01 Preface
With the normalization of cross-border investment, a large number of overseas enterprises and foreign investors have set up companies and carried out trade and investment businesses in China. Many foreign-invested entities operate in China relying on overseas operational experience, ignoring Chinese commercial, tax and labor compliance rules, which easily trigger legal risks such as administrative penalties, commercial disputes and equity disputes, ranging from fines and rectification to business license revocation.
02 Compliance Risks in Entity Establishment
Some overseas investors carry out business activities without completing filing and approval procedures in accordance with the Foreign Investment Law. The business scope of foreign-invested enterprises is inconsistent with actual business operations, resulting in ultra-range business operation. The identity and authorization procedures of overseas shareholders lack notarization and authentication, leading to defects in equity registration and change procedures.
03 Compliance Risks in Cross-border Transactions
When conducting cross-border trade and capital transactions in China, foreign-invested enterprises violate foreign exchange management regulations through illegal foreign exchange settlement, purchase and cross-border capital transfer. Cross-border cooperation contracts have non-compliant clauses without clear provisions on law application, jurisdiction and intellectual property ownership. Some transactions involve the negative list of foreign investment, facing risks of invalid contracts and investment rectification.
04 Labor and Tax Compliance Risks
When employing foreign and domestic employees, foreign-invested enterprises fail to sign labor contracts and pay social insurance in accordance with the law, and illegally terminate labor relations, triggering labor arbitration and litigation. Enterprises have non-compliant financial accounting and tax declaration procedures, fail to declare taxes for cross-border income, and face risks of tax evasion and cross-border tax violations.
05 Foreign Investment Compliance Rectification Suggestions
Before operating in China, overseas investors shall complete full compliance procedures including foreign investment filing, industrial and commercial registration and foreign exchange registration. Conduct regular self-inspection on cross-border business, equity, tax and labor compliance. Standardize the drafting and signing of cross-border contracts to avoid negative list risks. Establish a normalized compliance system.