The China Manager s Handbook

Transcription

1 Issue 123 April 2012 From Dezan Shira & Associates The China Manager s Handbook INCLUDING Liabilities of the Legal Representative Duties and Liabilities of Key Positions in an FIE Individual Income Tax Liabilities for Senior Management Positions Dezan Shira & Associates Opens New Offices in the U.S. and Singapore Scan this QR code with your smartphone to visit: China Briefing April 2012 Available in multiple languages 1

2 Welcome to the April issue of China Briefing Deciding who should fill the key roles in a foreigninvested enterprise (FIE) in China is often a source of significant hesitation. Many businessmen simply want to know what they re getting themselves into before signing on any dotted lines. What responsibilities and what potential legal liabilities are they taking on? note that this issue includes only information and should not be construed as legal advice. Warm regards, Stories of expats having their name added to the Administration of Industry and Commerce (AIC) blacklist and/or being trapped in China for company legal proceedings encourage a careful consideration of key positions in an FIE. This issue of China Briefing - the China Manager s Handbook - aims to shed a little light on this topic. Please Samantha L. Jones, Senior Editor, Asia Briefing editor@china-briefing.com All materials and contents 2012 Asia Briefing Ltd. No reproduction, copying or translation of materials without prior permission of the publisher. Twenty Years Of Excellence Corporate Establishment, Tax, Accounting & Payroll Throughout Asia Regional Business Intelligence From the Asia Foreign Direct Investment Practice Dezan Shira & Associates Business Advisory, Corporate Establishment, Tax, Accounting, Payroll, Due Diligence and Audit Throughout Asia VIETNAM BRIEFING INDIA BRIEFING MONGOLIA BRIEFING The China Practice: Beijing Tianjin Dalian Qingdao Shanghai Suzhou Hangzhou Ningbo Guangzhou Zhongshan Shenzhen Hong Kong china@dezshira.com The India Practice: Delhi Mumbai Chennai Bangalore Kolkata india@dezshira.com The Vietnam Practice: Hanoi HCMC vietnam@dezshira.com Scan this QR code with your smartphone to download the Asia Briefing mobile application. The Singapore Practice: singapore@dezshira.com Please visit for full details of services, contacts and to view our business library. Dezan Shira & Associates is proud to announce the opening of its new offices in the United States (Charlotte, North Carolina) and Singapore Dezan Shira & Associates Opens New Offices in the U.S. and Singapore These new offices expand the company s international presence, enabling it to better serve clients in emerging Asia. Today, Dezan Shira & Associates has 20 offices across five jurisdictions, with twelve offices in China, five offices in India, two offices in Vietnam, as well as offices in Hong Kong, Italy, the U.S. and Singapore. U.S. 700 East Morehead Street, #400 Charlotte, NC Phone: Fax: jessica.tou@dezshira.com Singapore 55 Market Street, #1014, Level 10 Singapore Tel: Fax: singapore@dezshira.com

3 Liabilities of the Legal Representative [ By Eunice Ku, Dezan Shira & Associates ] Every business established in China, foreign or domestic, is required to designate a legal representative, i.e. the responsible person who performs the duties and power on behalf of a company. The legal representative is, by definition of his or her role, one of the most powerful people in a foreign-invested enterprise. Yet this power comes with heavy responsibility and, if a single individual in a foreign-invested enterprise is to be held accountable for company actions, that person is more likely than not the legal representative. The people eligible to fill the role of legal representative vary by FIE type. In a wholly foreign-owned enterprise (WFOE), the chairman of the board of directors (or executive director in lieu of a board) or the general manager acts as the legal representative of the company. In a joint venture (JV), the legal representative can generally be either the chairman of the board of directors or the general manager. However, in practice, local authorities may not accept a general manager concurrently serving as a legal representative, due to a conflict between the China s Company Law and the JV Regulations. The name of the legal representative is stated in the business license and articles of association of a company. Since the Legal Representative Candidates Executive Director Chairman of the Board of Directors General Manager WFOE JV If a single individual in a foreign-invested enterprise is to be held accountable for company actions, that person is more likely than not the legal representative. legal representative is the authorized signatory of the company, the legal representative s signature should be filed with Administration of Industry and Commerce (AIC). In light of the heavy responsibility given to an FIE s legal representative, some will note that the legal representative is not required to reside in China or even place a toe on Chinese soil. Rather, the legal representative can (through written power of attorney) authorize someone in China to act in their place, including managing the legal representative s chop. A legal representative of one company cannot concurrently serve as the legal representative of another company under normal circumstances. Where, under special circumstances, an individual needs to concurrently serve as the legal representatives of two companies, they can only do so where the two companies are affiliated, associated, or have an investment relationship, and approved by the government or registration department in charge. Liabilities The legal representative has dual liabilities, those that apply to all senior positions and those that apply specifically to the legal representative. The former are discussed in the second article and the latter are discussed here. The liabilities specific to a legal representative are spread across a variety of laws and regulations. Three of the most important liabilities are those China Briefing April

