Report back to homepage

Expiration and termination of labor contracts Expiration and termination of labor contracts(0)

As stated earlier, the employee may terminate the labor contract during the probation period by giving three days prior notice. After the probation period the employee may terminate without notice, if the employer uses violence, threats and other illegal means to force employees to work, or gives orders violating applicable rules and thereby puts their safety at risk. If workplace safety or condition is not provided, compensation or social insurance is not paid in full, the company rules violate laws or the contract becomes void, the employee may terminate the labor contract at any time upon serving notice. The employee may also terminate the labor contract upon serving 30 day notice in writing.

By employer

Coming into immediate effect, the labor contract may be terminated if: the employee is found not capable of performing during the probation period; violates rules in a significant way; commits serious dereliction of duty or practices graft; becomes criminally convicted; establishes employment with another company which materially affects the completion of tasks with the employer, or when asked, refuses to rectify the matter.

The employer may also terminate a contract by giving the employee a 30-day written prior written notice; or one month?s in lieu of notice if:

  • after the set period of medical care for an illness or work-related injury, the employee can engage neither in his original work nor in other work arranged for him by his employer
  • the employee is incompetent and remains incompetent after training or adjustment of position
  • a major change in the objective circumstances relied upon at the time the contract was written renders it unfeasible and, after consultation, the employer and employee are unable to reach agreement on amending the labor contract

Termination prohibited

If an employee suffers from work-related injuries and is under medical observation, or it can be proven that the employee has lost ability to work due to occupational hazards or diseases, termination is prohibited. To ensure the diagnosis of such injuries, an exit health check-up for those exposed to occupational hazards is mandatory. Employers should not terminate contracts during medical treatment periods, pregnancy, confinement or nursing periods. A special non-termination rule applies for employees that have worked for over 15 consecutive years for one employer and are less than five years away from retirement.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Fixed and open-ended contracts Fixed and open-ended contracts(0)

Open-ended contracts are concluded if:

  • the employer and employee have mutually agreed to do so
  • the employee has been working for the same employer for ten consecutive years
  • the second fixed-term contract expires and the employee requests or agrees to renew the contract (please note that this only applies to fixed-term contracts entered into on or after January 1, 2008)
  • the labor contract has not been signed for one year or more

Part-time employment

Part-time employees should work no more than four hours per day and no more than 24 hours per week for an employer. The maximum payment schedule is 15 days. No written contract is necessary and a part-time employment can be terminated at any time ? monetary compensation is not payable.

Payment of wages

An employer is obliged to pay the salary, in accordance with the national regulations and the provisions of the employment contract, on time and in full. Under the current law, employees must hand in their complaints against unpaid wages at a labor arbitration tribunal; from 2008 onwards, they will be able to ask the court directly for an order to pay.

Next :
Expiration and termination of labor contracts


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Management due diligence Management due diligence(0)

Existing managerial habits

Chinese companies, especially State-owned enterprises, tend to have archaic attitudes to management that extend way back to China?s iron rice bowl. This, coupled with the rude fact that as SOEs they are representatives of the government itself and often above scrutiny, can often lead to polar opposites when it comes to business management and good corporate practice. Chinese executives may never have had to be scrutinized before, or subjected to checks and balances. Yet as soon as a foreign investment is made, be aware that the Chinese authorities will render special attention to the business at a far higher level of attention the Chinese have ever been exposed to. Naturally, as the new-to-China foreign investor, any difficulties in compliance will be your fault. The reality may be far different, and you need to be open to the conducting of an HR assessment of the capabilities of managerial staff to work in the corporate environment you require.

Inheriting staff from chinese companies

If staff are transferred from a State-owned enterprise to a new JV, or are inherited via merger, you need to conduct checks on who you will inherit and their pension/welfare obligations. Many new investors have found themselves unwittingly crushed by the sheer weight of taking on not just staff, but also long term social costs as well. Make sure you do your due diligence on the financial aspect of HR and do not just willy-nilly accept whatever staff you are given. If layoffs need to be conducted make sure the Chinese side does this as part of their responsibility instead of just passing it off on an unsuspecting new foreign partner. This is particularly true when an acquisition is made for just part of a Chinese SOE.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

The Chinese limited liability status grand misrepresentation technique The Chinese limited liability status grand misrepresentation technique(0)

Usually, in the West, this is issued in the form of a cash injection into the business, and can be checked via the public records office. Extending credit then, say of US$1 million, to a company with a limited liability of just US$25,000 may then start to flag up red with your accounts department. It?s a good way of protecting yourself against providing over-credit to customers more likely to default, and also a proven method of assessing risk when providing credit in the form of cash or sales.

