China Compliance Checklist for Foreign Companies: Ten Legal Risks
An American company hired our law firm after discovering that its China general manager had stolen company funds. Our investigation uncovered a much bigger problem. Its Chinese subsidiary didn't exist. The company had been manufacturing more than a billion dollars' worth of products annually in China and supposedly employed hundreds of people, but its general manager had never formed the Chinese company that was supposed to own and run the factory. No Chinese corporate taxes had been paid, and the employees had been working outside a lawful corporate structure. Nobody at headquarters knew any of this.
I wrote about that case in The Essential Role of China Due Diligence. It was an extreme example of something our China lawyers see regularly: foreign companies that believe their Chinese operations comply with the law because they complied when they started, or because their local managers tell them everything is fine.
Over the years, our firm has helped a lot of foreign companies deal with China compliance problems, and we have rarely concluded that a client was singled out by Chinese authorities for no good reason. Even when a client had done nothing wrong, we could usually understand why the authorities initially suspected otherwise. And though foreign companies have gotten better about compliance, we still hear from businesses that have been caught violating Chinese law and insist that "everyone is doing it." I've never understood why anyone thinks that is a defense.
With 2027 approaching, several important Chinese legal changes and deadlines deserve attention, as do the problems that have been getting foreign companies into trouble for decades. Here are the ten areas I would examine.
1. Corporate Registration and Structure
Start by pulling your company's Chinese business license and checking it against what the company actually does. Does its registered business scope cover all its activities? Is it operating from the address on its license? Check whether changes in directors, shareholders, or senior management have been properly recorded, and whether the registered legal representative is still the person you want holding that position. Find out who controls the company chop and bank accounts. These are things headquarters should know without having to ask someone in China. And please don't assume that because your local manager says your company is properly registered, it actually is. I've seen what happens when that assumption turns out to be wrong.
Foreign companies sometimes expand their China operations without updating their registrations. An import/export company starts manufacturing, a representative office begins conducting activities beyond what Chinese law permits, or a local manager leaves while remaining the registered legal representative. Problems that go unnoticed during ordinary business operations often become serious when the company is investigated, sued, or tries to close or sell its Chinese operations.
China's revised Company Law, which took effect July 1, 2024, changed corporate governance and registered-capital requirements. Newly established limited liability companies generally must pay their subscribed registered capital within five years. Companies established before that date are subject to transition rules. If your company's existing capital contribution deadline extends beyond June 30, 2032, you generally must adjust that deadline by June 30, 2027. That is the deadline for adjusting the contribution schedule, not necessarily for paying all the capital. Foreign-invested companies subject to the separate organizational transition under China's Foreign Investment Law should already have completed their required changes by December 31, 2024. Since January 1, 2025, the registration authorities will not process other registration matters for a company that missed that deadline, and they publicly announce its noncompliance.
You should also confirm that your business has the right legal structure. Selling products to Chinese customers from overseas generally does not require forming a Chinese company. Operating a local office, employing people in China, or running a factory is different. Depending on what you are doing, you may need a wholly foreign-owned enterprise (WFOE), a joint venture, or, for limited activities, a representative office. Industry restrictions and licensing requirements also need to be addressed before you begin new operations.
2. Employment
China's employment laws are complicated, localized, and generally favorable to employees. Full-time employees ordinarily must have written employment contracts within one month of starting work. Qualifying part-time employees can work under oral agreements, though written agreements are usually safer. Your employment contracts should reflect current Chinese law and the actual terms under which people work, rather than whatever your company used when it first entered China.
Your employee manual (also called Employer Rules and Regulations) is especially important. Chinese employers regularly run into trouble because their rules do not adequately address the misconduct for which they want to discipline or terminate an employee, or because the rules were never properly adopted. An employee manual copied from a U.S. company or downloaded from the internet is unlikely to do the job. Review your offer letters, confidentiality agreements, severance documents, and employee disciplinary procedures as well.
