Risks of doing business with Off-shore Companies in China.

By Sun Jin(Marlow), Chinese attorney at Law


 1. What are off-shore companies?

From WIKI (http://en.wikipedia.org/wiki/Offshore_company), we have below definition:

The term offshore company is ambiguous. It may refer to either:

A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial center (sometimes known as a non-resident company) i.e. a Canadian company may be 'offshore' for the purposes of a USA citizen ; 

or, Any company (resident or otherwise) incorporated in an offshore financial center, i.e. offshore jurisdictions. 

Typically the requirements for company registration under the relevant provision for non-resident status (as in the former of the two options above) will be pursuant to some or all of the following criteria in a strict legal sense according to Offshore Company Law: Theory, Regulations& Operation (By Zhang Shiwei, China Law Press, 2004):

Must be incorporated under Offshore Company Laws and regulations of offshore jurisdictions
Must be incorporated by non-residents of offshore jurisdictions
Must not trade within the offshore jurisdictions; and/or,
Must meet nominal tax expenses levied by the offshore jurisdictions.

2. What are off-shore companies in China in this article and what is the problem?

There are some off-shore companies whose shareholders and/or controlling persons are actually reside in mainland China(PRC, People’s Republic of China), but their companies were actually registered in off-shore areas from mainland China, like British Virgin Islands (BVI), or Hong Kong, or Cayman Islands, or Bermuda Islands. 

The biggest problem is, when these companies operate export businesses from mainland China as Chinese suppliers, they generally hide the truth that they are off-shore companies, but pretend themselves to be mainland Chinese companies. We may know that a company registered in mainland China, in its names, we generally have city or province name, for example, Ningbo ABC Electronic Product Co., Ltd., Zhejiang BCD House-hold Furniture Co., Ltd., or Yiwu CDE Import and Export Co., Ltd., etc, means these companies are registered in Ningbo City Administration Bureau of Industry and Commerce Bureau, or Zhejiang Province Administration Bureau of Industry and Commerce Bureau, or Yiwu City Administration Bureau of Industry and Commerce Bureau. But if you register a company in Hong Kong, you can also use one of above names. 

And for these off-shore companies, they can open bank accounts in banks in mainland China.

3. What are the dangers when doing business with one off-shore companies in China?

If you setup import & export business with one off-shore company who declares or pretends to be one mainland Chinese company or just not tell you that they are actually one off-shore company, and when they send you defective cargos, or just not deliver cargos against your payments, you may not be able to sue them in mainland China. When we file a litigation case against one mainland Chinese company, we need to offer a local Chinese Court with registration information of the defendant/ respondent/indictee. If it’s one real mainland Chinese company, we will be able to investigate and get their registration information from a related governmental authority (that is the industry and commerce administration bureau of the city where it’s registered), but if it’s one off-shore company, it will be very hard for us to get it’s registration information, at least we can not get it from the Island where it’s registered. Maybe we can get it from the Chinese bank where the off-shore company opens the bank account, but we will need to apply an order from a Court, the problem is, generally we cannot let a court to issue one order before we file the case. So here comes the problem, and you may see the puzzle in it, we want one egg, the problem is the egg comes from one hen, and the hen comes from an egg. So we cannot have either an egg or a hen. Well, sometimes we may find one solution. But you will see, this is a real headache.

Even we do not have the above problem, and we finally win the litigation case against the off-shore company, now what if they refuse to follow the court judgment? If it’s one mainland Chinese company, we can apply Court to enforce the court judgment, and let Court to freeze or save the properties of the company who failed in the litigation. But obviously, we can not enforce the Chinese court judgment in the off-shore area where the off-shore company is registered.

We had ever heard of several litigation cases against one off-shore company when the situation is similar to aforementioned situations, the bad news is we had never heard any good news that who finally get back their money from the off-shore company, even some of them won the litigation / arbitration case.

So here is point, if you sign one sales/purchase agreement with one off-shore company whose shareholders and/or controlling persons are actually reside in mainland China, this type of agreement is the Agreement of Gentleman, and you need to pray that he is a real gentleman. Otherwise, at least it’s a big headache for a Chinese lawyer to manage to help you, when dispute arouse and you really want to take legal actions against the guy.