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Items filtered by date: May 2018
Over the past several years, there has been a significant rise in the number of foreign-invested businesses that have been downsized or have left China altogether and this seems to be a trend that will continue as competition and the cost of doing business here increases. This article is intended as a practical overview of how to handle the closure of a WFOE.
When an investor decides that its China subsidiary is no longer sustainable, a decision has to be made whether or not to close the business or sell it. Normally, a trade sale will only be feasible if the business is profitable or a strategic investor can be found. If a buyer cannot be found, the business will need to be closed.
The preferred method for closing a WFOE (known as voluntary or solvent liquidation) involves three stages: liquidation, tax clearance, and deregistration, which altogether will require a minimum of 10-14 months to complete regardless of the industry or location of the business. The process, described below, is complicated and will require assistance from experienced lawyers and accountants.
This is done by paying all existing debts, including all debts to employees and to the PRC government, in accordance with a precise timetable. The process starts with the WFOE’s board of directors and, more often than not, the board of the investing entity, drafting a resolution to terminate operations and appoint a liquidation committee. This is followed by notifications to local authorities and creditors, which in turn is followed by a long, drawn-out government audit carried out by a local accounting firm. A so-called liquidation plan is generated and if, at any stage, it is determined that the WFOE is insolvent, and the investor refuses to inject additional cash, the liquidation will continue as a bankruptcy, controlled by a local court. If the WFOE is solvent, all of its assets are sold and the proceeds are used to settle all outstanding liabilities. A second audit is then carried out and a final liquidation report will be submitted to authorities for approval before tax clearance can begin.
During tax clearance, the liquidation committee will be required to submit various tax returns and statutory audit reports. Depending on the nature of the business and number of years it has been operating, local tax officials may scrutinize 6-10 years of tax filings and supporting documents and will focus on any related party transactions and transfer pricing practices. Tax clearance normally takes at least 6-8 months to complete.
Once the WFOE has obtained tax clearance, it will cancel registrations with all of the government agencies that it registered with while being incorporated. As part of this process, the original registration certificates must be returned and a failure to find or submit any of these documents will invariably delay the process. Only after this process is completed, can any remaining funds be remitted back to the investors with the final step being cancellation of the business license.
Given that China’s liquidation process is so time-consuming and expensive, we are often asked whether it is worthwhile and whether there are any alternatives. The main advantage of closing a WFOE this way is that it avoids unpleasant outcomes such as detention of expatriate personnel and revocation of their passports. It also leaves open the possibility of both the investor and any foreign personnel being able to return to China in future. Abandoning a WFOE without liquidating it properly will invariably result in the investor being blacklisted and unable to re-establish in China and if the legal representative or other senior executives are expatriates, there is a risk that they will be detained if they return to China.
As it turns out, in most instances, there is a relatively safe, informal alternative to the above process (besides bankruptcy) but it is not sanctioned by the PRC government.
China’s corporate laws do not officially permit the existence of dormant companies but it is possible to discharge most of a WFOE’s liabilities, effectively mothballing it until the business can be restarted or officially closed.
Investors wanting to avoid the formal liquidation process will need to first ensure that all expatriate personnel leave the country and then lay off all of the WFOE’s Chinese employees, paying them agreed severance packages and obtaining signed releases from all of them against any and all claims they might have against the business. All trade debts will need to be settled and again, releases obtained to minimize the risk of creditors later suing. Inventory and excess equipment will need to be sold and any leases that the WFOE has will need to either be terminated or let expire, whichever is more cost-effective. The WFOE will need to be relocated to a low-cost ‘address of convenience’ within the same district to cut expenses. This will be easier for non-manufacturing businesses.
The WFOE will then need to choreograph payment of all government taxes while remaining current with them. If the business was engaging in related party transactions and/or transfer pricing practices, it will be useful to engage a CPA firm to assess the amount of underpaid taxes prior to self-disclosure so the investor will be ready to challenge the official tax bill when it is issued.
Once all of the above steps have been carried out, the WFOE will still exist, but will essentially be dormant. It will be necessary to continue making NIL tax filings and pay whatever minimal ongoing taxes are levied. It will also still need to comply with all other government reporting requirements but if all of this is done properly, the cost of compliance, like the cost of the new registered office, will be minimal.
