Mitigating Risks Associated with Seals
Management of seals is a unique and significant challenge for companies in China.
Seals have been used in China for centuries to represent the authority of the emperor in official documents. That tradition has survived and the company seal — also more commonly known as a company stamp — is essentially an instrument that carries the authority of the company in various transactions.
There are also complexities due to the use of several types of seals in China. In addition, the significant power entrusted to the seal presents unique risks that companies looking to invest or start up in China must take note of.
Types of seals
Due to the multitude of actions that a company may be able to take, many different seals exist, each of which applies in a specific situation or for a particular action. A list of some important seals in China is shown below.
A company seal shows the registered full name of the company in Chinese and functions almost like the “company’s signature”. This is perhaps the most important seal because it can be used to authorise almost any action taken by the company. Generally, the presence of the company seal on a document also means that the company has accepted what is contained within that document and is therefore legally bound by that document. Due to the wide powers granted by this seal, it is potentially at the greatest risk of abuse.
A financial seal is used for basic company actions such as opening a bank account or issuing cheques. Due to the nature of the authority it carries, the financial seal is often held in the custody of the company’s officer in charge of finance, such as the Finance Director.
Legal representative seal
A legal representative seal is a personal seal representing the legal representative of the company. The seal symbolises company behaviour instead of individual conduct. It is commonly used together with the financial seal for opening bank accounts and regarded by the bank as evidence of authorisation by the company for bank-related activities.
A contract seal is used exclusively for all contracts that the company enters into. Technically speaking, this seal is not necessary and companies can choose to rely on the company seal instead. However, having a contract seal may make more practical sense where the company has many contracts to affirm, and relying constantly on the holder of the company seal can create difficulties.
An invoice seal is used specifically to authorise invoices issued by the company.
Apart from these common seals, some others include the customs seal and HR seal.
Risks associated with seals
Seals are widely used by companies in a myriad of situations and each carries certain specific powers. However, it can be a double-edged sword and is also a source of significant risk that is often underestimated by companies unfamiliar with China’s business and legal environment.
Risks associated with seals that arise from sources outside the company usually relate to fraud and forgery. Due to the significance placed on seals, attempts to forge various company seals are not uncommon. In many ways, this is very similar to forgery of a director’s signature. The risk is in relying on such seals in correspondence with other companies and thinking that the counterparty is legitimate. For example, one may receive a signed and sealed offer from a counterparty stating that goods will be delivered upon payment. Yet, the counterparty whose name is on the offer may in fact never have authorised such an offer as the seal was simply a forgery.
There are also risks that come from internal sources — namely, a company’s agents or employees. Such problems often stem from a failure to develop a proper internal control system to supervise the usage and possession of seals.
Seals may be lost or stolen by an employee of the company. In such a situation, the company will likely encounter several consequences. The most immediate effect is that operations will be disrupted as the company is unable to act without the seal. For example, the company may be consequently unable to pay wages, enter into new supply contracts or withdraw money from its bank accounts. Further problems may arise if the seals were in fact stolen by an employee. The employee may have been using the seal fraudulently, without the company’s authority, to conduct transactions, such as selling off company assets in return for payment to his or her personal bank account. These transactions are generally legally binding since they carry the relevant seal and can therefore be extremely detrimental to the company. Alternatively, the employee may seek to use the seals as leverage in an attempt to coerce the company into providing a generous severance pay.
Management of seals
Given the multitude of risks that can potentially arise from the use of seals, it would be prudent to take measures to mitigate such risks.
In relation to risks arising from external sources, the key solution is greater due diligence and more thorough investigation. Some steps that can be taken to reduce this risk are as follows: visit the local authority to inspect the business documents to determine if the seal used is the same as the real one, or visit the company to determine if the offer indeed originated from it, and whether the person who sealed the document did it with the authority of the company. This kind of due diligence, inconvenient as it may seem, may actually go a long way towards mitigating the risks of falling victim to fraud and forgery of the company seal.
