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A Comparison of a WFOE, Representative Office and Joint Venture Models of Compan...

April 13, 2018| Mr. David A. Dodge, Esq. | Uncategorized

It seems with every passing day increasingly we are being approached by companies outside China who seek not cheap manufacturing in the PRC like in the 80’s, 90’s and early 2000’s, but rather seek access to a market of 1.35 billion Chinese consumers. These companies look to grow internationally to sell and distribute their products to the Chinese consumer much like KFC and McDonald’s who caught the wave early and are now making record profits from their China-side product sales and distribution operations and are firmly entrenched in the consciousness of the Chinese consumer.

The first step (not the subject of this article) is to protect and establish a company’s intellectual property rights in that company’s brand name, product line name, logos, trademarks and patents in China in a legal and astute manner. However, from there, how should a company outside of China establish a functional entity that can carry on day to day operations effectively and efficiently?

One of the biggest considerations is the structure of the presence the company wishes to establish in China. There are three main options: Wholly Foreign Owned Enterprise, Representative Office, or Joint Venture. Each has its own merits and drawbacks with the right choice dependent on your organization’s goals and strategy.

It would perhaps be helpful for starter to provide a quick description for each of them:

Wholly Foreign Owned Enterprise (also commonly known as WOFE) – A WFOE is a privately held limited liability company in China in which all the shareholders are foreign.

Representative Office (RO) – A representative office is a base from which to manage relationships, attend meetings, and is not a “legal person”.

Joint Venture (JV) – A joint venture means starting a company in China with at least one foreign and one Chinese shareholder.
Ok now that we are all caught up, let’s jump into the comparisons:

Ease of Setup

Wholly Foreign Owned Enterprise – Moderate

The process of setting up a Wholly Foreign Owned Enterprise generally takes around 40 working days. During the application process, which varies depending on the type of of this business that you require (there are 3 types: Service, Trading, and Manufacturing), you will need to specify the scope of your business. The process can be broken down into 2 parts: Pre-registration and post-registration. Pre-registration requires the submission of a number of business related documents while post-registration requires companies to formally register with a number of Chinese government agencies.

Representative Office – Easy

Of the three structures, the easiest to setup and get off the ground is an RO. Recently, amendments have been made to curb the abuse of RO’s by foreign entities. Parent companies must have been established for a minimum of 2 years and RO’s are subject to inspection and need to keep accounting records. The application process, however, remains relatively simple. Submissions of company documents and then, once the application has been approved, registering with the various Chinese government agencies.

Joint Venture – Difficult

The process of setting up a JV is complicated by the need to, firstly, find a suitable Chinese company to partner with and then, secondly, to effectively negotiate the terms of the relationship with the prospective Chinese shareholder. Choosing partners that can make tangible business contributions, safeguarding intellectual property, ensuring operational control of the joint venture, and managing talent are some of the main points that need to be agreed upon. Others issues that need to be addressed are: aligning strategic priorities, creating a structure that permits rapid responses to change, and preparing up front for eventual restructuring. All these factors add to the complexity of setting up a JV.

Protection of Intellectual Property (IP)

Wholly Owned Foreign Enterprise – Easy

This company is completely owned by its foreign parent company. That means that the parent company controls all aspects of the business process and daily operations. This makes it easy for the company to protect its business processes, trademarks, and trade secrets.

RO – Moderate

RO’s have limited capabilities. They cannot issue invoices, receive payment, or engage in for profit activities. The result is that they still have to outsource the production of their business activities to local suppliers although they are able to monitor progress and thereby limit any IP violations.

JV – Difficult

A JV requires a foreign company to join forces with a local Chinese business. The benefits of sharing internal business networks, contacts, and processes is apparent as it reduces the time it takes for the company to establish itself. The danger, however, is that it makes the company vulnerable to theft and abuse of its intellectual property if the relationship between the shareholders deteriorates or if adequate protection isn’t built into the initial company setup.

Cost of setup

WOFE – Moderate

Setting up a WOFE used to require a company to invest Registered Capital. For a limited liability company with one single shareholder, the required amount of registered capital used to be designated at RMB 100,000. That however has changed. In 2014, the regulation regarding minimum registered capital for WFOEs were abolished in many cases to further promote it as an investment vehicle for foreign companies.