4 Liabilities of the Legal Representative dictated under the Civil Code, those under Enterprise Bankruptcy Law and those outlining obligations to the AIC. Civil Code The legal representative represents a legal person in litigation. The legal representative may be subject to fines, detention, administrative sanctions, or criminal liability pursued under the General Principles of the Civil Law of the People s Republic of China 1986 ( the Civil Code ) if the enterprise: 1. Carries out illegal business activities beyond the scope of business approved and registered by the AIC or its local delegate; 2. Conceals facts from the AIC or its local delegate or from the tax authorities; 3. Engages in fraud; 4. Extracts funds or conceals assets for the purpose of evading debts; 5. Fails to apply immediately for the registration and public announcement of a change or of termination, causing an interested party to sustain substantial loss; or 6. Engages in other activities prohibited by law, causing damage to State interests or common public interests. Under the Civil Code, the legal representative is not required to have personally engaged in, or have actual knowledge of, the above acts. Accordingly, it is possible that the legal representative may be sanctioned in the event the enterprise undertakes any of the above acts, notwithstanding that the legal representative is not personally at fault. The People s Court may also order the detention of the legal representative for a period of no more than 15 days. Under Chinese law, detention for this duration is considered to be a civil or administrative penalty rather than a criminal punishment. Liabilities under Bankruptcy Law According to the 2007 Enterprise Bankruptcy Law, the legal representative of the debtor and the person who is directly responsible will be liable for compensation where an enterprise debtor commits the following acts, thereby undermining the interests of its creditor: 1. T r a n s f e r p r o p e r t y w i t h o u t consideration; 2. Trade at an obviously unreasonable price; 3. Provide property guaranty to unsecured debts; 4. Pay off debts that are not yet due; 5. Abandon claims; 6. Debtor does not have enough assets to pay off debts but still chooses to repay certain creditors; 7. Conceal or transfer property to avoid repayment of debts; or 8. Fabricate debts or acknowledge nonexistent debts. Liabilities to the AIC The Regulations of the PRC Concerning the Administration of the Registration of Enterprises with the Status of Legal Persons 1988 ( Registration Regulations ) expand slightly on the liabilities listed above. Namely, an enterprise may be punished by the AIC by issuing a warning, imposing a fine, confiscating illegal income, ordering the suspension of business for rectification and confiscating or revoking its business license when the enterprise: 1. Conceals facts or practices fraud during registration or commences business without approval and registration; 2. Amends any of the main items of registration without authorization or engages in business activities beyond its approved and registered scope of business; 3. Fails to cancel its registration in accordance with regulations or to submit the annual inspection report and carry out annual inspection procedures; 4. Forges, alters, rents out, lends, assigns, sells or duplicates without authorization its business license of an enterprise legal person or copy thereof; 5. Gives away, diverts or conceals its property in order to evade its liabilities; 6. Engages in illegal business activities. Where failures in the above lead to the revocation of the enterprise s business license, the legal representative will not be permitted to serve as a legal representative within three years of the revocation date of the business license (except where they were unable to normally carry out their functions and powers during the annual inspection period). Qualification to be a Legal Representative An individual cannot serve as a legal representative if he/she: 1. Lacks capacity for civil conduct or has limited capacity for civil conduct; 2. Is undergoing criminal punishment or a criminal coercive measure is being enforced against him/her; 3. Is being wanted by public security organs or state security authorities; 4. Has been: a. S e n t e n c e d t o c r i m i n a l punishment for embezzlement, bribery or financial fraud or for disrupting the order of the socialist market economy, and not more than five years have elapsed since the expiration of the enforcement period; or b. Has been sentenced to criminal punishment for another crime, and not more than three years have elapsed since