With the continuous deepening of China’s opening-up to the outside world, more and more foreigners are coming to China to do business and start enterprises, enjoying the broad market dividends and convenient business environment in China. However, it is particularly important to note that China has clear compliance requirements for foreign-related business activities. Violations in fields such as tax, employment, and intellectual property will not only lead to penalties such as fines and business suspension, but also result in revocation of licenses, entry restrictions, and even criminal liability in serious cases. This article is specially created for foreigners planning to come to China or already doing business in China, detailing 5 uncrossable compliance red lines, combined with specific violation scenarios and penalty standards, to help you avoid risks, operate in compliance, and prevent “being fined for stepping on pitfalls”.
Doing business in China, “compliance” is the bottom line and premise. Especially for foreigners, due to their unfamiliarity with Chinese laws and regulations, they are prone to violations in high-frequency scenarios such as tax declaration, foreign employment, and intellectual property protection. The following 5 compliance red lines cover the core links of operation. Each clearly defines the red line boundary and violation consequences, which must be kept in mind and strictly followed.
I. Tax Compliance Red Line: No Tax Evasion, No Tax Omission, No Tax Avoidance – Declaration Procedures Must Be Standardized
Tax violations are the most common red line touched by foreigners doing business in China, and also a key area supervised by China’s tax authorities. Some foreign business operators, due to their unfamiliarity with China’s tax system or “luck psychology”, fail to declare taxes, underreport taxes, make false declarations, etc., all of which will face severe penalties. The core red line requires that foreigners establishing enterprises and carrying out business activities in China must perform tax registration, tax declaration, and tax payment obligations in accordance with the law, and shall not evade any legal tax liability.
Specific details of the red line: First, tax registration must be completed within 30 days after the establishment of the enterprise, truthfully fill in enterprise information and foreign investor information, and shall not forge the registered address or conceal operating income; Second, complete tax declaration on time. Whether it is value-added tax, corporate income tax, or foreign individual income tax, it must be declared within the specified time limit. Even if there is no taxable income in the current period, a “zero declaration” must be made, and no late declaration or missed declaration is allowed; Third, it is not allowed to evade taxes by means of false invoices, inconsistent accounts and actuals, profit transfer, etc., and shall not use cross-border transactions to evade China’s tax supervision, such as transferring domestic income to overseas affiliated enterprises, concealing cross-border transaction income, etc.; Fourth, the dividends, salaries and other incomes obtained by foreigners from the enterprise must pay personal income tax in accordance with the law, and the enterprise must perform the withholding obligation and shall not assist foreigners in evading taxes.
The consequences of violations are very severe: for minor violations (such as late declaration, missed declaration), a fine of 2,000 yuan to 10,000 yuan will be imposed; if there is tax evasion, the tax authority will recover the tax, add late payment fees, and impose a fine of 1 to 5 times the amount of tax evaded; in serious cases (such as large amount of tax evaded, repeated tax evasion), it will be transferred to the judicial organ for criminal liability. At the same time, the enterprise may be included in the tax blacklist, restricting the use of invoices and bank accounts, and foreign investors may be restricted from leaving the country. In addition, if tax cancellation is not handled in accordance with the regulations and the business is suspended without permission to evade taxes, the tax registration certificate will be revoked, affecting the subsequent business qualification in China.
II. Employment Compliance Red Line: No Illegal Employment, No Illegal Recruitment – Documents and Procedures Must Be Complete
When foreigners do business in China, whether they employ foreign employees or Chinese employees, they must strictly abide by China’s employment laws and regulations. Especially the compliance requirements for foreign employment are more stringent. Illegal employment and incomplete documents are serious violations with great penalties.
The core red line is that it is not allowed to employ foreign personnel without legal employment documents, employ foreign employees beyond the scope and term of the work permit, or evade the relevant provisions of China’s labor security.