It is important to note that an informal dormancy is at best a temporary solution. Eventually, within 12-20 months – depending on the location – the local government will either start to levy higher taxes or threaten to revoke the business license. However, for many businesses, this approach defers the expense and inconvenience of liquidating the business and a decision about whether or not to remain in China. In the meantime, all major debts will already have been cleared off the WFOE’s books so that any subsequent official liquidation will be quicker and easier. The main advantage of handling the closure this way, apart from keeping the investor’s options open, is that it avoids blacklisting and still affords the investor significant control over the process.
Voluntary liquidations are complicated and time-consuming but avoid the unpleasantness of bankruptcy and simply abandoning the business. Informal dormancies, once rare, have become fairly common and are increasingly regarded as a ‘halfway-house’ alternative between voluntary liquation and abandonment.
None of these arrangements are for the faint of heart and are best decided on after having taken professional advice and after all other alternatives, such as a trade sale, have been considered. As with everything else related to China, careful planning is vital to the success of a business closure.
Asialaw has announced their Leading Lawyers 2018 and we are pleased to announce that OLN has been ranked once again.
Maintaining last year's rankings, OLN's Partners are are ranked as both Market-leading Lawyers and Leading Lawyers.
This is excellent news not only for the firm but for our Corporate & Commercial, Dispute Resolution, Employment Law and Intellectual Property departments.
Congratulations to the following Partners for being ranked!
About Asialaw Leading Lawyers
Asialaw Leading Lawyers identifies outstanding private practice legal professionals – divided into market-leading, leading and rising stars in the same 18 practice areas and 24 jurisdictions listed above. Asialaw consults buyers of legal services, as well as lawyers in private practice who have deep knowledge of the markets. Please see here for more details about Asialaw Leading Lawyers.
By Richard Grams, Consultant, Oldham, Li & Nie.
Gift-giving and hospitality are time-honored traditions within mainland Chinese culture and still play a significant role in cultivating relationships, showing respect and appreciation. However, gift-giving in a business context is usually more nuanced due to the emphasis that Chinese place on hierarchy/social status and concerns about how actions reflect on themselves. Today’s more stringent anti-bribery enforcement climate also complicates business gift-giving in China.
What follows are some guidelines on gift-giving etiquette in Chinese business culture.
- Chinese place great emphasis on symbols and symbolic associations which may not be readily apparent to non-Chinese. Care must be taken in choosing gift items which are regarded as having symbolic significance.
- Give gifts to key business executives you visit, as a way to thank them for meeting you.
- Gifts exchanged in the context of an ongoing negotiation are acceptable but wait until avoid negotiations are finalized before giving gifts to avoid giving the impression that the gift is given for the purpose of influencing the outcome of negotiations.
- Colors carry great symbolism in China. Limit color of wrappings to Red, Gold, Silver and Pink. Colors such as white, blue, black or yellow wrapping with black text printed on should be avoided. To avoid wrapping being torn or creased from travel, wait until you arrive in China before wrapping the item. Speak with hotel staff about nearby gift-wrapping services.
- If giving multiple items, avoid giving 4 of any items as Chinese associate the number with death. The number 6 (六) sounds similar to the character for 'flow' (流), which indicates fluidity and that everything will go smoothly. The number 8 is considered the most auspicious number for the Chinese, mostly because the word 'eight' (八) in Chinese somewhat resembles the word for 'prosperity' or 'wealth' (发). A gift of either 6 or 8 items will be appreciated.
What to Give as Gifts
The ideal gift need not be big or expensive. It should, however, be something that the recipient will appreciate. Keep the following tips in mind:
- A gift that represents where you are from or an item which is not accessible in China will usually be highly appreciated.
- Avoid giving any gift that may regarded as extravagant as this may place undue pressure on the recipient to reciprocate. Reciprocity is a very important facet of Chinese culture and if the recipient feels unable to reciprocate, he/she will usually refuse to accept the gift offered.
- The more practical the gift, the better, as it will serve as an oft-used reminder of you and your thoughtfulness.
