Company law in China
The governance of foreign companies in China must follow the corporate law of the People's Republic of China.
The organizational form, governance structure and operating rules of LIED companies shall be subject to the provisions of Chinese corporate law and other applicable laws.
Two types of legal forms
Companies in China can adopt two types of legal forms: with legal personality o without legal personality.
entities with legal personality, As the limited liability companies and public limited companies, can be subject to civil rights and actions, enjoy civil rights and assume civil obligations autonomously and independently.
entities without legal personality, however, cannot assume civil obligations independently.
There is no unified definition of unincorporated entities in Chinese law, which can be organized as companies - with general or limited liability - or as cooperative entities.
Legal form for foreign companies in China
Foreign investments in China can be structured through different legal forms, which will be subject to different legal regimes.
Among them are the branch offices, representative offices (RO), the companies of wholly foreign owned (WFOE), the contractual joint venturess (CJV), the joint venture capital (EJV), the foreign-owned business enterprises (FICE), the foreign-owned corporations (FIJSC), the holding companies, regional headquarters and associations.
Tax law in China
En 1994 China has undertaken tax reform to establish a simplified tax system geared towards a socialist market economy.
In presentTaxes are the most important source of revenue for the government of the People's Republic of China.
They are a key component of macroeconomic policy and have a major impact on China's economic and social development.
Therefore, All companies are required to file their tax returns annually..
El Chinese fiscal year It runs from January 1st to December 31st, which corresponds to the calendar year.
Chinese government collect taxes of individuals and companies through the State Administration of Taxation (SAT), which is China's supreme fiscal authority and is a ministerial-level department directly subordinate to the State Council.
The structure of the Chinese fiscal system is organized at both local and state levels, with the budget being managed in a decentralized manner across different levels of government.
To do this, the company must hire a registered Chinese accounting firm to perform the annual audit.
Fiscal authorities
Tax authorities may review and inspect the declaration documents and check that the correct amounts have been declared.
The tax authorities also They can randomly select companies to conduct audits and reviews tax.
Some sectors are selected each year for a self-review prior to the tax audit.
They are usually sectors with high profits.
The tax authorities also They demand a tax audit before the liquidation of the companya.
Si A taxpayer fails to pay a tax or a withholding agent fails to pay the amounts withheld within the expected time, You may face a daily surcharge of 0,05% of the tax owed from the payment due date.
The tax authorities They may inspect the accounting books, account vouchers, statements and other relevant information of the taxpayer and the withholding agent., including, in the latter case, information on amounts withheld or collected and paid.
tax documents
Accounting books, accounting records, financial statements, tax receipts, invoices, export receipts and others Relevant tax documents must be kept for 10 years.
Taxpayers may face sanctions if they do not comply with legal and regulatory obligations.
Serious cases may even lead to criminal penalties.
Main taxes in China
- Corporate income tax (25%)
- Value added tax (17%, 13%, 3% and others);
- Social security contributions per monthly salary (variable up to 40%)
- Property tax (variable)
- Withholding on dividends paid to non-residents (10%)
- Withholding on interest paid to non-residents (10%)
- Royalties paid to non-residents.
Labor law in China
Hiring of personnel by foreign companies
With the exception of ORs, FIEs may directly hire their employees.
Chinese labor law requires that Employers sign a written contract with their employees within one month from the employee's first day of work at the company.
If they do not do so, the salary is doubled for each month without a contract and the contract becomes indefinite by default.
The contract must include the scope, conditions and place of work, occupational risks, safety conditions of production, salary and other matters required by law and regulations.
An exception to this rule is part-time work, where a verbal agreement is considered sufficient.
In general, China allows three types of employment contracts: fixed-term contracts, permanent contracts and end-of-work contracts.
However, it should be noted that after two consecutive fixed-term contracts, the employee may demand from the employer an indefinite contract for any extension of his contract.
Fixed contracts
This type of contract creates an employer-employee relationship for a specified duration and can be used for part-time or full-time employment.
In most cases, a fixed-term contract can only be renewed once, after which the employee will need to be given an open-ended contract when renewing it for the second time.
Some clauses may be inadmissible according to Chinese law, while others are mandatory.
For example, the employer may stipulate a trial period at the beginning of the contract, during which it is comparatively easier to dismiss the employee.
Furthermore, The employer may pay the employee 80% of the full salary stipulated in the employment contract., although this amount cannot be less than the local minimum wage.
On the other hand, The employee can resign with only three days' notice.
Therefore, It is not advisable to stipulate a very long trial period.
Contract duration and trial period
The duration of the fixed-term contract will determine the maximum duration of the trial period that the employer can establish.
Thus, If the duration of the contract is 3 months, there will be no trial period..
If the duration of the contract is from 3 months to 1 year, the trial period will be one month.
If the duration of the contract It is from 1 to 3 years, the maximum duration of the trial period is two months; and if the duration of the contract is over 3 years, the maximum duration of the trial period is 6 months.
During the probationary period, the employer may dismiss the employee if it is proven that he or she does not meet the requirements for the job.
The burden of proof lies with the employer.
Part-time contracts
In this type of contract, the employee cannot work more than four hours a day or 24 hours a week.
Furthermore, a trial period is not allowed and both the employer and the employee can terminate the agreement at any time.