RO – Low

RO’s are relatively affordable to setup. The regulatory changes in 2010 have however made operating an RO more expensive. Additional compliance requirements means a greater financial burden on the RO or facing heavy fine for not complying as well as having their registration certificate revoked. The tax burden is also higher, going up by more than 2% from 9.5% to 11.69%.

JV – Moderate

The costs associated with setting up a JV are dependent on the type of JV setup (Equity Joint Ventures and Cooperative Joint Ventures) and how it is decided among the shareholders to capitalize the JV. Generally the absolute minimum of registered capital is RMB 30,000 for each investor in a company with multiple shareholders and RMB 100,000 for a company with one shareholder.

Deciding on how to structure an expansion into China is a critical decision. Each option has its own benefits depending on your organizational goals. An RO is best suited for companies that wish to test the waters in China. It allows you to develop relationships, create a presence, and gain more insight into how business is done in China. A WOFE on the other hand allows a company to set up a more tangible presence that allows them to trade and conduct for-profit activities and benefits from lower tax rate as well as giving them full control of the operation. A JV is a good solution for companies that have well established relationships with Chinese companies and for situations where a WOFE might not be an option due to government regulation.

Free Trade Zones

There are also opportunities to take advantage of dramatic tax benefits by forming a foreign run entity in one of China’s Free Trade Zones such as the Qianhai Free Trade Port Zone in the Guangdong Province. Eligible companies registered in Qianhai are subject to a 15% preferential corporate income tax rate and eligible professional employees who are employed in Qianhai are exempt from personal income tax.

Whichever structure you decide to go with, make sure you do through research and that you understand the regulatory environment regarding your specific sector or industry.

Employment of Foreign and Chinese Workers in China: Distinguishing a FESCO or WF...

April 13, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We were recently approached by a mid-sized U.S. company that had been operating a sourcing, sales and distribution center in China through what is commonly known as a FESCO (Foreign Enterprise Service Company). As their China sales were increasing they were looking to transition from a Representative Office (contracting with a FESCO to pay independent contractors) to a Wholly Foreign Owned Enterprise (WFOE). The question being is it better to operate in China – a FESCO or to directly hire employees and have a WFOE directly employ workers?

The use of a FESCO (Foreign Enterprise Service Company) was a commonly used practice before there were significant regulatory reforms as to WFOE formation and when companies faced significant hurdles to forming a WFOE in China. Such Chinese run and operated FESCO’s would serve as an intermediary party for foreign companies employing workers or independent contractors in China. There are advantages and disadvantages to hiring labor through a FESCO, which should be weighed against other available options. Because employees in China (foreign or Chinese) may not be paid remotely, there must be some type of local payroll provider or entity that complies with Chinese laws. A FESCO can fill this role and allow a foreign company to quickly dispatch labor in China.

A FESCO is a company that provides labor and payroll services to companies in China, essentially acting as an agent for the recruitment, contracting and payroll management of Chinese employees. This can be helpful to a foreign company that does not have the resources for hiring local employees via internal payroll or prefers to have some assistance in the case of labor disputes.

Another reason to use a FESCO is that Chinese employees can be dispatched during the incorporation process for a foreign-invested company. Otherwise, the company would be unable to legally hire the needed employees during the pre-incorporation period. Because this process can take up to three to six months, many companies opt to use a FESCO to engage the necessary personnel. A FESCO is limited to hiring only temporary or auxiliary employees and may not dispatch ‘core’ personnel.

It is important to note that there are many FESCOs, and that this is a generic term for agencies that provide this service. It is a powerful and well-known brand, and some foreign companies mistakenly believe there is only one FESCO in China.

Is Contracting Workers Directly Possible in China?

A foreign company may not contract with a Chinese worker without a local, incorporated entity such as a Wholly Foreign Owned Entity (WFOE). Therefore, there is a need for a third-party agency, such as a FESCO or GEO, to contract with Chinese workers during the startup phase in country. A remote payroll, where a worker in China is paid directly by foreign company is illegal in China.

This also applies to independent contractors, since this type of work relationship is not allowed in China. Many companies that think they have independent contractors in China really have illegal employees being paid remotely without a WFOE. This is a risky practice, and one that Chinese authorities are watching for carefully.