All well and good. In China however, there is very limited access to any public records, and those pesky China business licenses that state ?the amount of registered capital? are prone to inaccuracies as well. As is always the case in China, the devil is in the details.

The registered capital amount as displayed on a Chinese business license also fulfills the same criteria as the limited liability status. So if a business has RMB1 million as its registered capital, the shareholders are also responsible for that amount of liability. If you want to send product worth US$1 million to a Chinese company, you?d better start assessing the amount of risk in the published registered capital amount shown on the license.

But it doesn?t stop there. When setting up a Chinese domestic company, before applying for the business license, the investors are required to contribute the registered capital required. Accordingly, a further check is needed to verify the registered capital amount was in fact paid. This document, a ?Capital Verification Report,? has to be issued by a third party Chinese CPA firm cross checking bank statements showing the amount was injected. The false production of such a certificate means the CPA firm can also be liable for fraud.

If a capital verification report has been issued, then the business has a legal limited liability status and it was, at time of incorporation, capitalized in accordance with the law.

It?s these simple checks that can separate a good sale to China from a delinquent sale to China, and they are easy to carry out.

Next :
Management due diligence


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Operational due diligence overview Operational due diligence overview(0)

The likelihood of buyers being disappointed by the performance of the target company can be reduced by conducting operational due diligence (ODD).

ODD can be a highly effective tool in helping the buyer understand exactly how the target company works, which in turn leads to a trouble free transition after the consummation of the acquisition. It can also prove effective at assisting the buyer in evaluating how well the target?s current operations support the future strategic objectives. ODD should include a detailed assessment of:

  • the functional operations of the target and the processes and systems supporting it
  • the interconnectedness of these operations
  • the likely impact of operations on the future financial value of the company

ODD can be used at variety of stages in the acquisition process, but is typically used to achieve one or more of the following outcomes:

Target assessment

  • Identifying potential operational enhancement upside opportunities, along with the key commercial issues associated with the deal. The unforeseen opportunities that might deliver say, an extra US$10 million to the bottom line. When factored into a valuation of say, ten times cash flow, such an uplift translates into an sizeable US$100 million of additional value. That can be the edge a buyer needs to place a deal winning bid in a competitive bidding process.

Bid evaluation

  • Reviewing management structures and controls and providing an assessment of operational effectiveness and benchmarking the business against other similar businesses.
  • Identification and validation of any assumed operational improvement initiatives that underpin the target?s business plan and assessment of the business?s capability to deliver each initiative. ODD will identify the deal killers ? aggressive management plans that simply won?t fly.

Post deal

  • Highlight operational areas where improvements can be made to enhance productivity and profitability and work with the management team to accelerate the improvement process.

Next :
The Chinese limited liability status grand misrepresentation technique


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Purchasing product from China Purchasing product from China(0)

Many are very serious indeed; from tainted food, to toxic materials found in popular products. These can also lead to litigation from consumer groups or customers back home. Quality control is one issue of course, and being technically specific, I will not deal with it here other than to say that of course it is your responsibility as a buyer to ensure that the product you are purchasing meets the legal requirements of your own nation?s legal standards. But there are other issues that can and do affect the purchasing process and if understood and rectified, can reduce the risk.

Profit margins

With China joining the WTO, one effect has been to introduce increased competition into domestic industry. The Chinese tend to have a knee-jerk reaction to this and automatically reduce prices. It is also true to say that many international buyers perform highly aggressive negotiating and purchasing policies that are intended to get the best possible financial deal for the buying entity. Some indeed, are utterly rapacious. There is a link between aggressive purchasing and quality risks, and it has largely been ignored. But squeeze the manufacturers too much, with wafer thin or even no profit margin capabilities, and the pressure and incentive arises for the manufacturer or their supply chain to cut corners. I see it essentially as a moral issue ? you need to allow your supplier to make a reasonable dollar out of your business. If you do, it will keep them honest and more committed to you.