The employee is not entitled to severance pay; the employee must be paid at least every 15 days; and part-time employees are not required to have a written contract.
Indefinite contracts
Due to its unlimited duration and limited grounds for termination, the open-ended contract guarantees job security until retirement.
In particular, a worker with an indefinite contract can only be dismissed for reasons of immediate dismissal, dismissal with 30 days' notice or in the context of a mass layoff.
During a mass layoff, workers with permanent contracts must be given priority over other workers.
The normal working hours are 8 hours a day and 40 hours a week.
The employer must pay overtime hours of employees around the 150% of the normal salary worked on a working day and at 300% for overtime carried out on holidays.
Hiring foreign employees
In the case of hiring foreign employees, is different.
According to the revised Administrative Regulations on Employment of Foreigners in China and the Entry and Exit Regulations issued in 2013, the procedures for an enterprise to hire foreign employees include:
- Application for a Work Permit Notification Letter for Foreigners in China
- Applying for a Z visa or R visa
- Applying for a work permit for foreigners
- The application for a residence permit.
All of them can be applied for at the State Administration of Foreign Expert Affairs (SAF) and its local branches.
But you also have to know that foreign workers are classified into three levels:
- High-level talents (Level A)
- Professional talents in line with the demand of the labor market (Level B)
- Other talents in line with the demand of the labor market (Level C).
The classification is based on the suitability and eligibility of expatriates through a comprehensive evaluation system that includes a points-based system.
Applicants are assigned points based on their Education, salary level, age, previous achievements, work experience and Chinese language level.
In addition, depending on the city, foreign employees are treated differently.
In Beijing, they are treated as domestic workers, meaning social security payments are mandatory.
However, foreign employees can benefit from social security exemptions if they come from countries with which China has social security exemption agreements, such as Spain.
In any case, Workers must register with social security and provide employees with the legally provided social security.
However, there are no national rules specifying the level of benefits; employers must turn to local authorities to determine the amount and method of payment.
Social security includes pensions, unemployment insurance, health insurance, work accident insurance and housing fund.
Workers must apply different coefficients to entrepreneurs according to whether residents or non-residents.
In addition, employers must retain workers' contributions and pay them on their behalf.
Some pension and health insurance contributions are calculated on the basis of the average salary of the previous year, which is published annually by the competent local authorities.
General questions about hiring in China
According to the Trade Union Law of the People's Republic of China, Companies with 25 or more employees union members They must create a grassroots union.
The employer must consult the union before taking any important decision on the operation, management and development of the company.
Trade unions should be invited to meetings held by the employer on issues that may affect their interests, such as wages, social assistance, health and safety at work and social security.
Furthermore, if the employer intends to unilaterally terminate an employment contract, he must inform the union in advance of the reasons.
The union may ask the employer to reconsider its decision if it considers that it is in contravention of the law, administrative regulations or the employment contract itself.
FIEs
FIEs also have the alternative option of employing Chinese workers through employment agencies.
According to relevant laws and regulations, labor posting agreements are only applicable for: a temporary position with a maximum duration of 6 months; an auxiliary position to provide auxiliary services to the employer's main or principal activity; and a replaceable position whereby a permanent employee is replaced by a temporary one while the former is away from the company on vacation, study or other reasons.
The total number of employees posted by an employer must not exceed 10% of the total number of employees, including permanent and displaced persons.
In addition, a contract must exist between the sending company and the posted employee, the sending company and the FIE, and the posted employee and the FIE, respectively. The contract between the posting company and the posted employee must have a fixed duration of at least two years.
Finally, there is another option to have workers: the Outsourcing.
Outsourcing is an additional option for FIEs.
Typically, the tasks most often outsourced are those that require specialized skills, a high degree of confidentiality, or those that have a clear scope but have significant consequences if executed incorrectly.
Some good examples in China are accounting, tax reporting, human resource management and payroll processing.
Many small and medium-sized businesses choose to completely outsource some or all of these functions, while larger companies create a separate entity to handle these administrative tasks in their regional subsidiaries.
Termination of the contract
From a legal point of view, Laying off employees in China may be more difficult than expected, especially with the regulations that came into force in 2008.
According to Chinese Labor Law (1994), employers should take the following steps to ensure that the dismissal is legal.
First, it is necessary to determine whether the termination of the contract is early or not.
If the employer chooses to terminate the contract before the fixed-term contract expires, it is considered “early termination"and certain additional requirements apply."
On the other hand, in the case of early termination, the entrepreneur must try Negotiate an agreement with the worker, including the termination date, severance pay, and any other necessary details.
This is usually the safest option, even if there are grounds for unilateral termination.
If a termination agreement cannot be reached, consider whether there are grounds for immediate termination for extreme cause or 30 days' notice for other reasons, taking into account the legal obstacles to these forms of termination.
If none of the above measures can be taken, the dismissal is likely to be considered illegal and that additional compensation be demanded.
In the event of a labour dispute, the parties may request mediation or arbitration, as well as go to court.
Labor arbitration is the procedure prior to the initiation of a trial.
If an employee files a claim directly with the court using as evidence a receipt for unpaid wages issued by the employer, and the claim does not involve any other dispute regarding the employment relationship, the court will approve the filing of the case.
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RRYP Globallawyers specializing in international trade.
