How regulators categorize a China company on formation presents a great opportunity for translators to help clients understand the business environment in China, but this opportunity is usually wasted. A translator can contribute great value to their English-speaking clients’ understanding of their business law environment by helping to demystify what some unspoken elements of business entity names tell native Chinese speakers. In this article, I will introduce the most confusing element of Chinese legal entity names in translation. Translation clients need and deserve to know about the hidden meaning behind these names.
What the Industry Name Part of a Business Entity Means
A native English speaker reading the names of Chinese business entities will often find their huge length quite strange. For example, Facebook Inc.’s closest equivalent in China has four times as many syllables: “Shenzhen Tencent Computer System Co. Ltd.” At first glance, it would seem that these Chinese companies are choosing bizarrely long names and could use a lesson about the value of brevity. However, the verbosity can be explained by clarifying that Tencent did not choose to add “Computer System” to its business entity name, but the regulator deliberately added these words to its name by following rules intended to protect the public from dishonest businesses. Rather than choosing their own names, Chinese corporations are required to have them legally approved by the business regulator, and only a small part of the name can be chosen by the business. This practice is not followed in English-speaking jurisdictions, but Chinese corporate law rules make clear that it’s a cornerstone of Chinese law:
“All entities shall specify their industry or characterizing features in their business name based on their main business pursuant to national industry classification standards. (Translated from §11)
Corporation names in China generally consist of four elements: the administrative division, trade name, industry category, and type of business. The industry identifier in the name is derived from an official catalog and informs you about the kind of business the company is carrying on. The industry category appearing in the name of a Chinese business entity, therefore, implies an extra layer of meaning, and those familiar with corporate regulation in China will be better protected against dishonest business practices than others.
What Industry Categories Stand For
There is a lot more important information packed within the industry category than meets the eye. This is a rather abstract concept, so may be better understood with a hypothetical example. Many years ago, the FDA conducted a study of imports of tainted food in China that, in some “highly publicized cases,” contained “unsafe additives.” The FDA was quick to point out that American businesses could have prevented the mistake if they knew how to conduct business in the Chinese environment in an appropriate manner. American buyers apparently made the mistake of negligently buying from sellers with the words “trading company” and similar phrases in their names, thus operating their business in an illegal manner — a red flag because companies with “food” or similar words in their names have to comply with these rules:
“Entities applying for food service licenses shall comply with the following:
(i) Entities shall own a place of business to process raw materials and process, sell, and store food suitable for the categories and quantity of food sold. Entities shall keep their place of business clean and sufficiently distant from toxic or harmful locations or other sources of pollution pursuant to law.
(ii) Entities shall own facilities or equipment suitable for the categories and quantity of food sold.” (Translated from §11)
The same general principles also apply to other fields such as electronics or chemical production. From time to time, in legal practice, I would see buyers from the United States go to China looking for manufacturers of products for resale in the United States. The entities with which they are contracting should, in theory, have something related to manufacturing shown in their names but, instead, are in the trading company or consulting company categories. Upon noticing this almost immediately, I would point out to the business manager that a potential business partner presenting themselves as a manufacturer is incorporated as a trading company, and there is a high risk that the company is misrepresenting the nature of their business activities.
When American business owners hire local Chinese attorneys to help draft contracts, the attorneys would simply fill their information into templates without taking the time to advise the companies that retained them that the companies they are dealing with are quite obviously not registered as manufacturing companies. An important cultural difference is Chinese attorneys tend to charge a flat fee for an entire document or transaction, and any additional time spent on analyzing your situation will technically be unpaid, thus they try to limit their time on such issues.
How the Industry Category is Assigned
In the above example about food and beverage companies, we saw how the industry category for a company is an indication of the nature of its operations. A company lacks the freedom to designate its own industry category, instead, there is a highly formulaic process for assigning this. The general reasoning of Chinese law is that the industry appearing in the company name should tell you what kind of work they are doing. So, in our example of a trading company, a business professional should be able to conclude that they are not a manufacturer but a middleman. The reality is a bit more complicated as the government rules indicate:
“Entities shall include or indicate their industry category or characterizing features in their business name. Entities involved in multiple industries shall list their first business category specified in their scope of business as their industry category. […] All entities shall specify their industry or characterizing features in their business name based on their main business pursuant to the national industry classification standards. […] Entities shall not include industries prohibited by law or State Council decrees in their business names. […] Entities shall not use terms inconsistent with their main business activities in their names.” (Translated from §§7, 13, and 28)
The general takeaway is that a company is permitted to carry on any business described in its business license, but that its primary business operations must be part of its business entity name. Therefore, a manufacturing company is permitted to trade in the goods it manufactures, but nonetheless must be called a manufacturing company. A trading company is almost never going to also be doing manufacturing because the production process is so capital and labor-intensive that manufacturing would be considered its primary business.
I have read about this topic on China legal blogs written for the English-speaking audience, and quite interestingly I can see a significant number of law firms charging businesses thousands of dollars for so-called “due diligence” into companies in China when the company’s name quite clearly says it is a trading company, consulting company, or other business entity much cheaper to get approved and in an irrelevant industry category. These lawyers can probably tell that this business partner is inappropriate just by looking at the name, but they can charge clients a lot more money if they go ahead and complete a due diligence report that finds a lot of problems. Chinese legal translation, on the other hand, can communicate the facts of the source language to a client at a mere fraction of the cost an unscrupulous lawyer would charge for overkill.