the expiration of the enforcement period; or c. Has been deprived of political rights for committing a crime, and not more than five years have elapsed since the expiration of the enforcement period; 5. Served as the legal representative, director or manager personally responsible for the bankruptcy liquidation of an enterprise due to mismanagement, where not more than three years have elapsed since the date of completion of the bankruptcy liquidation; 6. Served as the legal representative of an enterprise that had its business license revoked for violating the law, for which he/she bears personal liability and not more than three years have elapsed since the date of revocation of the business license; 7. Is burdened with relatively large amounts of personal debts past due but have not been settled; or 8. Under any other circumstances prescribed by law and the state council. 4 China Briefing April 2012

5 The Blacklist The State Administration of Industry and Commerce (SAIC) is the national governmental organization directly under the State Council that coordinates local Administrations of Industry of Commerce (AICs). Among the many SAIC and AIC functions and responsibilities, those highly relevant to the foreign investor include: (i) Overseeing the registration and supervision of enterprises, including punishing businesses without licenses; (ii) Managing IPR registration and protection, including investigating and punishing IPR infringement activities and handling IPR disputes; (iii) Enforcing Anti-Trust Law, including investigating and punishing unfair competition, commercial bribery, smuggling and other illegal economic activities; (iv) Categorizing enterprises by creditability and publicizing basic registration information; (v) Supervising trade in food commodities; and (vi) Supervising advertising activities. The AIC blacklist is part of an enterprise credibility supervision information system shared between AIC bureaus, but not made available to the public. Specifically, the list categorizes enterprises into four categories (A, B, C, D) based on their creditability. If your name is listed in a key position of a company in categories B to D of this list, this may inhibit or prevent you from participating in a key position in new FIEs in the future. Furthermore, while the directly relevant AIC policy does not state consequences for individuals those beyond the legal representative, it is worth noting that during company establishment, the names of all people in key positions of an enterprise are registered with the AIC. Many people do not even know that their name is on the blacklist before applying to register a new FIE. AIC Enterprise Credibility Categorizations Category Enterprise Credibility Credibility Criteria Treatment A Creditable All registered capital paid up; Contracts 100 percent fulfilled; and Has not violated any AIC administration laws and regulations within a year. B At risk of losing creditability Contracts not 100 percent fulfilled, but has not conducted fraudulent activities; Has had less than RMB30,000 in fines imposed on it for violating AIC administrative laws and regulations; or Other criteria. C Have lost creditability Conducted fraudulent contract behavior; Has had more than RMB30,000 imposed on it for violating AIC administrative laws and regulations; or Has been ordered to suspend business pending rectification; or Other criteria D Have seriously lost creditability Seriously violated the law and be ordered to close and/or have its business licenses revoked. Entitled to certain preferential treatments such as the exemption of annual inspection upon meeting certain conditions. Detailed examination will be conducted during the annual inspection and their violations will be publicized. Routine examination will be strengthened, they will be subject to ad hoc inspections, and their violations will be publicized. The legal representative cannot serve as the director, supervisor or senior management personnel of a company within three years from the date the business license is revoked. Source: AIC Guidelines [2003] Number 131

6 Duties and Liabilities of Key Positions in an FIE [ By Eunice Ku, Dezan Shira & Associates ] Key Positions by Foreign-Invested Enterprise Type Legal representative candidate WFOE JV Shareholder(s) Shareholder(s) Option 1 Option 2 Executive Director Board of Directors Chairman Supervisor(s) 1 Board of Directors Chairman Vice Chairman Supervisor(s) 1 General Manager 2 General Manager 2 1 A supervisor or member of the board of supervisors cannot be director or senior management personnel. Larger companies require a board of supervisors composed of representatives of the shareholders and representatives of staff/workers. 