Specific details of the red line: First, employing foreign employees must have “two complete documents”, that is, foreign employees must obtain the “Notice of Foreigner’s Work Permit” and “Foreigner’s Work Permit”, and go through the work-related residence permit. All three are indispensable. It is not allowed to employ foreign personnel who have not obtained the above documents, nor employ foreign personnel with expired, forged or altered documents; Second, foreign employees shall not be employed beyond the scope of the work permit. For example, if the work permit indicates the occupation, work unit and work area that are inconsistent with the actual work situation, it is a violation; Third, foreign interns and volunteers shall not be employed instead of formal employees, foreign employees shall not be required to engage in illegal work, and wages of foreign employees shall not be in arrears or withheld; Fourth, when employing Chinese employees, labor contracts must be signed and social insurance must be paid in accordance with the law. It is not allowed to evade the obligation of social insurance payment or sign “yin-yang contracts” to damage the legitimate rights and interests of employees.
Consequences of violations: For enterprises that illegally employ foreign employees, a fine of 5,000 yuan to 20,000 yuan will be imposed for each employee employed. In serious cases (such as repeated illegal employment, a large number of employees employed), the business license will be revoked. At the same time, the relevant foreign personnel will be fined and ordered to leave the country within a time limit. In serious cases, they will be deported and not allowed to enter China within 5 years; if foreign employees are illegally employed to engage in illegal work, both the enterprise and the relevant personnel shall bear joint criminal liability; those who arrear employees’ wages or evade social insurance payment will be ordered to make up the social insurance, pay the arrears of wages and compensation, and be fined, affecting the enterprise’s credit rating.
III. Intellectual Property Compliance Red Line: No Infringement, No Plagiarism, No Counterfeiting – Independent Protection Must Be In Place
China’s efforts to protect intellectual property rights are constantly increasing. In recent years, it has continuously improved intellectual property laws and regulations and severely cracked down on infringement and counterfeiting. When foreigners do business in China, whether using others’ intellectual property rights or owning their own intellectual property rights, they must abide by relevant regulations, not touch the infringement red line, and do a good job in protecting their own intellectual property rights to avoid damage to their rights and interests. The core red line is that it is not allowed to infringe upon others’ intellectual property rights such as trademarks, patents, and copyrights, produce or sell counterfeit or shoddy products, or plagiarize or steal others’ intellectual achievements.
Specific details of the red line: First, it is not allowed to use others’ trademarks without authorization, such as using the same or similar signs as others’ registered trademarks on products and promotional materials, or selling products counterfeiting others’ trademarks; Second, it is not allowed to infringe upon others’ patents, such as manufacturing, selling, or offering to sell others’ patented products without the permission of the patentee, or stealing others’ patent technology for production and operation; Third, it is not allowed to infringe upon others’ copyrights, such as plagiarizing others’ written works, design works, and software programs, arbitrarily copying and disseminating others’ copyrighted works, or using pirated software and pirated materials; Fourth, for their own intellectual property rights (such as trademarks and patents registered overseas by foreigners), if they want to obtain protection in China, they must go through the registration and filing procedures in China in accordance with the law, otherwise it will be difficult to obtain legal protection.
Consequences of violations: Those who infringe upon others’ intellectual property rights will be ordered to stop the infringing acts, destroy the infringing products and related tools, confiscate the illegal gains, and be fined 1 to 10 times the illegal gains; if the illegal gains are difficult to calculate, a fine of 50,000 yuan to 5 million yuan will be imposed; in serious cases (such as repeated infringement, large amount of infringement), criminal liability will be pursued; at the same time, the infringement will be recorded in the enterprise’s credit file, affecting the enterprise’s bidding, financing and other business activities. The personal credit of foreign operators will also be affected, and even their commercial activities in China will be restricted.
IV. Business Qualification Compliance Red Line: No Unauthorized Operation, No Beyond-Scope Operation – Qualification Approval Must Be Compliant
Foreigners doing business in China must obtain corresponding business qualifications in accordance with the law, shall not operate without a license, operate beyond the scope, or forge, alter, rent, or lend business licenses. This is the premise for carrying out business activities and an uncrossable compliance red line. Some foreign business operators mistakenly believe that “they can carry out any business after registering the enterprise”, ignore the qualification approval requirements, and eventually face penalties and business suspension.