Translators should also be forewarned not to rely on the official industry category courtesy translations published by Chinese administrative agencies because they are provided for informational purposes and not reliance. A good case study involves the highly publicized Luckin Coffee case. Despite attorneys having done due diligence on Luckin Coffee and assurances from the prestigious New York law firm that listed the stock, NYSE investors were still defrauded of millions on the stock exchange. The law firm’s SEC filings repeatedly refer to Luckin as a “catering” company, possibly copying a misleading official translation, but this is nonetheless misleading to investors. Later, Luckin was exposed for millions of dollars of sham transactions for what looked like big corporate catering transactions; if the China-based attorneys had not blindly copied the misleading Chinese translation into SEC filings, the attorneys at their law firm would not have been misled into thinking the company operated in the catering industry and would have discovered that the purported catering transactions were fictional.
Returning to business conducted within PRC jurisdiction, a company traveling to do business in China will frequently encounter companies doing business outside of their licensed activities. Such a situation is not abnormal but can cause regulatory headaches. The China incorporation system is highly restrictive about an entity’s permitted industry categories, so a China business will frequently find itself in situations where local employees want to work with a business that is not technically licensed for a certain business activity. In the United States, businesses generally do not encounter this sort of situation because this red tape doesn’t exist. So, what usually happens when a business signs a contract with another entity not licensed for that line of business?
Contracting with Non-permitted Activities
Some blogs on Chinese business law have given business professionals a scare by implying that entering into contracts with companies not licensed for the contracted activity is gravely illegal in China and can result in severe consequences. This is misleading if one takes the time to read judicial opinions about how the law deals with such cases. The Supreme Court has provided some explicit guidance on this issue:
“The People’s Court may not void a contract if it falls outside a Party’s permitted business activities unless such contract violates national business and franchising laws, or regulations on prohibited businesses.” (Translated from §10)
Nevertheless, non-compliant contracts may still cause some problems under administrative law, such as when issuing tax receipts. A company doing business outside of its industry category is not allowed to issue tax receipts for that industry, as doing so would violate the company’s permitted activities, thus making it impossible for you to claim those expenses. The Chinese tax administration describes the process in delightfully opaque officialese:
“The tax office shall determine the tax receipt category, quantity, and purchase method and send tax receipt determinations within 5 business days based on the permitted business activity and size of the business.” (Translated from ¶4)
When translated to plain language, the tax administration is basically saying that small businesses should expect to pay less tax. If the seller’s business license does not permit them to operate in that field, then the tax administration will not even recognize that the transaction took place when documenting value-added tax. For most international companies, this might mean that the local businesses will use a fictitious transaction and amount of actual charges, or otherwise the business will simply be unable to take a VAT tax deduction. While a favorite of sketchy accountants around the world, reporting fictitious transactions in any jurisdiction is highly criminal and should be avoided.
Historically, there was an expectation that refusal to issue these tax receipts would put pressure on companies to register in the correct industry and end their unlawful conduct. The actual result of rules making it hard to report transactions was apparently widespread tax evasion. Regulators say local companies may ask you to sign contracts that contain what is usually translated as a “no invoice clause.” Foreign businesses are usually happy to sign these because it sounds like they are agreeing to a simple paperwork reduction. However, “invoice” actually refers to the “tax receipt” for the VAT amounts paid, so these Chinese translations conceal the fact that you are being asked to aid and abet potentially criminal tax evasion. A trial court judge Chen Xiefeng wrote the following as a caution to businesses:
“Some entities circumvent treasury policy by adding “No Tax Receipt” or “Partial Tax Receipt” clauses to their transaction agreements. Section 19 of the Administrative Regulations on Tax Receipts of the People’s Republic of China provides that any entity or individual receiving payment for goods sold, services provided, or any other business shall issue a tax receipt to the payer. The payer shall also be required to issue a tax receipt to the payee under certain circumstances. Section 20 of the Tax Receipt Administrative Rules provides that all entities or individuals involved in production or operation activities should request tax receipts from payees when such entities or individuals issue payments for goods purchased, services received, or other business. Entities or individuals shall not require the payee to change the category or amount when issuing tax receipts. Such “No Tax Receipt” or “Partial Tax Receipt” clauses contravene statutory tax obligations and may constitute a criminal offense under certain circumstances. Therefore, these agreements are deemed invalid pursuant to law. Sellers must issue authentic tax receipts and buyers must pay the necessary taxes.” (Translated from ¶13)
The above discussion about the reality of industry categories and their relevance to permitting and tax obligations reveals a serious problem about how translators of Chinese to English are working. First, their clients are misled as to what kind of business the partner company is conducting. Then, they sign a contract with a clause obligating them to illegally aid and abet tax evasion based on the mistranslation of tax receipts into invoices. This is made extra confusing by the fact that accounts in China are frequently settled without issuing invoices, and it does not necessarily imply tax evasion.
Conclusion
The value a legal translator brings to their client is the ability to fully convey all of the information from a source document into the reader’s native language. Something as routine and administrative as the industry category appearing in the name of a company actually compresses a vast amount of relevant information into a small package. Adequately conveying this information to the Chinese legal translation client could save them thousands or even millions of dollars. This is the difference between a low-budget translation and a professional translation service: professional work that conveys important information creates value. The business will be unable to factor in the relevant information when making important business decisions. A business professional who understands the deeper meaning behind the industry category and knows that it is a label that describes what the business actually does will be well-positioned to avoid the potential China business pitfalls and be successful in their enterprise.