Suggested Gift Items:
- A bottle of good or very good wine, cognac or scotch whiskey since apart from the material value these represent, they also symbolize a toast to the good health of the recipient so regarded as very sincere
- A fine pen
- Memorabilia of a sports team near your company’s operations (a jersey with name printed – be careful with the colors)
- A coffee table book on symbolic moments in your country’s history or on wildlife, landscapes or art culture
- Good quality foreign cigarettes or cigars if the intended recipient is a smoker
- A small basket of apples is a popular tradition in China is to give apples especially on Christmas Eve. This is because Christmas Eve is called ‘Ping An Ye’ (平安夜), which sounds similar to the word for apple, and literally translates to ‘Peaceful, Silent Night’
- A leather wallet or other practical local handicraft especially if handcrafted in the country, region or city you are from
Items to avoid giving
- The word for ‘Shoes’in Chinese (鞋) sounds a bit like the Chinese word for ‘evil’‘heretical’(邪). It also giving them the tools to ‘walk away’and could be misinterpreted as you wanting to part ways, thus ending your relationship
- Avoid giving umbrellas, scissors, handkerchiefs or pens containing red ink and avoid signing cards with red ink.
- While most Chinese people would welcome receiving most fruit, especially apples, don’t give pears because the Chinese word for 'pear' (梨) sounds the same as 'to separate' or 'to part from' (离) and might imply that you hope the recipient's family will separate (through death or divorce).
- Flowers are generally fine but if you decide to give these, avoid white ones, especially Chrysanthemums, which are only used when visiting graves or during funerals.
- The Chinese word for 'four' (四) sounds similar to the character for 'death' (死) so avoid giving any item in a set of four.
Proper Etiquette for Giving a Gift
Chinese people believe that the manner in which a gift is given is sometimes worth more than the gift. The most common gift-giving faux pas can be avoided by following the tips below:
- Hierarchy is a treasured concept in China, with people at the higher levels of social strata receiving a great amount of deference. When making a gift to a company or to a group of people within a company, present it to the most senior ranking person in the room.
- In general, to avoid possible embarrassment, give the same type of gift to recipients at the same level within their organization.
- Giving a gift to an individual as a gesture of friendship rather than as a token of appreciation to the group that the recipient represents is usually best done in private.
- Chinese people are typically reserved and your gift is likely to be received with a reserved demeanor particularly if you give it in the presence of the recipient’s staff. Do not take this is a lack of enthusiasm for the gift; the recipient simply does not want to be cast as greedy.
- To avoid appearing greedy, the recipient may decline the gift the first time it is offered. Persist and ask again. It is customary for a gift to be declined up to 3 times before it is accepted so be prepared for this. If the gift has been absolutely refused, do not press on but politely acknowledge the refusal.
- Gifts are usually not unwrapped when they are received so do not be offended if the recipient does not open the gift in front of you. Chinese people do not usually open a gift in front of the giver to avoid possible embarrassment. Instead, a recipient will open it later and then call or write to thank the giver.
- Once the gift is accepted, express your gratitude that they have accepted the gift and proceed from there.
- Wrap gifts well and ensure that the wrapping is presentable before giving a gift. Never present a gift in the store bag the gift was purchased from.
- When presenting a gift, offer it facing the correct way to the recipient and do so with both hands. It signifies that respect and care has been taken. This is similar to the process of exchanging business cards.
- Unless the occasion is symbolic, do not photograph the gift-giving.
Proper Etiquette for Receiving a Gift
The procedure for receiving a gift is similar to that for giving one. Please note:
- You may be expected to initially decline the gift, 3 times customarily, before eventually accepting it and expressing your gratitude.
- When you do accept the gift, take it with both hands. As earlier noted, it symbolizes respect and gratitude for the gift and the thoughtfulness of the person giving it.
- Chinese people who have had previous contact with Americans or other Westerners may expect you to follow the American custom of opening the gift when it is received (ie: in front of the person giving). To avoid confusion, you can always ask, "Would you like me to open this now?
- Call or send a thank-you note. And, if possible, bring a gift of roughly similar value to give the giver on a subsequent occasion.
May 4, 2018
China’s long-awaited new National Standards on Information Security Technology – Personal Information Security Specification GB/T 35273-2017 (the “Regulations”) came into force on May 1, 2018. The Regulations are arguably China’s most important personal data protection rules, representing new standards for the handling of personal data.
