Prohibited Foreign Investment for Legal Consultancies: What Does it Mean for China Legal Services?

July 13, 2015 Posted by China Briefing Reading Time: 5 minutes

Earlier this year, China “Legal Affairs Consultation Services” were added to the Foreign Investment Prohibited list in China’s rules concerning foreign investment into the country. The addition will radically reshape the manner in which legal services are provided in China and will force many players out of the market.

While the Chinese government has not yet begun cracking down on the practice of providing legal services – which includes offering incorporation services, trademark registrations, and other legal advice – it will only be a matter of time before it does. Hardest hit will be foreign owned consulting companies, as well as those overseas using local Chinese consultants to carry out their business for them.

The new business model for foreign firms to practice legal services in China requires that the Managing Partner be a Chinese national, and the practice be registered in China as a Joint Venture, requiring approval from China’s Ministry of Justice. This is already happening amongst the larger international firms, as can be demonstrated by Mayer Brown’s just announced hook up with Beijing firm Jintian & Gongcheng. With Shanghai’s Free Trade Zone also providing relaxation for the provision of certain legal services, many more prominent practices will set up JVs in the zone. Requirements for doing so are as follows for foreign law firms:

Has established a legal representative office (RO) in Shanghai for three years, or has established one RO elsewhere in China for three years and another in Shanghai;
The existing legal representative office has not been subject to any administrative punishments in the past three years.

This effectively rules out of the picture any foreign firm that has not been registered in China. The most recent list of Foreign law firms currently licensed to practice in China can be found here.

It also means that law practices who have built an online reputation with a blog-based marketing strategy instead of having invested in their own firm’s capabilities will start to experience acute problems in attracting clients.

The regulation also affects multi-disciplinary practices (such as our own), including the likes of the Big Four and other larger professional audit firms who routinely carry out legal professional services work as part of their global remit. A continuation of this work in China will require a subsidiary hookup with a local Chinese law firm. The larger and better established firms in this field in China are currently progressing with this to remain in compliance – no doubt over the next year or so some interesting JVs will be announced between subsidiaries of such practices and Chinese law firms.

Meanwhile, the future for smaller, non-China registered foreign law firms and foreign consultancy WFOEs in China looks bleak. Unless they can find a JV partner and go through the Ministry of Justice approvals process, they are unlikely to survive. Now may be a time, if profits are still being maintained, to cash in on the client base and sell the business. China, with falling margins in professional services and a tightening of regulations occurring at the same time, is not a market to be competing in without the right partners. When China starts to crack down on such businesses, punishments for non-compliance – for effectively providing un-authorized legal services – can be expected to be swift and severe. I would estimate the next twelve months to be a final period of grace before a legal services clampdown begins.

Want to Sell Your China Practice?

Dezan Shira & Associates are in the market to acquire verified quality foreign invested clients in China and Hong Kong currently being serviced in the contractual provision of legal, tax, accountancy and audit work. Purchase of practice will also be considered. Please contact the Chairman of the firm in full confidence at chairman@dezshira.com. ‍

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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