Check your foreign employees' work permits and residence permits, and confirm that you have obtained and renewed the necessary approvals for employees working under non-standard working hours arrangements. Audit your overtime payments, statutory leave, social insurance, and housing-fund contributions. China's Supreme People's Court clarified in 2025 that agreements allowing employers and employees to opt out of mandatory social insurance contributions are invalid. Paying employees extra money instead of making required contributions does not solve the problem.
I remember an American client that discovered rampant corruption among its Chinese employees. The CEO was furious and wanted to shut down the WFOE and terminate approximately 47 employees. His deadline was tomorrow. I explained that there was no way our lawyers could put together a lawful mass-layoff and corporate shutdown plan overnight, and that proceeding without one would expose the company and potentially its executives to serious problems. Before anything else, we needed to examine employment liabilities, severance obligations, taxes, and the applicable local government procedures. As we worked through those issues, the CEO calmed down, and the company decided to downsize substantially and reassess its China operations later rather than shut everything down. I wrote about the matter in China WFOE Shutdowns: Fast or Legal?.
3. Taxes and the New VAT Law
Your Chinese accounting firm should understand Chinese tax law and have at least a working knowledge of the tax consequences in your home country. Review your corporate income taxes, withholding taxes, VAT, and intercompany payments. Your transfer pricing needs to comply with China's arm's-length requirements and be supported by appropriate contracts and documentation. China's new Value-Added Tax Law and implementing regulations took effect January 1, 2026, replacing the provisional regulations that had governed VAT since the 1990s. If your company has been using the same tax and invoicing practices for years, have your accountants confirm that those practices remain correct under the new rules.
Our M&A lawyers have seen business acquisitions fall apart because sellers treated Chinese tax compliance as optional. In one group of proposed acquisitions, we examined the China operations of American companies whose owners wanted to sell. We spotted discrepancies when we compared one seller's employment documents with its financial statements, and when we pressed the seller, it acknowledged that it had been paying part of its Chinese employees' salaries through FESCO, an authorized employment agency, and the rest in cash. It told us, essentially, that it intended to start complying with Chinese tax laws soon. This had apparently been going on for roughly 15 years.
Starting to comply in the future did nothing to resolve the potential liability for years of unpaid taxes, interest, and penalties. We advised our buyer of the risks, and it walked away from the transaction. That seller, whose story I tell in China Transactions When Your Due Diligence Says Don't Do It, spent years saving money by violating Chinese tax laws, only to lose a potential business sale because of it. If you think you might someday sell your China business, assume a competent buyer will examine your tax records and employment arrangements very carefully.
4. Intellectual Property
We represented a Canadian coat manufacturer whose products were detained by China Customs because someone else had registered its trademark in China. We ultimately negotiated a six-figure purchase of that registration to get the goods moving again. The company could have avoided the problem by registering its trademark in China before someone else did.
Having a registration is not always enough, though. A company selling protective work gloves came to us after China Customs seized one of its shipments. The company had registered its trademark in China years earlier, so it couldn't understand what had gone wrong. Its Chinese trademark lawyer had registered the mark in Class 25, which covers gloves worn as clothing. Protective work gloves belong in Class 9. A competitor had registered the mark in the correct class and used that registration to stop the shipment.
Our client had paid for a Chinese trademark registration and gotten one. It just didn't protect the products the company actually sold. I discuss that case in China Trademark Registration: Why U.S. Companies Need More Than a Filing Agent. Trademark registrations need periodic review. A registration that protected your business five years ago may not cover the products you sell today. Check your brands, logos, new product lines, and the classes and subclasses in which you have registered them. Monitor conflicting trademark applications and counterfeit products, and keep evidence of trademark use so you can defend against cancellation for three consecutive years of non-use. If you manufacture branded products in China, consider recording your trademarks with China Customs.
