Legal Health Check for Your Chinese Subsidiary in 2023

From 8 January 2023, China dropped mandatory quarantine for inbound travelers and opened its borders.

For the first time in 3 years, international travelers can utilise the 24/ 72/ 144 visa-exemption transit policy for short business trips. And Chinese nationals can freely travel aboard.

For many European or American stakeholders with Chinese subsidiaries, the lifted border restrictions allow headquarters personnel to conduct an on-site visit – for the first time in three years. At Horizons, we have been formulating legal health checks for clients to ensure their Chinese subsidiary is operating in compliance. With rapid legislation changes, particularly in data and employee compliance, it is crucial to ensure policies and procedures are updated and implemented regularly. Failure to resolve legal issues can be result in legal liabilities such as penalties, revocation of business license and in certain circumstances criminal liabilities could be pursued.

We round up the crucial areas to consider for your legal health check.

Protecting Intellectual Property

For many headquarters, China intellectual property (IPR) infringement remains a high issue. Utilising the right legal tools to protect IPRs especially those with a high IPRs value, reduces infringement risks. At Horizons, we advise clients to select, and trademark register the Chinese name in Chinese characters and pinyin, to stop competitors from registering a Chinese version in when the mark gains recognition in China.

For companies facing trademark squatters, there are several approaches to claim malicious registered trademarks including filing cancellation for non-use in three consecutive years and trademark opposition.

Formulating Robust Contracts

Drafting a conventional, enforceable contract in China is essential. At Horizons, we often encounter cases in which the governing law is a foreign jurisdiction and solely in English. However, such contracts may be not enforceable in a Chinese court of law. Even though, the Chinese Law permits the use of foreign language in contracts, evidence submitted to the court must be in Chinese. Therefore, a bilingual contract with Chinese as the prevailing language is highly recommended.

Equally, linguistic and cultural differences are crucial aspects to be considered. Often, the same contractual clause can be interpreted differently by the parties due to cultural nuances and language differences. A robust contract should include clear and detailed context setting forth clear parameters, transparency, and trust between the parties.

Establishing Data Compliance

Over the past 2 years, legislation concerning cyber, data, and personal information security in China have been rapidly rolled out and enforced. The legal framework for cyber, data and personal information security reflects the comprehensive and mature digital ecosystem in China and cross-border exchanges. Risk assessing and implementing data compliance are crucial in ensuring the company is compliant. At Horizons, we ask clients to review the following in their risk assessment:

  • Do we process high data volumes and export such data overseas? Companies should evaluate whether data is shared with politically sensitive countries and whether such transfers will be politicised.
  • Does the collected and processed data hold a high damage risk to national security? Specifically, the degree of damage in the case the data is leaked or tampered.
  • Which industries are subject to higher scrutiny and enforcement? Monitoring enforcement allows companies to understand the practical application of such laws, rules, and regulations. Additionally, the company can gain insight into what regulators prioritise.
Building Gender Inclusive Workplaces

The revised Women’s Protection Law was adopted on October 30, 2022, by the Standing Committee of the 13th National People’s Congress. Effective from January 1, 2022, the Law brings sexual harassment and discrimination to the forefront of employers.

For companies in China, the amended law significantly impacts recruitment and hiring procedures and calls for robust actions to tackle sexual harassment in the workplace. The legislation also requires state departments, enterprises, and public institutions to support women in filing lawsuits. Hence, it is crucial that companies address gender equality and women’s rights seriously.

The amended law substantially increases obligations for employers to protect women’s rights in the workplace. With the social security department, trade union and women’s federation empowered by the amendments to supervise employers and protect women’s rights in the workplace, employers are subject to external stakeholders to ensure gender equality is implemented.

Implementing Zero-Tolerance Policy for Money-Laundering

In the digital age, new technologies have forged online money laundering and terrorist financing activities. The anonymity of digital channels permits money to be laundered with little detection. And jurisdictions around the world are strengthening regulation and enforcement to address the changes. In China, the Measures for Financial Institutions on Customer Due Diligence and Client ID Information, and Transaction Records Management (‘Measures’) effective from March 1, 2022, enables legal provisions to respond more intuitive to money-laundering threats.

Whilst the Measures mostly affects financial institutions, companies are subjected to enhanced customer and transaction due diligence. Hence, companies should update anti-money laundering (‘AML’) policies and improve discipline, control, and responsibility across the workforce to decrease risks. We recommend clients to evaluate current practices and adopt a zero-tolerance policy. Failure to update current practices or establish a concrete framework for international companies could lead to white-collar investigations and reputation damages.  

In recent years, the legislation in China has been continuously strengthened and enforced by regulators. It is clear that companies operating in grey areas will face penalties. Namely, the big data is utilised to investigate enterprises operating irregularly. Any violating companies are blacklisted and subject to certain restrictions. Therefore, it is imperative to conduct regular legal health checks to ensure operations are fully aligned with regulations.

If you have questions or concerns on legal health checks or related matters, please contact Horizons at talktous@horizons-advisory.com to schedule a consultation session.