Key legal points for business in China

In this blog, we set out some key issues for you to consider when investing or doing business in China. We’ll first set out the different investment options and then we will look at some key commercial law issues for business in China. 

Different modes of investment in China

There are a number of investment options which your Australian business can choose from to conduct business in China.

Representative Office ('RO') 

One option is to set up a RO which is the simplest and least time consuming type of business structure to set up in China. Under Chinese law, ROs are not permitted to directly engage in business activities (eg, entering contracts and receiving payments) on behalf of your company (unlike an agent or distributor). However, ROs will be able to carry out market research and promote your products or services to the Chinese market. This option will be particularly suitable for smaller companies with limited resources. 

Wholly Foreign-Owned Entity ('WFOE')

Another option is to establish a WFOE. A WFOE is the most common and generally preferred investment vehicle for foreign investors. A WFOE is a limited liability company which is funded exclusively by foreign investors. The usual amount of capital required to establish a WFOE is 30,000 RMB (approximately $6000 AUD) subject to the circumstances of the business. The benefit of this option is that it creates an independent legal entity that can engage in business activities (unlike a RO). The process of setting up a WFOE in China usually requires around three to four months. 

Other options

For more complicated activities, you can also consider establishing a joint venture ('JV'). A JV is created through a partnership between the foreign investor and a Chinese entity, who share the venture’s gains, losses and management according to the terms of the JV entered into between them. There are two types of JVs in China - equity joint ventures ('EJV') and cooperative joint ventures ('CJV'). Broadly speaking, EJVs are commonly established to take advantage of the Chinese partner's market knowledge, preferential treatment and advantages in manufacturing and service offering. A CJV has the advantage of allowing a foreign company to participate in an enterprise where they prefer to remain a minor shareholder. Contributions from investors don't have to be financial; they can be in the form of labour, resources and services. 

Commercial activities

Intellectual Property 

China is a member of the World Trade Organisation ('WTO') and therefore a party to all major IP conventions of the WTO, including the Paris Convention. 

Patents 

In China, three different types of patents are available: invention patents (which have a 20-year term and are comparable to Australian standard patents); utility models (which are used for simpler inventions and have a 10-year term); and designs, which have a 15-year term.  

An invention patent protects any innovative technological solution relating to a product or a process. For instance, it might protect a pharmaceutical substance and composition, its production method, and use. A utility model patent protects any novel technological solution relating to a product’s shape or structure. A design patent protects any novel shape or pattern of a product. 

Inventors may submit applications for different types of patents for the same invention. 

In comparison to Australia, China typically has a longer patent examination process. 

Trademarks 

An application for trademark registration must be submitted to the Trademark Office of the China National Intellectual Property Administration in accordance with Chinese trademark law. After a trademark application has been accepted by the Office, and no opposition is filed within the statutory 3-month opposition period, the trademark will be registered.

Any ‘visually or acoustically perceptible’ sign which is capable of distinguishing the goods of a trader from another may qualify for registration as a trade mark. The sign could be composed of words, numbers, shapes, sounds or colour combinations. Single-colour marks, smell and taste marks, however, cannot be registered. 

A trademark application may be opposed on a number of grounds including bad-faith application without intention of use. 

After the final date of approval, a trademark registration is valid for 10 years, with additional 10-year renewal terms available.

Copyright 

The Copyright Law of China provides protection for a wide range of creative works, including literary and artistic creations, performing arts, works of architecture, and computer software. Although registration is not required in order to enforce a copyright, it might serve as prima facie evidence in such actions.

In terms of remedies, preliminary injunctions may be sought against copyright infringers, but this is rarely available in practice. Statutory damages of up 5,000,000 RMB ($1.1 million AUD) may be granted in circumstances where it is impossible to determine the plaintiff's damages or the infringer's profits. There may also be criminal penalties for copyright infringement. 

Employment

According to China's Labour and Employment Contract Law, each full-time employee must enter into a written contract with the employer. Employment agreements may be open-ended or have a limited length. 

There is no such thing as a right to simple termination with notice in Chinese law. This means that while resignations are typically accepted with 30 days' notice from employees, employers may only terminate an employee's employment without cause under the conditions specified in relevant legislation. 

Chinese legislation mandates that both domestic and international employees enrol in China's social insurance scheme.  

Only foreigners with approval from the necessary authorities are permitted to work in China.

Dispute resolution 

For foreign companies, mediation and arbitration are the most common forms of dispute settlement in China. 

Due to the ease with which awards can be enforced internationally and the freedom given to the parties to select the arbitral venue and process, arbitration is typically advised for international transactions involving a Chinese party. Institutional arbitration, which is carried out by a recognised arbitration committee, is the only type of arbitration recognised under the Chinese law.

We hope the above summary of issues is helpful to you. Please feel free to contact us with any queries you might have about doing business in China.