China's revised Trademark Law takes effect January 1, 2027. The new law strengthens measures against bad-faith and excessive trademark applications and changes certain registration and cancellation procedures. Two of those changes bear directly on evidence of use. The revised law expressly recognizes use through the internet and other information networks as trademark use, and it gives China's trademark office authority to initiate cancellation of a mark unused for three consecutive years without a justifiable reason. Until now, non-use cancellation required an application from a third party. Companies with substantial China trademark portfolios should review them before the new law takes effect. Fred Rocafort explains the most important practical steps in Five Practical Steps Foreign Brands Should Take to Prepare for China's New Trademark Law.
Designs and trade secrets need their own protection. Register design patents before publicly disclosing your designs. A properly drafted China NNN Agreement can protect confidential information and restrict unauthorized use and circumvention, but it needs to be signed by the correct Chinese company and tailored to the relationship. Limit access to technical information, document what you disclose, and think carefully about how much you share before an agreement is signed. Our guide to protecting IP in China covers these issues in greater detail.
5. Contracts
Years ago, I represented a mainland Chinese company owed $2 million by an American customer. We demanded payment, got nowhere, and filed a lawsuit. A few weeks later, the American company wired $2 million to a Hong Kong company, and its lawyer demanded that I dismiss the case because the debt had supposedly been paid.
The Hong Kong company was not my client, and my client did not own it. It was the intermediary through which the American company had historically made payments, and the American company apparently figured that paying it would satisfy the debt. The American company also hoped to deprive me of what it assumed was a contingency fee. We were actually working on an hourly basis. I explained that our mainland Chinese client was still owed its $2 million. The case eventually settled with our client receiving an additional six figures, and as far as I know, the Hong Kong company never returned the original payment. You can read the story in The Hong Kong Intermediary Trap.
We continue to see foreign companies treat Hong Kong intermediaries and mainland Chinese factories as though they are interchangeable. They aren't. A contract with a Hong Kong trading company does not automatically bind the mainland factory that manufactures your products, holds your molds, or possesses your confidential information. Before signing a contract, determine exactly which company you are dealing with, what it controls, and where its assets are located.
For contracts you expect to enforce against a mainland Chinese company with assets in China, Chinese law and Chinese courts or an appropriate arbitration forum often make the most sense. A Chinese-language or bilingual agreement with Chinese as the controlling language is usually preferable. There are exceptions, depending on the transaction and the parties, but those choices need to be made before anyone signs. Winning a lawsuit in California is of limited value if the Chinese defendant has no assets there and you cannot practically collect on your judgment. Our Drafting China Contracts That Work article explains how to structure agreements that can be enforced in China.
Your contracts also need to address the problems your particular business is likely to face. Manufacturing contracts should cover quality standards, inspections, delivery requirements, subcontracting restrictions, IP ownership, and remedies for breach. One subject companies often overlook is tooling. A manufacturer paid $90,000 for molds used to make its products in China. Two years later, when it wanted those molds returned, the factory refused. The company ended up paying $200,000 to recover tooling it had already purchased. It had a good argument that the molds belonged to it, but it had never signed an agreement addressing ownership, permitted use, or the factory's obligation to return them. A properly drafted tooling agreement would have cost a small fraction of that $200,000. We discuss the case in How to Protect Your IP in China.
6. Bribery and Internal Fraud
Our China lawyers have worked with foreign companies that believed they were paying their sourcing agents a disclosed 5 percent commission, only to discover that the agents were collecting an undisclosed 40 percent premium through arrangements with the factories. These companies thought they had hired someone to help them get good prices from Chinese suppliers. Instead, their agents were getting rich at their expense, sometimes for years, through schemes like those we discuss in China Internal Company Frauds. Foreign companies should know who owns their Chinese suppliers and whether their employees or sourcing agents have undisclosed financial interests in those businesses. Purchasing and payment authority should not be concentrated in one person's hands without independent oversight. Periodic supplier reviews and financial audits are worth their cost, particularly when a local manager has broad discretion to choose vendors, negotiate pricing, and approve payments.
