries in China than has been the case in the past. Firms with knowledge platforms in China will be able to provide this expert assistance when it comes to industry specifics.
The year 2015 will provide both a carrot and a stick for foreign investors in China, meaning it is wise to take preventative measures now. Crackdowns on errant practices and a tougher approach to tax and law enforcement mean that foreign investors will need to take stock of their total compliance strategies during 2015 and implement measures to minimize risk.
Foreign law firms operating in China will find a tougher environment awaits next year; basic legal knowledge (e.g., how to set up WFOEs, handle trademarks or draft employment contracts) is no longer enough to survive. Rather, firms need to adopt specializations and be fully committed to upgrading their own presence in the P.R.C. Overall, 2015 promises a year of winners and losers – and it will be the best prepared businesses in all industry sectors – including legal services – that will come out ahead.