2 The general manager can also be a director or executive director. For JVs, in addition to the general manager, several deputy general managers can also be appointed, collectively referred to as a management office. Be y o n d t h e c o m m o n thread of requiring a legal representative (or chief representative in the case of a representative office), the key positions in a foreigninvested enterprise (FIE) in China vary by enterprise structure and size. In a wholly foreign-owned enterprise (WFOE) or joint venture (JV), the legal representative position is held concurrently with another key position. While we have already discussed the duties and liabilities of the legal representative in the previous article, here we discuss the remaining key positions in an FIE in China, as well as their respective duties and potential legal liabilities as stipulated by Chinese law. China s 2006 Company Law sets forth the primary duties and potential legal liabilities of key positions of limited liability companies in China (including WFOEs and JVs), with additional liabilities stemming from the Civil Code, Criminal Law, Tax Law, etc. For representative offices, the RO Regulations effective March 1, 2011 dictate duties and potential legal liabilities. Of course, the roles and responsibilities of those in key positions are in no way limited to those defined under Chinese law. Keep in mind that a foreign-invested company is a subsidiary of a foreign company and therefore falls under both China s laws and the laws of the country in which its parent company is registered. For this reason, foreign businesses and individuals operating in China should also be aware of the stipulations of regulations, such as those covering bribery abroad (i.e. the U.S. Foreign Corrupt Practices Act). Key Positions by FIE Type For a WFOE, the shareholder(s), those who make capital contributions, are the highest authority of the company. In a WFOE, there can be an executive director or board of directors. The executive director (or board of directors) sets the agenda of the company s operations according to shareholder decisions. For a JV, the board of directors is the highest authority. The board of directors should have no fewer than three directors appointed by the parties of the JV, with the ratio between Chinese and foreignappointed directors determined through 6 China Briefing April 2012

7 Duties and Liabilities of Key Positions in an FIE consultation between the two parties. In China, there are two types of joint ventures cooperative joint ventures (CJV) and equity joint ventures (EJV). For CJVs, the chairman and vice chairman of the board must be appointed by different parties. Company Law also requires that WFOEs and JVs have at least one supervisor to supervise the execution of company duties by the directors and senior management personnel. To ensure that there are no conflicts of interest, directors and senior management personnel cannot concurrently serve as supervisors. Where a company has a relatively small number of shareholders and is relatively small in scale, it can have one or two supervisors. For larger companies, a board of supervisors composed of no less than three members is required. A board of supervisors should consist of representatives of the shareholders, and no less than one-third of the board members should be representatives of the staff and workers of the company. The specific proportion should be stipulated in the company s articles of association. The board of supervisors should have one chairman, elected by more than half of all the supervisors. Finally, both WFOEs and JVs need a general manager, who is responsible for company day-to-day operations. The executive director or a member of the board of directors can concurrently serve as the general manager. For JVs, several deputy general managers can also be appointed, collectively this group is referred to as the management office. A director of the board can concurrently hold the post of general manager, deputy general manager, or any other senior management position, which also includes CFO, and any other personnel designated as such in the company s articles of association. Duties by Role Below, we describe the qualifications and duties by role for key positions in an FIE: Shareholders; Supervisors; Directors; and Senior Management. Shareholders The shareholders assembly, which comprises all of its shareholders, exercises the following functions and powers according to Company Law: 1. Decide on the operational policy and investment plan of the company; 2. Elect or replace directors and supervisors who are not representatives of the staff and workers, and decide on matters concerning the remuneration of the directors and supervisors; 3. Examine and approve: a. Reports of the board of directors; b. Reports of the board of supervisors or the supervisors; c. The annual financial budget plan and final accounts plan of the company; 4. Examine and approve the company s plans for profit distribution and for making up losses; 5. Adopt resolutions on: a. The increase or reduction of the registered capital of the company; b. The issue of corporate bonds; c. The merger, division, dissolution, liquidation or transformation of the company; 6. Amend the articles of association of the company; and 7. Other functions and powers provided for in the company s articles of association. The meetings of the shareholders assembly are divided into regular meetings (convened on a fixed schedule as specified by the provisions of the company s articles of association - often simply an annual general meeting ) and interim meetings (convened when it is proposed by shareholders representing one-tenth or more of the voting rights, by one-third or more of the directors, by the board of supervisors, or by the supervisors of a company without a board of supervisors). Supervisors The term of office of a supervisor is three years and a supervisor may, if reelected upon expiration of the term of