Bribery creates a separate set of legal problems, and China's anti-corruption and commercial-bribery laws reach beyond payments to government officials. China's revised Anti-Unfair Competition Law, effective October 15, 2025, strengthened penalties for commercial bribery and expanded personal exposure for individuals responsible for violations. Your company should have clear policies governing gifts, entertainment, commissions, and payments through intermediaries. The employees and agents handling those payments need to understand the policies, and someone independent should be checking that they are being followed. An employee's explanation that a payment is customary in China is not a legal defense.
7. Export Controls and Customs
A company once contacted us about drafting sales contracts for a technology product it planned to export to China. My first question was whether U.S. law would even allow the company to export the product. Nobody there had considered that question. It turned out that the proposed exports were prohibited under U.S. law, and the company had already spent considerable time negotiating a transaction it could not legally complete.
Before shipping technology, equipment, software, or other products to China, determine whether they are subject to U.S. export licensing requirements. Check the product's classification, the ultimate customer, the end user, and the intended use. Products that ordinarily do not require a license can become restricted because of who receives them or how they will be used. China's own import restrictions and export controls also need to be considered.
For companies importing Chinese goods into the United States, compliance includes tariff classification, country-of-origin determinations, applicable duties, and restrictions on forced-labor products. A Chinese supplier's assurances that everything is legal are a starting point for investigation, not proof of compliance. One of our lawyers, Fred Rocafort, was retained by a company that suspected its Chinese supplier was manufacturing unauthorized products. During an audit, Fred and his team went to the address that was supposed to be the factory. They found a small building surrounded by farmland, with a few products inside but no production lines. When they asked where production actually took place, the person in charge said it was happening at a prison several hundred miles away. He even showed them invoices from the prison.
The man then backtracked, claiming that our client's products were made at another facility. When our client demanded an inspection of that facility, the supplier refused, and our client terminated the relationship. We never established that its products had been made using prison labor, but the supplier's refusal to allow verification was more than enough reason to stop doing business with it. Fred recounts the experience in Forced Labor in China: Don't Trust AND Do Verify.
If Chinese Customs starts investigating your company, involve experienced counsel before deciding what documents to produce or what explanations to give. We once warned a company facing a Customs investigation that it needed legal help immediately. The company assured us it understood, then proceeded to deal directly with Customs anyway. It later returned to us facing an enormous proposed fine, partly because of information it had disclosed without understanding the legal consequences. We negotiated the proposed penalty down substantially, but the company still paid considerably more than it likely would have had it involved us from the beginning. I wrote about that matter in China Customs Problem? Keep Your Mouth Shut!.
8. Product Safety and Liability
Whether you manufacture goods in China for export or sell products to Chinese customers, you need to know who is responsible when a product turns out to be defective or unsafe. The rules on product testing, certification, labeling, recalls, and liability vary from country to country. Some products require specific Chinese certifications before they can be sold in China, while products manufactured there for export must meet the applicable requirements of their destination markets. A foreign brand owner, importer, or distributor can face substantial liability even when the defect originated with its Chinese manufacturer.
Years ago, I started sending some of our clients a set of deposition questions from a product liability case involving an American company whose China-made product had badly injured a child. The questions were painfully basic. How had the company chosen its Chinese supplier? What safety testing had it done? Where were the safety requirements spelled out in its manufacturing contract? When had it first suspected a problem with the product, and what had it done about it? How much would fixing the defect have cost per unit?
I still think those are some of the best questions a company can ask itself before selling a product made overseas. They're considerably easier to answer before someone gets hurt than when a plaintiff's lawyer is asking them under oath. I discuss the case and the questions in Reducing Your Product Liability Risks from Overseas Products.
We have seen enough manufacturing disputes to know that a factory's promise to take responsibility for defective goods means little if the factory has no money, refuses to cooperate, or cannot be forced to comply. Investigate the factory before hiring it and inspect products before shipment. Make sure your manufacturing agreements establish the required specifications and quality standards, give you appropriate inspection rights, and determine who pays for defective products, rejected shipments, and recalls. Then confirm that your insurance covers the products you actually sell and the countries where you sell them.
