1. What are the main guidelines for labor contracts in China?

In June 2007, China’s top legislature, China’s top legislature, the National People’s Congress, adopted a new labor contract law that became effective January 1, 2008.

Among other key topics, this law protects workers’ legal rights by demanding a written contract. A written contract between the employer and employee is required; if no contract is provided then the employment relationship will commence from the employee’s first day of work.

An employer who fails to provide such a contract after one month will be forced to pay the employee twice their monthly salary. The law only allows for two continuous fixed term contracts and any further contracts must be, in common, open term contracts, which make it emphatically harder to fire an inappropriate employee.

In addition, the Central Government has decided to effectively double the minimum pay level in China within the next 5 years, meaning mandatory pay increases of about 20 percent annually. Both the new labor law and the raising of minimum pay levels are having the effect of increasing labor costs in China and making it more costly to disperse employees. Human resources management and administration is therefore now a significant part of any medium-large size investment into China.

2. Are representative offices still a good option for me?

From January 1, 2010, representative offices are no longer exempt from corporate income tax in China.

A circular issued by the State Administration of Taxation on February 20, 2010 specifically stipulates that representative offices must pay corporate income tax on their taxable income, as well as sales tax and VAT (Value Added Tax), and will be required to assess CIT (Court of International Trade) liability using either the cost plus means or actual revenue method.

Representative offices must submit an annual report between March 1 and June 30 every year providing information on its legal status and standing, ongoing business activities, and payment balance audited by accounting agencies.

The administrative regulations on representative offices issued by the State Council that took effect in March 2011, specify that the activities that representative offices are permitted to engage in contain:

• Market research, display and publicity activities that relate to organization services or product;
• Contact activities that relate to company product sales or service provision, and family procurement and investment.

Representative offices are forbidden from engaging in any profit-seeking activities except for those which China has agreed on in international agreements or contracts. As such, a representative office may not directly invoice for sales or services in China and can only interplay with Chinese businesses indirectly.

As of 2010, a parent company must have been in reality for two years to establish a representative office.

Representative office can still be useful for pure market research and liaison activities, but these new regulations mean that representative office are no longer the cost effective vehicle they used to be, especially given their constraints regarding trading activities.

Organizations now would be advised to set up a foreign-invested commercial enterprise or a wholly foreign-owned enterprise instead.

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