The Regulations supplement rather than abrogate China’s existing patchwork of data protection laws and regulations. Although the Regulations themselves are not legally binding, they dovetail with China’s 2017 Cybersecurity Law and Consumer Protection Law which are binding. Furthermore, over the coming months, regulators will be pressing for compliance with the Regulations, so organisations operating in China are strongly advised to review and update their China data protection policies and practices to reflect the new standards.
Summary of Key Features
- Clarification of key data protection concepts and definitions.
- Personal data is defined as either “personal information” or “sensitive personal information” with the latter subject to more stringent data protection (eg: all personal information of persons under 14 years of age is categorized as “sensitive personal information”).
- Explicit consent is required for collection of sensitive personal information or use of personal information for any new purpose.
- Inclusion of certain prescribed information in all privacy notices, including but not limited to (for business use) personal information collection and processing rules such as the collection method and frequency, place of storage, and frequency of collection; if data is shared, disclosed or transferred, the types of data involved, the types of the data recipients, and rights and obligations of each party; data subject rights, and complaint handling; security principles followed, and security measures implemented.
- Personal information security impact assessments are required for: (i) outsourcing of data processing; (ii) sharing and transfer of personal information; or (iii) disclosing personal information to public.
- All personal information collected/produced in China and transferred to or shared with offshore parties requires a security assessment and all such assessments must be conducted in accordance with yet-to-be-released official standards and procedures.
- All requests for access to, correction of, copies and deletion of personal information, and withdrawal of consent must be responded to within 30 days, and there should be no charge for any reasonable request unless repeated requests are made within a certain period of time.
- New standards and procedures for effective data protection that organisations need to comply with and include: (i) drafting, implementing and updating privacy policies and corresponding procedures; (ii) privacy training; (iii) security impact assessments and audits.
- Organisations must appoint a data protection officer and a dedicated data security team to be directly responsible for the protection of personal information.
- Data breach notifications: a specific incident response plan is required together with periodic reviews and rehearsals and organisations must keep a record of incidents detailing the scope of such breaches.
- Periodic data protection impact assessments which must be carried out at least annually.
The Regulations do not bring China’s data protection framework as close to GDPR standards as some commentators have predicted but they are an unmistakable sign both that the PRC government takes data protection seriously and is moving towards adopting international best practices in this space. This will be welcomed by international businesses currently undertaking GDPR compliance reviews and who are now turning their attention to their China practices. Nevertheless, clear local distinctions (notably regarding data localisation, the requirement for consent, and restrictions on handling of non-personal data) remain in China and must be specifically addressed.
Over the course of the next year or so, we should see new and updated national standards promulgated to cover key areas such as data anonymisation, handling of big data, overseas data transfers, and diverse aspects of information security. Some of these implementing standards will simply adapt existing ISO standards.
We are continuing to monitor regulatory developments in this space and will report as and when they occur. In the meantime, organisations with data exposure to China need to appreciate that enforcement action in the data protection sphere is already a reality in China and as this regulatory and enforcement framework continues to evolve, they need to take steps now to review and update their compliance programmes to ensure these comply with the Regulations.
Asian Legal Business (ALB) has released Intellectual Property Rankings 2018 and we are delighted to announce that OLN has been ranked across all categories in China and Hong Kong.
Maintaining last year's rankings, OLN is ranked at Tier 2 in Hong Kong for both Patents and Trademark / Copyright, and continues to hold its ranking at Tier 3 for both categories in China.
Our Intellectual Property team provides practical advice and solutions with our understanding of the latest regulations and practices, the frequent updates of local government policies and branding positions in the Chinese-speaking market.
Congratulations to our Intellectual Property team for getting ranked!
About ALB and the IP Rankings
Thomson Reuters’s Asian Legal Business magazine provides current analysis and information on law-related issues throughout the Asia region. ALB drew information from firm submissions, interviews, editorial resources and market suggestions to identify and rank the top firms for Intellectual Property in Asia. The rankings were based on the firm’s visibility and profile in the region, the volume, complexity and size of work undertaken, key personnel hires and growth of the practice group, key clients and new client wins, and its presence across Asia and in individual jurisdictions.
