Legal aspects of doing business with China

A one of the fastest growing economies in the world, China continues to attract companies of all shapes and sizes to its markets.

However, opportunity also can be a challenge. It is strongly recommended to be aware of the up-to-date laws and regulations at first in order to gain a success in China.

1. Methods of Market Entry – Exporting

Direct Exporting
Exporting of goods to China always involves engagement of a company, which has a license for import/ export according to Chinese laws. Such a company has to be registered in China. Therefore, the term “importer” in Chinese trade terminology usually refers to the registered company in China possessing an “import/export license”.

Indirect Exporting
Overseas Agents or Distributors
Another method to enter the China market is through an intermediary (i.e., an agent or a distributor) in China.
An agent is your company’s direct representative and is normally paid certain management fee and/or a commission to help represent and sell your product. A distributor buys your products and then sells them on to customers through a third party or directly.

Franchising
Franchising is a method of distributing products or services.China permits foreign investors to engage in franchising activities through wholly foreign-owned or joint venture commercial enterprises. Cross-border franchising is also permitted.

Licensing
Licensing is a permission granted by an exclusive owner of Intellectual Property Rights to another party to use such IPR on agreed terms and conditions, while the IPR owner continues to retain ownership of the IPR.There is no need to build a distribution network when you choose licensing, which will lower costs of market entry. However, please pay attention to the potential IPR infringement risk.

Selling Online
There are two different methods for a business to sell online and therefore directly to its consumer in China: 1) Standalone website outside/inside China; 2) Third party platform outside/inside China.

Standalone Websites
An existing standalone website outside of China may be the easiest method of selling online, but it is likely not to be the most effective. In some cases, the Chinese government has blocked online selling websites because they do not hold a China ICP (Commercial Internet Content Provider) license. In addition, if the company chooses to build and maintain a website within China, the company must be a legal registered entity in China to receive the necessary ICP license.

Third-party Platforms
China introduced a cross-border e-commerce pilot program in 2014 in order to regulate the sale of goods by overseas sellers directly to Chinese consumers through approved e-commerce platforms.  Foreign seller is not required to set up a legal presence in China. However, it is required to find the qualified third-party logistics service providers and e-commerce platforms approved by Chinese Customs in order to sell goods under this program.

2. Methods of Market Entry – Investment Directly in China

Several legal forms are available for foreign investors to invest directly in China. It is mainly comprised of representative office, wholly foreign-owned enterprise, joint venture (including equity joint venture and cooperative joint venture).

Representative Office (RO)
A Representative Office (RO) is not a legal entity but rather a liaison office in China for the company’s headquarters’ in the home country.

Wholly Foreign-owned Enterprise (WFOE)
A wholly Foreign-owned Enterprise (WFOE) refers to the entity fully invested by one or more foreign investors. WFOE can be the limited company, or take another form upon approval. WFOE is the most common way of getting incorporated in China since it allows foreign investors to fully control the business.

Joint Ventures (CJV & EJV)
A joint venture is a structure set up by Chinese and foreign parties holding joint operations and ownership, and who agreed on management and the division of risks.

Cooperative joint venture (CJV)
A CJV is organized by means of a JV contract between Chinese and foreign parties and articles of association. CJV can be formed as a legal person or a partnership whereby the latter one shall undertake unlimited liability.

Equity Joint Venture (EJV)

An equity joint venture (“EJV”) is a Chinese legal person with limited liability. It is established on the basis of a joint venture contract and articles of association between Chinese and foreign parties.

3. Intellectual Property Regulations (IPR)

China is a member of the WTO and consequently a party to all major intellectual property conventions of the organization.

Trademark
The Trademark Law imposes a strict “first-to-file rule” for obtaining trademark rights, whereby the first party to file for registration of a mark pre-empts later applicants. In general, prior use of an unregistered mark is irrelevant for trademark registration purposes, unless the prior mark in question is a well-known mark, or the later filing is a bad-faith pre-emption of the prior mark that has achieved a certain level of fame through use.

Patent
The Patent Law and its Implementing Regulations adopt a “first-to-file” rather than “first-to-invent” system. Foreign applicants are required to submit patent applications in China through an officially designated patent agent, and should not apply directly to the Patent Office. International applicants may be granted a Chinese patent only after the applicant has carried out the relevant procedures in the PRC Patent Office. A patent applicant whose application is rejected by the Patent Office may request a re-examination by the Patent Review Board (“PRB”). The decision of the PRB may be appealed to a People’s Court.

Copyright
The rights protected the copyrights of authors in their literary, artistic and scientific works and rights related to copyright.
In compliance with Berne Convention, for foreigners, the Copyright Law in China stipulates that copyright arises automatically 1) when foreigners or stateless people publish their original work first in China, or 2) when foreigners or stateless people are the citizens or permanent residents of contracting states, or 3) when foreigners or stateless people publish their original work first in contracting states.

Even if you can acquire automatic copyright protection, but the enforcement process will be much easier with a registered copyright as registration is considered to be persuasive evidence of copyright ownership.

4. Risks and Countermeasures of doing business with China

Risks
Risks in doing business with China can be divided into several types, such as
Market Risk
Market risk is the risk of loss due to changes in the market. The main market risk faced by international trade enterprises is exchange rate and commodity price risk.
Commercial Risk and Default Risk
In addition to the market and policy risk, the main risks a foreign company may encounter are commercial risk, which includes buyer’s insolvency/credit risk, buyer’s acceptance risk, seller’s performance risk, transit risk, and intellectual property infringement risk.

Countermeasures
Careful preparation to avoid legal problems in the first place is the best solution. To deal with the potential risk, following practices are helpful:
Conduct due diligence or business background check on the counter party
Conduct due diligence is perhaps the most important step before entering a formal relationship with foreign partners. Companies must be careful to exam and verify the legal status and financial capacity of foreign parties before signing any business contracts with them.
Sign written contracts review by lawyers
It is necessary for enterprises to sign a detailed written contract with their counter party, and ensure that the contract and documentary credit does not contain erroneous or ambiguous terms and conditions. Most sales or trade contract are similar, but the devil is in the details, and each of these provisions will have its own ramification if an actual dispute occurs. So, it is strongly recommended to consult a lawyer to help negotiate and draft the contract with more favorable provisions.
Chose safer payment method
Enterprises should carefully choose payment method when doing business. Generally, payment methods like letter of credit (L/C) issued by a bank with high credibility and escrow service are safer than credit cards and wire transfers.

 


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