China’s Labor Union Movement Affecting Foreign-Invested Enterprises

Many Corps Receive “Fee” Collection Notices.

(Sunnyvale, CA)- China’s state-run All China Federation of Trade Unions (ACFTU) has announced it aims create labor unions in 65% of the country’s foreign-invested enterprises by the end of the year 2011 and increase the percentages to 78% by 2012 and 90% by 2013.

“The enforcement campaign is affecting companies with subsidiaries in the PRC as some face increased costs in complying with the labor union requirements,” said Dr. Shan Nair, CEO and Co-founder of Nair & Co., a global services firm that specializes in helping companies expand overseas.

According to ACFTU reports, trade unions have been formed in 460,000 enterprises from January to July in 2011.

The “Union”
Legally, the union’s nature is an organization formed by the employees voluntarily under People’s Republic of China (“PRC”) Trade Union Law. An employer has no obligation to form a trade union, nor does it have the right to form a trade union irrespective of the employees’ opinions. However, the ACFTU and the central government in 2004 initiated a campaign targeted especially at foreign-invested enterprises to form a trade union.

Impact on Companies with subsidiaries in China
Employers that reject pressure to establish unions may face the following measures:

a.A “union preparatory fund” calculated at the rate of 2% of total payroll and collected by the tax bureau;

b.Annual inspections required by the Administration of Industry and Commerce;

c.Carried out more rigorously and difficulties in passing these Possible loss of or ineligibility for tax incentives; and

d.Increased chance of investigations by labor and customs authorities.


Many foreign enterprises claim they have received a notice from the Tax Authority requiring the submission of relevant forms to “Entrust Tax Authority” to collect the Trade Union preparatory fee.

Legally, neither the trade union nor the Tax Authority has the right to collect a preparatory fund from employer’s bank account without prior approval by the employer.

“At the national law level, a company is not obliged to pay preparatory fund if a trade union has not been formed or preparation for setting up a trade union has not been initiated…the ACFTU has no legal authority to require preparatory funds if employees do not initiate preparatory work to set up a Union,” Nair added.

The Tax Authority relies on the Notice on Management over Collection of Fees by Tax Authorities for funds collection.

However, the Notice provides that the Tax Authority cannot collect any fees, unless the fee is provided by law, or approved by the State Council organs or provincial governments in accordance with relevant regulations.

Even though Beijing Municipal Government provides the principle to entrust the Tax Authority to charge trade union fund and preparatory fund as from July 1, 2010, it does not change the lack of legal basis for collection of trade union preparatory fund.

“Companies can take a wait and watch approach on the preparatory funds payment issue and act when there is more clarity,” added Nair.

Employers should be cautious about handling trade union formation. Article 3 of PRC Trade Union Law stipulates that an employer may not “hinder or restrict” the establishment of the trade union. A company should, therefore, be careful of activities that could be interpreted as delay tactics that “hinder or restrict” the establishment of a trade union.

When interacting with a local trade union or tax authority, it is advisable not to:

• Refuse to meet local trade union or tax authority, or refuse to take their calls;

• Argue that the company has no obligation to set up a trade union, or employees are not willing to have a trade union; and

• Challenge the legal basis for preparatory fund, although it may be fine to try to consult with the local trade union and tax authority regarding the detailed legal basis.

Read more on China’s Individual Income Tax Amendments, Data Privacy Protection Rules in China

About Nair & Co.
Nair & Co. provides an integrated solution in the HR, finance, tax, compliance and legal arenas making a company’s overseas operations less risky, stress free and more strategic. It currently has 750+ client operations in over 50 countries with offices in U.K., India, China, U.S., Japan and Singapore. Nair & Co. was named among the top 100 outsourcing services providers in the world by the International Association of Outsourcing Professionals (IAOP).
Learn more at www.nair-co.com

Nair & Co., 1250 Oakmead Parkway, Suite 210
Sunnyvale, CA 94085 United States
Nandita Verma
Nair & Co.
(408) 515-9048
nandita.verma@nair-co.com

This release was published on openPR.