9. Data Privacy and Cross-Border Transfers
Many foreign companies have never mapped what personal information their Chinese subsidiaries collect or where that information goes. Employee records are sent to headquarters, customer information is stored on overseas servers, and payroll providers, cloud services, and outside contractors have access to information that management has never formally reviewed. Those arrangements need to comply with Chinese law, and just because you've been doing something for years without getting caught doesn't mean it's legal.
China's Personal Information Protection Law (PIPL) took effect in November 2021. It gives individuals rights concerning their personal information and imposes obligations on companies that collect, store, use, or disclose that information. China's data protection rules have continued to change, including amendments to its Cybersecurity Law that took effect January 1, 2026, and increased penalties for serious violations.
Contrary to what many foreign businesses have been told, China does not require every company to keep all personal information in China. The rules depend on the nature and volume of the information, the type of business, and the circumstances of any overseas transfer. China's 2024 rules introduced exemptions and thresholds for certain cross-border data transfers, and additional personal information export certification rules took effect January 1, 2026. Review the information your company collects, the legal basis for collecting it, who has access, how long it is retained, and what happens when it is transferred outside China. Depending on the circumstances, cross-border transfers require notices, consent, impact assessments, contracts, certification, or government review.
10. Geopolitical Risk, Exit Bans, and Contingency Planning
Your company can comply with every applicable Chinese law and still suffer serious losses because of something that happens between Beijing and Washington. Tariffs, sanctions, restrictions on technology transfers, and Chinese countermeasures can change the economics of your China business almost overnight. If most of your manufacturing takes place in China, you should know what would happen if your Chinese factory stopped shipping for six months. That means knowing whether you could move production elsewhere and recover your molds, technical files, and other manufacturing assets, and whether alternative suppliers could make your product and what switching would actually cost. Our firm has spent years helping companies reduce their dependence on China, including by moving manufacturing to Mexico. Leaving China is not the right decision for every company, but depending entirely on Chinese production without a realistic backup plan is increasingly risky.
A foreign company can attract unwanted government attention even when it believes its activities are perfectly ordinary. In March 2023, Chinese authorities raided the Beijing office of the American due diligence firm Mintz Group and detained five employees. The incident showed how quickly a foreign company's business activities can become a national security matter in China. Companies involved in due diligence, technology, research, or politically sensitive industries need to take this possibility seriously.
The issue that worries me most, though, is what can happen to individual businesspeople who travel to China without understanding their personal exposure. I've personally handled more than two dozen China exit-ban matters. Some involved people who had been explicitly told they could not leave China and knew why. Others involved people already in China who feared they had been subjected to an exit ban, or people outside China who were afraid to go there because they could not be sure they would be allowed to leave. Foreign executives have been prevented from leaving China because of commercial disputes, debts, investigations, and other matters that would not ordinarily restrict international travel in their home countries. The U.S. State Department's current travel advisory specifically warns about arbitrary enforcement of local laws, exit bans, and wrongful detention.
I have also dealt with cases where the danger went beyond a formal exit ban. In one matter, we strongly advised a company not to send any of its personnel to China because of an ongoing dispute. Someone from the company went anyway and ended up being held hostage for five days in a high-end American hotel in Qingdao. We organized a team to get her out of the hotel, transport her to Beijing, and help her leave China. She was fortunate that she was not subject to an actual exit ban.
Before sending an executive or employee to China, find out whether your company has any unresolved disputes, unpaid debts, or regulatory problems that could create personal risks, and examine the individual's role in those matters. A company does not have to be guilty of anything for its personnel to face serious difficulties, and an executive who believes a routine business visit is harmless can discover otherwise. Our firm regularly conducts personal China risk assessments for precisely this reason. I would much rather tell a client not to make a trip to China than have to figure out how to get that client out after the authorities have refused to let them leave.