office, serve consecutive terms. Like the legal representative, the supervisor is not required to reside in, or even visit, China. A supervisor is entitled to attend meetings of the board of directors as a non-voting participant, and inquire about or put forth proposals on matters on which resolutions have been or are to be adopted by the board of directors. When the board of supervisors or the supervisor of a company discovers something unusual in the operation of the company, it/he can conduct an investigation into the operating situation; and when necessary, engage an accounting firm or other such services to assist in the work, with the entailing expenses borne by the company. Where the shareholders assembly requests supervisors, directors or senior managers to be present at its meeting, the latter should attend the meeting as non-voting participants and subject themselves to inquiries by the shareholders. Directors or senior managers are required to truthfully provide relevant information and data to the board of supervisors or the supervisors, and not hinder the exercise of the functions and powers by the board of supervisors or the supervisors. Directors If a company has a relatively small number of shareholders and is relatively small in scale, it can have an executive director instead of a board of directors. The functions and powers of the executive director should be stipulated in the company s articles of association. For larger sized companies, a limited liability company in China is required to set up a board of directors comprising of three to thirteen members, which is accountable to the shareholders assembly. A board of directors should have a chairman and could have a vice-chairman, with the measures for the election of the chairman and vice-chairman of the board stipulated in the company s articles of association. Senior Management Senior management includes the general manager, deputy general manager, and CFO of a listed company, along with any other personnel designated as such in the company s articles of association. China Briefing April

8 Duties and Liabilities of Key Positions in an FIE Supervisor(s) (Board of Supervisors) 1. Examine the financial affairs of the company; 2. Supervise the acts of the directors and senior management personnel in respect of the performance of their duties assigned by the company, and put forward proposals for removal of the directors or senior managers who violate laws, administrative regulations or the company s articles of association, or the resolutions adopted by the shareholders assembly; 3. Demand directors or senior management personnel to rectify when their acts damage the interests of the company; 4. Propose convening an interim meeting of the shareholders assembly and to convene and preside over the meeting when the board of directors fails to perform the duty of convening and presiding over such meeting as provided for by this law; 5. Put forth motions at the meeting of the shareholders assembly; 6. Conduct legal proceedings against directors or senior management personnel; and 7. Exercise other functions and powers stipulated by the company s articles of association. Duties of Key Positions According to Company Law Executive Director (Board of Directors) 1. Convening shareholders meetings and reporting the board s work to the shareholders; 2. Executing the shareholders resolutions; 3. Deciding the company s operational plans and investment scheme; 4. Formulating plans for the company s: a. Annual financial budget; b. Annual profits distribution or loss recovery; c. Increase or reduction in registered capital and any issuance of bonds; and d. Merger with any other entity, as well as the division, dissolution, liquidation of the company or other changes to its corporate structure; 5. Determining the company s internal management structure; 6. D e c i d i n g t h e a p p o i n t m e n t o r dismissal of the general manager and his compensation; and deciding the appointment or dismissal of the deputy general manager and CFO, as well as their respective compensation (based on the recommendation of the general manager); 7. Formulating the basic management plan of the company; and 8. Other duties and responsibilities as stipulated by the articles of association. General Manager The general manager is required to attend meetings of the board of directors as a nonvoting attendant and should exercise the following functions and powers: 1. Take charge of production, operation and management of the company and organize implementation of the resolutions of the board of directors; 2. Organize implementation of the annual operational plan and the investment plan of the company; 3. Draw up plans for establishment of the internal administrative bodies of the company; 4. Draw up the basic management system of the company; 5. Formulate the specific rules of the company; 6. Recommend the engagement or dismissal of the deputy manager(s) and of the CFO of the company; 7. Decide on the engagement or dismissal of the persons in charge of management other than the ones the engagement or dismissal of whom is to be decided by the board of directors; and 8. Exercise other functions and powers granted by the board of directors. Qualification to Accept a Key Position A person who falls under any of the following categories cannot be appointed as a