If not, there is a risk of the following equation occurring:

a) Aggressive Pricing x Reduced Profit Margins = Cost Cutting By Supplier

b) Reduction in Quality + Minimal QC Checks = Risk Of Contamination

a+b = c Toxic / Substandard Products

c = Risk of Litigation

Due diligence here can also be measured financially: the cost of litigation and award payouts set against purchasing costs. There are case studies, and if this hasn?t affected your business yet ? then you may well be wise to look at cases involving other unfortunate businesses who ignored this aspect.

Next :
Operational due diligence overview


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Conducting due diligence in China Conducting due diligence in China(0)

Over the 15 years of working with Dezan Shira & Associates in China, we have seen many cases of troubled investors with problems in our dealings with foreign investors in the country. Some of these, regrettably, have proved terminal and the venture had to close. Contrary to popular belief, lawyers and accountants do not want to see businesses with problems. At Dezan Shira, clients who are profitable and on-track with their investment are a far greater source of sustainable income than those with problems. It?s also true to say that of the many trouble shooting cases we?ve been involved in, 90% could have been avoided by the deployment of due diligence at the front end of the investment planning. That initial work upfront would have almost certainly have thrown up red flags that would have altered the destiny of the investment and made it far less prone to inherent problems. In this article I begin by pointing out some of the areas and attitudes concerning investment into China that can hinder a sensible approach to due diligence. The process does not have to be expensive and there is much the savvy investor can do to limit the risk. We point out areas of basic due diligence an investor can conduct himself and also look at common technical due diligence mistakes and assumptions foreign investors can make in China. Due diligence, due diligence, due diligence. The six D?s foreign investors must carry with them in a box of things to do that need to be crossed off their investment check list. Not to do so is largely negligent, and those problems later on that so many expatriates like to tell horror stories about can usually be avoided.

To begin, I start with reasons why investors shy from due diligence, followed by basic checks, examples of hidden areas of risk, and more complex due diligence examples.

General poor attitude concerning due diligence

A tendency in China when it comes to due diligence is essentially a lack of professionalism, a desire to make a quick buck, a refusal to invest in any reasonable homework and an under-appreciation of how savvy the Chinese can be when it comes to the law.

Next :
Purchasing product from China


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Tax planning, finance, and registered capital matters Tax planning, finance, and registered capital matters(0)

Every foreign investor needs to be aware of what taxes they are liable for, how to calculate those liabilities, and when you can claim exemptions.

Registered capital

The minimum registered capital requirements

Foreign investors enjoy national treatment (meaning regionally consistent) in setting up trading companies with minimum registered capital in accordance with the Company Law of China. Minimum registered capital requirements are very substantially reduced from the previous levels, in general RMB100,000 is sufficient. But whatever the minimum registered capital requirements, you must ensure that the registered capital is sufficient for your initial cash flow, not simply to satisfy regulatory needs.

Correctly calculating your total and registered capital requirements

One of the most common, and most serious, problems with WFOE and FICE applications, especially for small businesses, is the issue over registered capital. This is a much misunderstood area. Confusion exists, and many ill-advised investments are made in China due to misinterpretation of the local government?s term ?minimum registered capital.? This is meant as a guideline only, and is not supposed to be a ruling on how much you need to invest.

Additionally, there is often conflict here between the local government ? keen on securing another foreign investor in order to meet its targets ? and other government departments responsible for monitoring and managing China business issues, especially the tax bureau and customs.

It is important to note that tax collection is administered centrally, while the approvals process is at a local level. This means conflicts can and do arise between what the local government says in order to attract your investment, and what the tax bureau then says in dealing with any lack of compliance. And by then it?s too late ? you?re already committed ? and you have no choice other than to go through additional pain and hassle to get things put right, usually involving more investment capital.

In fact, some local government officials are downright reckless when using minimum registered capital requirements as a sales pitch. The amounts they may state may not be in compliance with the actual needs of your business or other government department requirements ? the classic obfuscation that so often blurs the thinking and otherwise competent planning by international investors.