Advantages and Disadvantages of a FESCO

A FESCO is not an ideal solution and does have both pros and cons that have to be considered. Companies should keep in mind that the FESCO is a Chinese entity and will operate according to that country’s cultural and language standards. Also, FESCOs typically use standard employment contracts that may not be adequate for some foreign employers and are not typically open to negotiation.


• The FESCO can assist the foreign company in the case of labor disputes with employees

• May be state-owned and have a strong legal team to assist clients with litigation and arbitration

• Can hire and dispatch employees prior to incorporation, which can prevent delays in starting business operations

• The FESCO can pay mandatory benefits to employees located in multiple cities, which can vary widely between regions


• May be conflict of interest where a FESCO is both recruiting and managing payroll, with the misuse of confidential data

• Lack of transparency in the payroll process

• Reports may only be in basic English, with little detail

• FESCO should not be used to hire “core staff” under China labor laws, and are limited to temporary and auxiliary staff

• A FESCO labor contract must be fixed term only for two years (although lawful termination of employees is allowed.)

Impact on Social Security Benefits

The welfare system in China is mandatory for both employee and employer contribution and is a complex system that can amount to almost a 40% total contribution based on income. The FESCO, as a Chinese HR organization can handle the withholding of contributions for a foreign company that might find it difficult to navigate the state and regional variances for employees in multiple locations.

Alternative Options to Using a FESCO

1. Hire Chinese employees directly through a legal corporate entity: This requires that the foreign company go through the entire process of incorporation prior to hiring any employees. Also, at that point the company will be faced with running an internal payroll to comply with China’s complex tax and welfare contribution system.

2. GEO services: Essentially, the GEO becomes the local employer of record for employees or independent contractors with a legal entity already in place. The GEO ensures compliance with all payroll, tax and employment rules.

3. Hire individuals as consultants pre-incorporation, then formally employ them after incorporation. (This option is technically illegal in China)

4. Formally incorporate with a WFOE and use a local payroll provider: This is one way to manage the employment process directly, but use a Chinese provider to handle the specifics of payroll and withholding.

How Can a GEO Employer of Record Be Used in China in Compliance with Employment Law?

A GEO (Global Employment Organization) can be used in China to hire both foreign and Chinese employees. The GEO complies with Chinese law by having a local entity already in place to run payroll, withhold taxes and make all required statutory contributions. While this is similar to using a FESCO, the difference is that the GEO provider is not Chinese run or controlled, and there is a higher degree of transparency and flexibility within the employment agreement.

The GEO solution is ideal for a company that wants to make a quick entry to China but is hesitant to make the commitment to a FESCO. By employing local or foreign workers during the incorporation phase, the GEO will allow the company to start operations immediately, while avoiding any compliance problems with Chinese payroll or employment laws.


A FESCO is not the only way to employ workers in China, but it is one solution for companies that do not have a WFOE set up and want to use a Chinese-based agent. The advantages of legal representation and employee benefits payments have to be weighed against the cost and commitment required. As a Chinese entity, a FESCO will adhere to local contractual, cultural and language norms, which may not suit every foreign employer.

While a FESCO can offer temporary employment during the incorporation process or even after, there are alternatives, such as a GEO solution. In any case, companies should avoid the temptation of using independent contractors or running a remote payroll in China, since this could result in penalties or prohibitions for future business operations.

Hong Kong Firm Fubs Mainland TM Appeal: Appeal From the Publication Notice Not F...

January 12, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We were retained recently to handle a China trademark appeal as to a rejection our client received while being represented by their previous legal representatives in Hong Kong. It appeared that our client’s supplier in Dongguan or another party affiliated with them, had filed for the TM before the client did. This is commonplace in China. Hence, our firm’s first task for clients doing business in China is to secure their IP rights as it is a “first to file” jurisdiction and the clients’ suppliers and China competitors will attempt to trademark and patent technology before the client is able to file for their own protection, resulting in a loss of their future intellectual property rights in China.

The previous Hong Kong law firm (overpriced and inexperienced in matters involving mainland China intellectual property matters) received the client’s Certificate of Incorporation and had their Mainland patent agents file an application for that TM with the State Intellectual Property Office (SIPO).

