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China contracts: Calling a table a chair is not clever

by Dan Harris


I like this cartoon because it is funny. But I love this cartoon because it is so China relevant. This cartoon was sent to me by my friend Roberto De Vido, whose  own very funny and topical cartoons can be found here. Roberto told me that “he knew” I would like this and then we discussed some of the examples we have seen where foreign companies actually tried similar things in China.

The reason this post is titled the way it is is because I oftentimes analogize to tables and chairs when explaining to clients why what they are proposing will not work. I tell them that we can call a table a chair, but it will still be a table, and vice-versa. I then tell them that no government — including the one in China — is going to treat a table as a chair just because you call it that, and the same holds true for contracts.

Over the years, our China lawyers have seen the following, among other things:

1. Contracts with Chinese employees who are working in China that claim to be contracts for the employee to work in the United States. US companies (and yes, US lawyers) say that they do these contracts so as to avoid China’s onerous tax and labor laws. I say that they do these contracts because they have absolutely no clue regarding either international law or China’s labor laws. First off, no country in the world is going to allow you to employ one of its citizens in that country and have some foreign law apply to that employer-employee relationship, notwithstanding any lie in your contract. Second off, if you do not have a written contract with your China-based employees, you are opening yourself up for massive penalties. If I were a Chinese employee, I would argue that a contract like this does not qualify and I would expect the Chinese arbiters to concur with that.

My all time favorite on this was when an American company contacted me after learning that the Chinese government had come by wanting to see their employment contracts. When I told him that he was in big trouble because the government would see that all of his contracts claimed that the employees were working in the United States, he asked me how they wouild be able to prove that. I pointed out that all they would need to do is check the employee passports. I am not making this up!!

2.  We often see royalty agreements, service agreements and product sales agreements intentionally mislabeled in an attempt to reduce taxes, avoid the foreign company from being deemed to be doing business in China, or to make it easier for the Chinese company to be able to get money out of China. This sort of thing is never a good idea.

3. We also have seen a number of times where companies have gotten into trouble with China customs for claiming to be importing X when actually importing Y. Companies typically do this to secure a lower duty or because the Y product requires certifications or is not allowed in China at all. Let’s just say that China customs is not at all understanding in these situations.

4. Bribes. Without naming names, one prominent company has had huge bribery problems both in China and elsewhere and one of the things this company allegedly did was to provide its employees with $5,000 in monthly “travel reimbursements” which reimbursements were actually for the paying of bribes. Not smart.

Roberto told me of a story involving a friend of his who had been convinced by his Chinese partner to describe its business to the Chinese government officials one way, when it was actually something else, and to do so in order to get a business license, even though its real business was not open to foreigners. Roberto said that at a certain point, the government official interrupts his friend’s “umpteenth explanation of why the business license should be granted” and says something along the lines of “Mr. Xxxxxx, we understand your business very well. And for that very reason we don’t want to grant you a license.”

It should go without saying — but it doesn’t — that lying is a always a very bad way to try to deal with a government and that your putting a false label on something not only does not usually work, but it also usually will subject you to additional penalties, including criminal. It should also go without saying — but again it doesn’t — that just because your Chinese counter-party insists that “everyone does it” does not mean that you will get away with it and that Chinese government officials did not just fall off the turnip truck.

The cartoon above is funny, but what will happen to you if you seek to emulate it will not be. You agree, right?

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes as a source of China legal and business information.

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