Registered capital is a key issue when structuring your investment and planning its financing ? you need to get this right or face serious problems ? either immediately, or later on. They can be avoided.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

(0)

The application process to create a FICE can be divided into three parts:

  • pre-registration ? what happens before the WFOE formally exists
  • post-registration ? what happens after the WFOE formally exists
  • tax planning ? important when structuring your business

It is important you hire a firm who can provide a complete one stop service, and one who can properly identify registered capital and tax structuring requirements. If not, a FICE business can go wrong almost immediately after the application process has been completed.

Applications are made at a provincial or municipal level (e.g. Guangdong province, Shanghai municipality, Beijing municipality, etc), albeit with input from local offices of state-level authorities. In addition, the five Special Economic Zones in South China have independent approval authority over this issue.

Pre-registration

Name registration

The relevant authority is the State Administration for Industry and Commerce (SAIC). This bureau administers the registration of all kinds of enterprises (including FIEs), organizations or individuals that are engaged in business activities; examines and ratifys the registration of business names; and reviews, approves and issues business licenses. Verification of feasibility of the proposed name by SAIC will take a few working days.

Only the Chinese name will be legally binding ? the English name is not legally relevant for Chinese authorities. The word ?China? cannot be freely included in the Chinese name. The name can be translated by meaning and/or phonetically.

Next :
Tax planning, finance, and registered capital matters


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Establishing Trading Companies In China Establishing Trading Companies In China(0)

China has permitted foreign direct investors to establish fully operational, 100 percent foreign owned retail and trading companies that can buy and sell in China, holding their own import-export licenses since June 2004.

Generally, such companies are inexpensive to establish, and if properly structured can be of great assistance to the foreign investor in combining both sourcing and quality control activities ? increasingly vital in China given recent scandals over substandard foods and toys ? with a purchasing and export facility, thus providing much more control and reaction times than if sourcing purely while based overseas. Such a trading operation, in terms of the legal structure, is known as a “FICE” – Foreign Invested Commercial Enterprise. In detail, the regulations governing FICEs apply to the following activities:

  • import/export, distribution and retailing
  • retailing ? i.e. selling goods and related services to individual persons from a fixed location, as􀀁well as through TV, telephone, mail order, internet, and vending machines
  • wholesaling ? i.e. selling goods and related services to companies and customers from industry, trade or other organizations
  • representative transactions on the basis of provisions (agent, broker)
  • franchising

Limitations do, however, apply to some specific products such as books, periodicals, newspapers, automobiles, medicines, salt, agricultural chemicals such as pesticides, crude oil and petroleum. If a foreign investor has more than 30 retail stores in China and distributes products mentioned in the paragraph above from different brands or suppliers, the foreign investor?s share in a retail enterprise is limited to 49 percent. Retailing enterprises, which do not distribute any of the limited products, are not restricted on the number of stores in China, and additionally all geographical restrictions for retailing enterprises have been removed, and foreign investors can establish retail stores anywhere in China.

It should also be noted that new regulations for operating commercial franchises came into effect on May 1, 2007. Generally speaking, these new laws reflect that the Chinese government is willing to adopt a more liberal regulatory system towards foreign enterprises operating in this field.

For businesses that are engaged in the import and export of product, a further incentive is that the FICE may have its own I/E license, thus saving on agent’s fees. Be aware however that new regulations concerning the rebate, upon export of Chinese VAT (generally 17 percent of the purchase price) have been announced ? please see the box entry on page six for details.

Set-up requirements

You must ensure that the registered capital is sufficient for your initial cash flow, not simply to satisfy regulatory needs. Have you considered all your working capital needs, and issues such as placing a bond with customs for imports? Or how to apply for VAT rebates on export? If not, you can get into trouble very quickly indeed if your registered capital needs are insufficient. This issue ? often misunderstood – will be discussed later in this edition of China Briefing.

Business duration is limited to 30 years for foreign trading companies set up in the developed coastal areas ? companies established in the west of China are allowed business duration of 40 years. Foreign companies shall ?possess a sound reputation and comply with Chinese law.?

Next :
The application process ? FICE


To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com

Contacts and information

Social networks

Most popular categories

Real Time Analytics