Because the client’s supplier had previously filed a TM application with SIPO, a notice of rejection due to the previous filing by the competitor/supplier was mailed out by SIPO. Under Chinese law, an appeal of the rejection notice is due within 15 days from the date of the receipt of the notice.

However, it is meaningless to appeal the rejection notice if there is a previous filed application (the competitor’s). SIPO will reject the appeal of the rejection notice as if there is an existing same trademark application that has already been filed.

Under these circumstances, instead, the foreign client must file an opposition against the previous filed trademark application (the competitor’s application) and apply for a new trademark just as same as the original contemporaneous with filing an opposition to the competitor’s TM application.

In order to accomplish this successfully, one must look to when the competitor’s publication period commenced, in other words, the date it was published. Under Chinese law, there is a three (3) month period during this publication for any parties with superior rights (i.e. the client who already has a previously granted USPTO TM) to file an application and opposition against the competitor’s application for the TM.

This is in accordance with the Trademark Law of the People’s Republic of China, Article 33:

“For a preliminary approved and published trademark, within three months from the date of publication, a prior rights holder or an interested party which believes that paragraph 2 or 3 of Article 13, Article 15, paragraph 1 of Article 16, Article 30, Article 31, or Article 32 of this Law is violated or any person which believes that Article 10, 11, or 12 of this Law is violated may file an opposition with the Trademark Office. If no opposition has been filed upon expiry of the publication period, the registration shall be approved, a certificate of trademark registration shall be issued, and the registered trademark shall be published.”

The Hong Kong IP firm was advising the client (wrongfully and expensively) that they must appeal from the rejection notice they received from SIPO. Fortunately, we were retained to step in and file and application and opposition against the competitor’s application for trademark rights to our client’s company name in China.

Drafting China Manufacturing and Supply Agreements (MSA) — Huge Errors

January 10, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We recently advised a client who had retained their regular corporate counsel in the U.S. to draft a China Manufacturing and Supply Agreement (MSA) in regards to their Chinese potential suppliers in Dongguan and Shenzhen. The client was concerned that although the MSA appeared to be workable in the U.S. context, there was nothing China-particular.

There were numerous huge errors in contract drafting and legal judgment made by their corporate legal counsel who had advised the client in the past on non-China matters.

The contract itself was what I would call “U.S. boilerplate” and there needed to be several changes beyond translation to render it China appropriate and, most importantly, enforceable in the PRC context. Without internationally enforceable and China appropriate enforcement provisions the agreement had no teeth. Particularly as it related to the dispute resolution clause.

1. The Manufacturing and Supply Agreement (MSA) had a non-disclosure and confidentiality provision embedded in it as part of the agreement — a huge error in the China context. What happens when parties engage in negotiations and information disclosure but do not reach an agreement? Then the Chinese supplier has all of the plans and specifications as to the product but there is no enforceable confidentiality agreement?

Also, there were no provisions as to non-circumvention and non-competition. A huge issue in the China manufacturing context.

We had to clean the whole thing up and style things as a non-disclosure, non-circumvention and non-competition (NNN) addendum. The timing of entering into an NNN as a separate consideration to the MSA is crucial. In the event parties do not reach a final agreement, our foreign client’s proprietary and confidential information disclosed in negotiations should be protected from any prospective Chinese supplier engaging in wrongful disclosure, competition and/or circumvention.

Also, they needed to include non-competition and non-circumvention provisions that are China appropriate and enforceable in China as that is a huge consideration for the China side business.

2. There was no treatment as to liquidated damages although contract damages can be difficult to prove internationally and, in particular, in the China context. Furthermore, there needs to be some leverage over the supplier such the liquidated damages provide a strong motive to abide by the terms of the contract. We needed to draft an LDA as to liquidated damage considerations that spoke as to delays in the Contract Schedule or violation of the NNN or the wrongful retention of the client’s tooling. We styled the NNN as an addendum so that we could decide which provisions we wished to incorporate and which not.

