Multinational corporations (MNCs) are reevaluating their business presence in China for various reasons, including geopolitical tensions, tariff disputes, rising labor costs, and increasing compliance burdens. Restructuring operations in China, whether by streamlining entities, selling off units, or shifting supply chains, is a complex undertaking. For most MNCs that have benefited from the rapid growth of the Chinese market in past decades, any restructuring requires a serious and in-depth feasibility analysis before a plan is finalized and implemented. General counsels of MNCs need to understand the key legal issues, common options, their pros and cons, and China-specific factors that must be incorporated into the restructuring plan.
Engage Local Government Early
Although the barrier for foreign investment to enter the Chinese market has significantly lowered over the past decade, local governments still have a pervasive ability to influence the operations and restructuring of foreign-invested companies within their jurisdiction. For example, many foreign-invested manufacturers need a Safe Production License if their business involves hazardous chemicals, construction, or mining. This license has a three-year term and must be renewed regularly. If a company fails to meet all compliance standards, the license may be withheld or rejected, leading to business suspension or disruption.
In other cases, foreign investors may have an agreement with the local government from when the Chinese subsidiary was first established. These agreements can include not only favorable treatments like subsidies or loans but also foreign investors’ commitments regarding total capital and production capacity. Before these commitments are fulfilled, the local government may not be sympathetic to a company’s desire to downsize, transfer, or relocate. The reasons for the local government's decisions are complex and multifaceted, including the desire to increase local tax revenue, respond to policies from higher-level government, or adapt to changes in laws, regulations, or zoning. It is always wise to maintain close and constant communication with the local government to understand policy trends and potential impacts on the local subsidiary. This doesn't mean the company must always comply. If the local government is simply enforcing higher-level directives, the company can try to involve them as an ally rather than an adversary.
Navigate Complex Labor Laws
While most Chinese companies do not have independent and powerful trade unions, China’s labor framework heavily favors employees, making workforce reductions a legal minefield. Terminations related to restructuring must meet strict criteria under Article 40(3) of the Labor Contract Law, which permits dismissals only for “major changes in objective circumstances,” such as business closures or relocations. Even then, layoffs affecting 20 or more employees require consultations with trade unions (or all employees) and 30 days’ advance notice. Local labor bureaus often encourage severance packages that exceed the statutory minimums to prevent social instability, especially in areas with high unemployment. To ensure a smooth and peaceful restructuring, companies often lean toward negotiated exits with larger payouts, sometimes even above the legitimate standards. The labor component of a restructuring plan is therefore a top priority and a key focus for headquarters. Local managers, directors, and supervisors (DSMs) are typically responsible for implementing this, but they might resist if the restructuring threatens their own roles or positions.
Address Data Security Challenges
Recent data legislation, including the Cybersecurity Law (CSL 2016), Personal Information Protection Law (PIPL 2021), and Data Security Law (DSL 2021), has made communication between headquarters and Chinese subsidiaries less straightforward. These rules mandate local data storage and security checks for cross-border transfers under specific circumstances, with fines of up to 5% of revenue for violations. Local DSMs, particularly legal representatives, might be reluctant to provide data requested by overseas headquarters due to fears of personal liability under PIPL’s Article 66, especially when U.S. headquarters push conflicting priorities. European companies also feel this pressure, often siloing their IT systems to comply with China’s rules, which 28% report as widening the gap with their headquarters and sacrificing efficiency and innovation. Tesla’s Shanghai data center, built by 2021 and updated in 2024, demonstrates how DSMs can ensure DSL compliance during restructuring, a model U.S. firms may follow.
Manage Entity Dissolution and Governance
If a restructuring plan involves dissolving an existing company, be prepared for a potentially difficult process. Local government, vendors, distributors, and management may all have conflicting interests in the remaining assets. A tax audit is inevitable and typically lasts for months, often leading the tax authority to impose penalties for past violations. Joint venture partners might also resist control shifts, especially if they want to continue the business while foreign shareholders are leaving. Local management, if dissatisfied with their personal settlement plan, might hesitate to execute the plan or even defect to competitors during the transitional period, which could take over a year. Therefore, careful planning is crucial if your business plan necessitates the closure of a Chinese subsidiary.
Manage Tax Implications
The dissolution or restructuring of a Chinese subsidiary by a multinational enterprise (MNC) group typically triggers complex Chinese tax implications. These may involve direct transfers or indirect transfers through offshore holding structures. According to China’s tax regulations, anti-tax avoidance rules are especially stipulated in PN 7 (SAT [2015] Public Notice 7), the tax liability of such a restructuring depends on whether the offshore intermediate entities have “reasonable business purposes” and “adequate economic substance,” and whether the transaction qualifies for “Safe Harbor Rules”. If these criteria are not met, an indirect transfer may be recharacterized as a direct taxable event, making it subject to Chinese corporate income tax.