supervisor, director, general manager or other senior management personnel of a company, according to Article 147 of Company Law: 1. Does not have civil capacity or has only limited civil capacity; 2. Has been convicted of any criminal offence in the nature of corruption, bribery, conversion, misappropriation or disrupting the economic order of the socialist market and 5 years have not elapsed since any penalty imposed has been completed, or any person who has ever been deprived of his political rights due to any crime and 5 years have not elapsed since the penalty imposed was completed; 3. Former director, factory director or manager of a company or enterprise which has been declared bankrupt and liquidated in circumstances where he was personally responsible for the bankruptcy of the company or enterprise, and three years have not elapsed since the bankruptcy and liquidation of the company or enterprise was completed; 4. Former legal representative of a company or enterprise which has had its business license revoked and has been ordered to close its business operations due to any violation of law in circumstances where the former legal representative was personally liable for the revocation of the business license and three years have not elapsed since the date of revocation; or 5. Has significant unpaid debts. Any election or appointment of any supervisor, director, general manager or other senior manager made in violation of the provisions of this article shall be invalid. Any existing supervisor, director, general manager or other senior manager the appointment of whom would violate the provisions of this article shall be removed from his post. 8 China Briefing April 2012

9 Duties and Liabilities of Key Positions in an FIE The accompanying table describes the duties of the general manager according to Company Law. Where the articles of association of a company provide otherwise for the functions and powers of the general manager, the provisions of the articles of association will prevail. The duties and responsibilities of senior management personnel other than the general manager are to be stipulated solely in the articles of association, which has binding force on the company, its shareholders, directors, supervisors and senior management personnel. Liabilities The majority of liabilities for the company fall on the shoulders of the legal representative (and are described in the next article). However, those in other key positions also have liabilities for (and, of course, liabilities to) the company. These include: Liability for criminal offenses Liability for liquidation Liability to the company Liability for Criminal Offenses Where a breach of Company Law amounts to a criminal offence, criminal liabilities can be pursued against a director, management personnel and/or legal representative. Specifically, penalties can be imposed on the company s officers who were directly in charge and/or directly responsible for the company at the time the criminal activity occurred. Criminal Law does not define who qualifies as an officer directly in charge or a directly responsible officer, so it is unclear whether the shareholder, director, senior management and/ or legal representative would be subject to criminal liability. Criminal offenses under Company Law include bribery, unlawful seizure, and misappropriation of funds. Any director, supervisor or employee of a company or other kind of enterprise who takes advantage of his position to demand or accept a relatively large bribe is guilty of the crime of commercial bribery. Where the bribe demanded or accepted is in the amount of RMB5,000 to RMB20,000 or above, it will be considered moderate, while a bribe of RMB100,000 or more will be considered major. Any director, supervisor or employee of a company or other kind of enterprise who takes advantage of his position to unlawfully seize a relatively large amount of property belonging to the company or other kind of enterprise is guilty of the crime of unlawful seizure. Unlawful seizure means that the violator illegally takes control of property belonging to the company or other kind of enterprise by embezzlement, theft, fraud, or a similar method. Embezzlement of property belonging to a company or other kind of enterprise will be considered moderate if the value of such property is from RMB5,000 to RMB20,000 or more, and major if the value of such property is RMB100,000 or more. Any director, supervisor or employee of a company or other kind of enterprise who takes advantage of his position to misappropriate funds belonging to the company or other kind of enterprise for his own personal use or to lend to a third party is, where the amount misappropriated is relatively large and is not returned within three months, guilty of the crime of misappropriation of funds; or where a relatively large amount of such funds are returned within three months but are used to carry on activities for profit or illegal activities, is also guilty of the same crime. Under Company Law, the officer directly in charge (who may be the legal representative) is also liable where: The company issues false or deceptive financial and accounting reports to the public, in which case the officer directly in charge, along with other directly responsible personnel, may be subject to fines ranging from RMB30,000 to RMB300,000; or