Regarding risks that stem from internal sources, the most important policy is that not all the seals should be held by one person. If it is absolutely necessary for one person to hold multiple seals, a company may still consider placing limits on those powers. A good practice is to keep a copy of all documents for which a seal is used, and to keep a record of all these copies in running serial numbers. This has the benefit of ensuring that all documents that have ever been sealed are known and recorded, which allows any forgery or unauthorised sealed documents to be easily identified. Further security layers can be added as desired, such as requiring application for seals to be made and approved by another officer in the company, or requiring seals to be signed out every time they are removed from the safekeeping area.
Cloud-based corporate compliance solution
Online tools can further mitigate risks arising from the use of seals and other corporate compliance issues, and reduce the cost of rectification should incidents occur. Such solutions may be especially useful for companies operating in China where administrative lapses could present unique risks.
For example, C3 is a comprehensive cloud-based solution developed by SBA Stone Forest to help businesses build a robust system of internal control, mitigate business risk and ensure corporate compliance with ease in China.
Issuance of Circular on Cultural Development Fees for Entertainment Services
The Ministry of Finance (MOF) and State Administration of Taxation jointly issued the Caishui  No. 60 circular on 13 May 2016 regarding the collection and administration of cultural development fees for entertainment services within the territory of the People’s Republic of China.
Cultural development fee for entertainment services payable by taxpayer =
[Total revenue from entertainment service (inclusive of value added tax) + other charges] x 3%
This fee is payable together with the value added tax. However, the circular also states that taxpayers who have not exceeded the value added tax threshold are exempt from paying the cultural development fee for entertainment services.
Agreement on Avoidance of Double Taxation between China and Germany
The State Administration of Taxation recently announced that an Agreement on the Avoidance of Double Taxation between the People’s Republic of China and the Federal Republic of Germany has taken effect.
The Agreement was signed officially on 28 March 2014 in Berlin. China and Germany have completed the respective domestic legal procedures necessary for the Agreement to take effect. The Agreement took effect from 6 April 2016 and applies to income obtained on or after 1 January 2017. It is expected to help in reducing the tax burdens on enterprises and facilitate economic and trade cooperation between China and Germany.
Revocation of Business Licences of Non-operating Enterprises Under Long-term Suspension
The State Administration of Industry and Commerce and the State Administration of Taxation have jointly issued a circular stating that revocation of business licences of all non-operating enterprises under long-term suspension nationwide will be considered.
According to PRC law, the State Administration of Industry and Commerce may revoke the business licence of any enterprise that:
- Fails to carry out operating activities;
- Cannot be reached through its registered address or business location after an on-site inspection; or
- Fails to make a tax declaration for two consecutive years.
Measures for Publicising Acts in Material Violation of Labour Protection Laws
To strengthen enforcement of labour protection laws, the Ministry of Human Resources and Social Security has drafted a list of measures for publicising acts in material violation of labour protection laws and sought public comments for it.
These measures apply to all human resources and social security administrative departments of local authorities that supervise labour protection. Such departments at the provincial level are required to publicise acts in material violation of labour protection laws by any organisation (including private non-enterprise entities) at least twice a year. Those departments at the city level are required to do so at least quarterly.
On the national level, the Ministry of Human Resources and Social Security shall select such acts reported by the local authorities and publicise them through the state-level mainstream media once every half-year.
Change of Marriage Leave Entitlements in 29 Locations
Since June 2016, 29 locations in China have reduced local marriage leave entitlements within the limit allowed by the law. Of these, 11 — namely, Guangdong, Hubei, Sichuan, Zhejiang, Jiangxi, Ningxia, Guangxi, Anhui, Hunan, Tianjin and Shandong — have lowered the local marriage leave entitlement to the statutory minimum limit of 3 days.
Other provinces offer additional days of marriage leave — ranging from 10 to 18 days more than the statutory minimum limit — according to their local practice.
The marriage leave entitlements of some locations in China are shown in the table below.
|Location||Marriage Leave Entitlement|
SBA Stone Forest (SBASF) is a corporate advisory and public accounting group that focuses on serving foreign enterprises in China since 2001. Headquartered in Shanghai with offices in Beijing, Suzhou, Shenzhen, Chengdu and Hangzhou, we help help foreign investors set up in China smoothly, and thereafter support them in navigating China’s regulatory and business environment.
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