Furthermore, the dissolution or restructuring of a Chinese subsidiary may be just one part of a larger MNC reorganization. Consequently, the tax implications of any subsequent reinvestments in China require close attention. For example, China offers preferential tax policies for foreign investors, such as “reinvestment deferral” and “reinvestment tax credits,” to encourage capital retention and sustained investment. These measures are aligned with the government’s goal of stabilizing and attracting foreign direct investment (FDI). Under specific circumstances, cross-border restructuring transactions may also be eligible for special tax-exemption treatment if the relevant legal requirements are met. This tax exemption can be combined with the aforementioned reinvestment deferral and tax credits. By effectively leveraging these tax incentives, MNCs can achieve substantial tax benefits when reorganizing their Chinese operations, which can help lay the groundwork for long-term strategic investment.
Safeguard Intellectual Property (IP)
China’s intellectual property (IP) regime presents unique challenges during restructuring, particularly when transferring patents, trademarks, or copyrights across borders. Any cross-border IP transfer requires approval from Chinese authorities, with varying timelines and procedures. For instance, patent transfers are only effective after approval by the China National Intellectual Property Administration (CNIPA), while trademark transfers can take six to eight months to process. Delays or non-compliance can invalidate ownership or lead to disputes.
A critical tax consideration for IP transfers is that due to the complexity, intangibility, and mobility of IP assets, MNCs increasingly place IP in low-tax jurisdictions, creating a misalignment between “legal ownership” and “economic ownership”. These aggressive tax planning practices through complex related-party transactions have become a significant factor in “Base Erosion and Profit Shifting (BEPS)”. To counter this, the OECD’s BEPS Action 8-10 (2015) specifically targets the abuse of IP transfer pricing arrangements. As a result, tax authorities worldwide have intensified “anti-tax avoidance investigations”. Therefore, IP transfers must be structured with strong “commercial substance” to ensure alignment between legal and economic ownership and mitigate anti-avoidance risks.
A key risk is indirect IP transfers via offshore holding structures. China’s anti-avoidance rules under Public Notice 7 (PN7) allow tax authorities to scrutinize transactions that lack a “reasonable commercial purpose” and potentially impose enterprise income tax (EIT) on gains from indirect transfers of China-sourced assets. Legal teams must structure transactions to align with PN7’s safe harbor criteria, such as demonstrating substantive business activities in intermediary entities. Additionally, cross-border licensing agreements, especially for software or sensitive technologies, require approvals from regulators like the Cyberspace Administration of China (CAC), adding another layer of complexity to restructuring plans. If the IP holding entity is dissolved, headquarters must decide how to handle the existing IPs. Transferring the IP to another affiliate is an option, but the 6–8-month processing time at the CNIPA must be factored into the restructuring timeline. Some U.S. companies have chosen to abandon low-value patents and trademarks registered in China during an exit due to time constraints.
Mitigate Compliance Risks
Bribery risks are also a major concern, with China’s Anti-Unfair Competition Law and the U.S. Foreign Corrupt Practices Act (FCPA) cracking down on corruption, in addition to other applicable laws. Some sectors, like pharmaceuticals, are heavily regulated and inherently high-risk. During a restructuring, it is common to uncover past “guanxi” dealings that were previously unknown to stakeholders, which can widen compliance risk exposure. These risks can arise from heightened government scrutiny, which may be used to signal a desire to correct non-compliant business models or even to overturn an unreasonable business decision. Risks can also come from local DSMs who may whistle-blow to gain an advantage or to cover up past dealings with the local government. There have been cases where a U.S. cable company had to heavily discount the value of its China business upon exiting the market due to last-minute anti-bribery allegations.
Factor in Geopolitical and Trade Dynamics
U.S. latest wave of tariffs has had a deep and widespread chilling effect globally. Any restructuring plan must take into account geopolitical tensions, trade pressures, and potential sanctions. While such restrictions can be impossible to foresee or fully mitigate, general counsels must remind headquarters of these risks and try to build solutions into business contracts. For example, to protect a transaction from potential government interference, one should specify the types of acts or events that could frustrate the deal by expanding the definition of “force majeure” or including separate clauses. If possible, one should seek break-up fees or similar arrangements from the other party should the transaction fall apart unexpectedly.
Conclusion
For general counsels of MNCs, restructuring in China is a high-stakes puzzle of legal risks, from labor and data to geopolitics. The experiences of companies like Mitsubishi and Tesla show how costly missteps can be. Local DSMs offer on-the-ground knowledge but need to be aligned, while legal counsel must decipher regulatory complexities. The trend of MNCs siloing their operations and undergoing some form of restructuring, driven by compliance and geopolitical factors, is likely to be a frequent topic in boardrooms for the next few years. Engaging stakeholders early is key to keeping restructurings compliant and competitive in this fast-moving market.
- Practices
- Tax