A company in liquidation conceals property, records false information or distributes property prior to payment of debts, in which case the officer directly in charge, along with other directly responsible personnel, may be subject to fines ranging from RMB10,000 to RMB100,000. When a case is serious enough to involve criminal liability, the legal representative and/or the person directly responsible will generally be questioned and investigated by the public security bureau. Liability for Liquidation (Piercing the Corporate Veil) Under usual circumstances, a corporation is treated as a separate legal person and directors and shareholders are not liable for the debts of the corporation. However, Chinese law stipulates a few circumstances under which courts can pierce the corporate veil, i.e. where the courts hold the investors in a limited liability company liable beyond their subscribed registered capital for the debts of the company, in order to protect creditors of the company against fraud and unfair practices. One of these situations is where any delay in the performance of the shareholders liquidation obligations results in the loss of significant properties, account books, material documents or other things of the company and in an impossibility of the relevant liquidation work, in which case directors or controlling shareholder (the shareholder holding more than half of the company shares) should be severally and jointly responsible for the debts of the company. Liability to the Company Another type of supervisor, director and senior management liability about which Company Law is especially specific is liability to the company. The Company Law provides that supervisors, directors and senior management of a company should assume the duties of loyalty and diligence to the company. They cannot take advantage of their functions and powers to accept bribes China Briefing April

10 Duties and Liabilities of Key Positions in an FIE or collect other illicit earnings, and should not take illegal possession of the property of the company. Where those in key positions violate laws, administrative regulations or the company s articles of association in performance of their duties for the company, and thus cause losses to the company, they will be liable for compensation. A c c o r d i n g t o the 2007 Enterprise Bankruptcy Law, where p e r s o n n e l b r e a c h their duties of loyalty and diligence and this results in the bankruptcy of the company, they should bear civil liability according to the law. In addition, they will be forbidden from serving as a director, supervisor or senior management personnel of any enterprise within three years from the date of the completion of the bankruptcy procedure. The Company Law also prohibits a director or senior management personnel from the following conduct, for which he/she will be liable to compensate the company for any resulting damage to its interests: Lending the company s funds to others or pledging the company s property to secure third party debt without the approval of the shareholder(s) or the board of directors; Concluding contracts or conducting business with the company without the approval of the shareholder(s) or the board of directors; Usurping the company s business opportunities or engaging in the same type of business as the company for his own benefit or for the benefit of another by using his authority in the company without the approval of the shareholder(s) or the board of directors; Accepting commissions from third parties for their transactions with the company; Disclosing confidential information of the company without authorization; or Breaching his fiduciary duty to the company. If a director or senior management personnel violates any of the above prohibitions, all wrongful earnings must be returned to the company. In addition, any shareholder of the company is entitled to initiate, or request the company s supervisor or board of supervisors (as the case may be) to initiate, legal proceedings against him. The shareholder may also lodge a complaint under his own name, if: The supervisor (or board of supervisors) refuses to take action or fails to sue more than 30 days after the complaint was lodged; or The circumstances are so urgent that irreversible damage will result if proper action is not taken immediately. In practice, there are few cases of shareholders or supervisors pursuing civil or criminal liabilities against a director or management personnel. For more information on foreign invested enterprises, please visit www. dezshira.com or Dezan Shira & Associates at china@dezshira.com. Representative Office Key Positions The chief representative can generally be considered the representative office (RO) equivalent of a legal representative. The RO Regulations effective March 1, 2011 are quite broad in their definitions of the chief representative s role and liability. These regulations simply state that an RO should designate a chief representative to sign the application documents for the registration of the RO and observe provisions of laws and administrative regulations on entry-exit, residence, employment, tax payment and foreign exchange registration. Chief Representative General Representative(s) Legal representative equivalent An individual falling under any of these categories cannot act as a chief