3. Next was the issue of dispute resolution — namely, it was nowhere addressed. I asked their corporate counsel, “What happens if a disagreement arises with the Chinese supplier?’ He answered, “We would sue them in federal court.” Obviously, it would be utterly foolish to sue most Chinese companies and in particular suppliers in a U.S. federal court who have no assets in the United States. Obviously, with Chinese courts being decidedly pro-Chinese companies, we needed a choice of arbitration clause that could be enforced in Chinese court that also would be cost-effective and expedient. Otherwise, the foreign client would have no negotiating power with the Chinese supplier if and when problems arose.

I asked their corporate counsel to start contemplating whether we prefer CIETAC or HKIAC binding or non-binding arbitration in the event of disputes with our supplier. They had no idea what I was speaking of, let alone how to properly proceed.

When doing business in the China context, we strongly encourage our clients to seek competent legal counsel with China experience.

COGSA Defenses in a China Shipping Case — Not Always Applicable

January 9, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We recently received correspondence in regards to our Shenzhen, China client’s claims against a major global shipping company that had botched the release of 3 container loads of our client’s goods shipped from port in Shenzhen and, subsequently, bailed in a warehouse in Long Beach. The goods were transmitted to the buyer absent transmission from our client of the original bills of lading as to the pertinent goods. We received a response from the shipper and logistic company’s corporate counsel in Manhattan that our client’s claims were:

“. . subject to the rules governed by the terms, conditions and exceptions of the Carriage of Goods by Sea Act 46 U.S.C. § 1300, et. seq., the Federal Bill of Lading Act, 49 U.S.C. Chapter 801, and/or other legislation pertinent to the shipment which is the subject of the claim.”

COGSA has been a defense for shipper liability both due to its $500.00 per package damage limitation and due to its restrictive one (1) year statute of limitation period.

Goods, however, that are bailed in a warehouse and no longer on board the subject vessel may not be subject to COGSA limitations. As we stated in response:

“However, it is clear under federal law that when the goods at issue were transferred to land and no longer on the subject vessels at issue in this matter, COGSA does not apply. COGSA only applies by its own force during “the period from the time when the goods are loaded on [the vessel] to the time when they are discharged from the ship.” 46 U.S.C. § 1301(e). In this case, the goods were wrongfully transferred by —– to —–‘s customer, absent the appropriate transfer of three (3) original bills of lading, while in the warehouse on land, not at sea. Thus, your reliance on COGSA is misplaced. Further, since —– does substantial and regular business in the State of California their actions while in this state are subject to the laws and judicial authority of the State of California.

Furthermore, federal admiralty jurisdiction is not invoked in this dispute, and California law and jurisprudence is the appropriate mechanism for relief as —– was not acting solely as a “maritime” agent, but also as a logistics agent and “bailee” of the goods at issue. Said another way, —–’s breach and negligence were solely related to their duties as a “bailee” operating in the State of California. The general rule for exercising admiralty jurisdiction in a contract case is that “jurisdiction arises only when the subject-matter of the contract is ‘purely’ or ‘wholly’ maritime in nature.” Transatlantic Marine Claims Agency, Inc., v. Ace Shipping Corp.,109 F.3d 105, 109 (2d Cir. 1997) (citing Rea v. The Eclipse,135 U.S. 599, 608 (1890)).”

Lastly, even if COGSA limitations did apply to our client’s goods shipped from port in Shenzhen to Long Beach, there were several limitations to a carrier’s COGSA defenses. As stated:

“Even if we were to proceed in federal court in respect to your COGSA arguments and bring the other state law California claims forth under the Court’s ancillary and supplemental jurisdiction, there are a number of weaknesses to —–‘s proposed defenses:

1. Under the doctrine of “substantial deviation” under COGSA, our Federal Circuit (the 9th Circuit) defines this term fairly broadly in terms of gross negligence as a quasi-deviation; and,

2. With respect to package limitation exceptions, the fundamental breach doctrine bears close resemblance to the deviation doctrine. This close relationship effectively allows deviations and quasi-deviations to be viewed as a subset of fundamental breaches. Thus, a carrier could face liability for a fundamental breach without committing an infraction that attacks the “essence of the contract.”

COGSA is not always a complete defense and bar to a client’s claims as to goods that are damaged or wrongfully transferred while on land in the context of a shipment from Shenzhen, China to Long Beach.