Hong Kong Broadband Hack: Implications for Retention of Customer Data by Insurers
By Adelina Wong, Consultant, Insurance, Oldham, Li & Nie
Recent hacks into the customer databases of a telecommunications company and travel agencies have put the spotlight on how companies retain customer data and may lead to a revamp of data protection law in Hong Kong. These developments have far-reaching implications for insurers, who in the course of providing insurance services to the public, collect and process large amounts of personal data relating to existing, prospective and former customers.
HK Broadband Data Breach
Hong Kong Broadband Network, the second largest fixed-line residential broadband provider in Hong Kong, revealed a few weeks ago that an inactive customer database on an active server had been accessed without its authorization. Private information of some 380,000 former and existing customers was potentially compromised in the hack, including their names, ID card numbers, home addresses, telephone numbers and credit card details. The personal information dated back to 2012 and included information of customers who had not been active since 2012. It later came to light that the compromised inactive database was not encrypted, unlike other active databases maintained by the company.
With the fallout from the hack, including extensive media reports and initiation of a compliance review by Hong Kong’s Privacy Commissioner for Personal Data, the company announced that it would purge the data of 900,000 former customers and reduce its information retention period on past customers from seven years to six months. In this regard, Hong Kong Broadband admitted that it had mistakenly applied its 7-year rule for retention of business records to customer information as well. Going forward, the company indicated that it will not only shorten its data retention period for past customers but also change the way existing customer information is stored. In particular, Hong Kong ID card numbers and credit card numbers held in customer databases would have some digits deleted to make the information less attractive to hackers.
Implications for Insurers
Currently, Hong Kong’s Personal Data (Privacy) Ordinance, which has been in force since 1996, does not definitively state how long data users should keep personal data. Data Protection Principle 2(2) merely provides that personal data should not be kept “longer than is necessary for the fulfillment of the purpose (for which the data was to be used)”. However, Privacy Commissioner Stephen Wong has indicated that he is satisfied with the remedial actions to be taken by Hong Kong Broadband. A 2004 case arising from a complaint to the Privacy Commissioner by an unsuccessful insurance applicant regarding retention of his application data by the insurer is also instructive.
In that case, an investigation by the Office of the Privacy Commissioner for Personal Data (“PCPD”) found that the insurer’s practice was to retain personal data of unsuccessful insurance applicants for an indefinite period of time. In support of this practice, the insurer cited legal requirements for keeping books of accounts and the need to maintain a record in case of future applications, inquiries, potential litigation and complaints. The Commissioner at the time found however that those reasons did not justify the indefinite retention of personal data where money transactions (e.g. involving the payment of premiums) were not involved. In such cases, the Commissioner determined that a retention period of 2 years would suffice for the purposes stated. Even where money transactions were involved, the retention period should be limited to 7 years (the period prescribed in applicable ordinances for keeping books of account). The PCPD served an enforcement notice on the insurer requiring it to erase any data which had been kept for longer than the periods prescribed, pursuant to which the insurer erased more than 7000 records.
Of course, each case has to be considered on its own facts. However, indiscriminate retention of personal data, or blanket retention of personal data for 7 years (or other arbitrary period), will be hard to justify if a complaint is made to the PCPD. Insurers would be well advised to establish a considered policy in relation to their and their agents’ retention and use of data which takes into account the nature of the customer (e.g. existing or former policyholder or unsuccessful applicant) and factors which may justify a longer or shorter retention period.
This is all the more important given that the Privacy Commissioner has indicated that he will review the Personal Data (Privacy) Ordinance to see if it affords enough protection in light of recent data leaks and global trends, including the adoption of a new data protection framework under General Data Protection Regulation (GDPR) in the EU from May 25, 2018. GDPR significantly enhances the data privacy rights of individuals in the EU, including the “right to be forgotten” – or demand erasure of personal data which is “no longer necessary in relation to the purposes for which they were collected”, subject to limited exceptions where retention of the data is required by law or justified in the public interest etc. With the global trend to enhance the data privacy rights of individuals, it will be incumbent on insurers to achieve a deeper understanding of the various purposes for which personal data are kept or processed, since different retention periods may apply according to such purposes. For example, personal data which may not justifiably be retained/used for marketing purposes may nevertheless be retained/used to comply with legal or accounting requirements. Thus, insurers will have to be able to classify data appropriately and have the systems capability to flexibly remove data from certain applications while keeping it for others.