representative: 1. A person who has records of being imposed with criminal penalties for harming China s national security or public interests; 2. A person who was a chief representative or representative of a representative organization of which the establishment registration has been cancelled or the registration certificate has been revoked in accordance with the law, or which has been ordered to close down by the relevant department in accordance with the law, due to involvement in illegal activities such as harming China s national security or public interests, and it has been no more than five years from the date of such cancellation, revocation or ordered closing down; 3. Other circumstances stipulated by the AIC. In addition to a chief representative, an RO can also nominate multiple general representatives. In practice, it is often easier for general representatives to gain work permits compared to general employees. Including the chief representative and general representatives, each RO can hire at most four foreigners. A company can, however, have several ROs across different cities in China, each with four foreigners. 10 China Briefing April 2012

11 Individual Income Tax Liabilities for Senior Personnel The individual income tax (IIT) liability of employees holding a director or senior m a n a g e m e n t p o s i t i o n (including general and deputy managers, supervisors, persons occupying functional chief positions, and other persons occupying similar management level positions, collectively senior personnel ) in China is dependent on a few factors, namely: Where the employer pays; The period in which the senior personnel is in China; and Where the income is derived. Income Paid by the Employer in China For income paid entirely by the employer in China, regardless of whether the income is derived in China or overseas and the period in which the senior personnel is in China, the senior personnel is liable for IIT for the entire duration of time that they hold a senior personnel position. Income Paid by the Employer Overseas For income paid by the employer overseas, IIT liability depends on the period in which the senior personnel is in China and on whether the income is derived from China or overseas. <90/183 Days Where the company senior personnel has been in China no more than 90 days (or 183 days if a treaty is signed) cumulatively or consecutively in a year, such income is exempt from IIT. IIT Liability by Income Source and Period in China Period in China <90/183 days >90/183 days but 5 years >5 years >90/183 Days but 5 Years Where the senior personnel has been in China for more than 90/183 days consecutively or cumulatively but no more than five years, his/her income derived from China and paid by employer overseas is also subject to IIT. >5 Years Where the senior personnel has been in China for more than five years, and is in China for one full year in the sixth year, he/she will be subject to IIT on his/her global income. Income Paid by the Employer in China and Overseas For income paid partially by the employer in China and partially by the employer overseas, and where the senior personnel spends a certain number of days working abroad in a month, the portion of income paid by the employer overseas will be exempt from IIT for the number of days the senior personnel works overseas. Income Derived from China paid by the employer Income Derived Outside of China paid by the employer in China Overseas in China Overseas (Please see box below for formula). In addition, a few countries have clauses in their double tax agreement with China where the rules may differ slightly. Tax Liability for Chief Representatives of ROs In general, chief representatives can be divided into full-time and part-time chief representatives. A full-time chief representative needs to pay tax on his/her whole salary package on a monthly basis, without time apportionment. A part-time chief representative s IIT is calculated based on the total salary received from both the China entity and the headquarters. The tax is time-apportioned, i.e. the income from time spent overseas is exempted from tax and the chief representative only needs to pay IIT for the time he/she spends in China. To pay tax as a part-time chief representative, the employment contract must specify that the position is part-time. For income paid partially by employers in China and partially by employers overseas, where the senior personnel spends a certain number of days working overseas in a month, the formula for calculating the monthly tax payable is as follows: Monthly Tax Payable = [(Salary III )* tax rate - QD)] * (1 - Salary II / Salary III * Day II / Day III) Salary II = Income paid by employer overseas Salary III = Income paid by employer in China + income paid by employer overseas Day II = # of days working overseas Day III = # of days in the month China Briefing April

12 For when you need both in your business. Foreign Direct Investment Advice into China from Corporate Establishment, Due Diligence, Business Advisory, Tax Planning, Accounting, Payroll, Audit and Compliance Beijing: Dalian: Qingdao: Tianjin: Shanghai: Hangzhou: Ningbo: Suzhou: Guangzhou: Zhongshan: Shenzhen: Hong Kong: Scan this QR code with your smartphone to visit us at: China India Vietnam Singapore 12 China Briefing April 2012 Twenty years of excellence