Specific details of the red line: First, when registering an enterprise, the business scope must be clearly defined, and business activities shall not be carried out beyond the business scope. For example, if the registered business is “cross-border trade”, it is not allowed to arbitrarily carry out businesses requiring special approval such as catering, education, and medical care; Second, some industries need to obtain special business qualifications, such as food sales needing to obtain the “Food Business License”, education and training needing to obtain the “School-Running License”, and cross-border e-commerce needing to complete customs filing. It is not allowed to carry out relevant businesses without obtaining special qualifications; Third, it is not allowed to forge or alter business licenses, or rent, lend, or transfer qualification certificates. For example, transferring one’s own business qualifications to other enterprises for use, or borrowing others’ qualifications to carry out business, are all violations; Fourth, after the expiration of the business qualification, the renewal procedures must be completed in a timely manner, and business activities shall not be continued after the qualification expires.
Consequences of violations: Those who operate without a license or beyond the scope will be ordered to stop relevant business activities, confiscate illegal gains, and be fined 1 to 10 times the illegal gains; if the illegal gains are difficult to calculate, a fine of 50,000 yuan to 1 million yuan will be imposed, and in serious cases, the business license will be revoked; those who forge, alter, rent, or lend business qualifications will be fined, confiscate illegal gains, revoke the qualification certificate, and the relevant responsible persons may be detained, and criminal liability will be pursued in serious cases.
V. Cross-Border Business Compliance Red Line: No Illegal Cross-Border Settlement, No Regulatory Evasion – Foreign Exchange Transactions Must Be Standardized
Most foreigners doing business in China are involved in cross-border transactions and foreign exchange transactions, such as the remittance of overseas investment funds, the remittance of domestic profits overseas, and cross-border trade settlement. Such activities must strictly abide by China’s foreign exchange management and cross-border capital flow related regulations, shall not evade supervision or conduct illegal settlement, which is an easily overlooked but serious compliance red line. The core red line is that cross-border capital flows must go through filing and approval procedures in accordance with the law, shall not illegally transfer funds or evade foreign exchange supervision, and shall not use illegal channels for foreign exchange settlement.
Specific details of the red line: First, the investment funds remitted by overseas investors must complete foreign exchange registration procedures in accordance with the law, shall not be remitted in or out without authorization, and shall not conceal the source and purpose of the investment funds; Second, when an enterprise remits domestic profits overseas, it must complete tax declaration and payment in accordance with the law, go through filing procedures with the foreign exchange management department with tax payment certificates, profit distribution resolutions and other materials, shall not remit profits without filing, and shall not transfer funds through illegal channels such as underground banks; Third, during cross-border trade settlement, customs declaration and foreign exchange verification procedures must be completed in accordance with the law, shall not forge trade documents or conduct false foreign exchange settlement, and shall not use cross-border trade to evade foreign exchange supervision; Fourth, it is not allowed to retain foreign exchange privately, lend foreign exchange accounts, illegally transfer domestic foreign exchange overseas, or assist others in evading foreign exchange management regulations.
Consequences of violations: Those who conduct illegal cross-border settlement or evade foreign exchange supervision will be ordered to make corrections, confiscate illegal gains, and be fined less than 30% of the illegal amount; in serious cases (such as large illegal amount, repeated violations), a fine of more than 30% of the illegal amount up to the equivalent amount will be imposed. At the same time, the enterprise’s bank account may be frozen, the cross-border capital flow of foreign investors will be restricted, and criminal liability will be pursued in serious cases.
Summary: For foreigners doing business in China, opportunities and risks coexist, and compliant operation is the key to long-term development. The above 5 compliance red lines cover five core links: tax, employment, intellectual property, business qualification, and cross-border business. Each red line has clear legal and regulatory basis, and violators will be held accountable and fined for stepping on the pitfalls. It is recommended that foreign business operators fully understand China’s relevant laws and regulations before coming to China, or entrust professional foreign-related legal service institutions and financial institutions to provide assistance and standardize the handling of various procedures; in the process of operation, regularly check compliance risks, correct irregular behaviors in a timely manner, and avoid touching the red line due to temporary negligence, which will affect their own operation and development in China. China has always welcomed foreigners who operate in compliance to do business in China. Only by adhering to the bottom line of compliance can we better enjoy the dividends of the Chinese market and achieve long-term development.
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