How To Shut Down Or Downsize Your China WFOE: Part 3 – IP, Data, And Exit Strategies - Contracts and Commercial Law

How to Shut Down or Downsize Your China WFOE: Part 3 – IP Protection, Data Compliance, and Reducing Your China Risks

In Part 1 of this four-part series, How to Shut Down or Downsize Your China WFOE: A 2025 Four-Part Survival Guide, we addressed the strategic decision-making process that leads companies to consider shutting down or downsizing their China WFOE (Wholly Foreign-Owned Enterprise), including key triggers, red flags, and early-stage planning considerations.

In Part 2 of this four-part series, How to Shut Down or Downsize Your China WFOE: Part 2 – Execution, Compliance, and Legal Pitfalls — we guided you through the compliance and execution phase of shutting down your China WFOE (Wholly Foreign-Owned Enterprise, highlighting the legal, operational, and bureaucratic steps involved.

As you approach your China exit, protecting your intellectual property (IP) and complying with data security regulations become mission-critical. The regulatory landscape in China is increasingly unforgiving, and even a well-planned wind-down can go sideways if these areas are neglected.

Whether you're executing a fast exit from China or letting your company gradually fade away, lightening your China footprint can serve as an effective strategy for risk mitigation and future planning.

This post covers three essential areas:

How to protect your IP during and after your WFOE exit.
How to comply with China's evolving data transfer and data security laws.
How to structure your post-China footprint to protect your company and your personnel from China, while remaining economically engaged with China.

Protecting Your IP During Your China Exit

An often-overlooked part of the WFOE exit strategy is what happens to your intellectual property and brand assets after you leave. Once your exit begins, your IP becomes vulnerable. Internally, we call this the IP Scramble.

Too often, companies focus on logistics and paperwork while failing to renew or defend their trademarks or other China IP. This can be a costly oversight. We've worked with companies that lost key IP because competitors swooped in during the exit process — and in some cases, began using their brand names overseas after securing trademarks in China and beyond.

We've seen it all: former employees registering similar trademarks, suppliers duplicating branding, even partners applying for your patents. Throw out your North American concepts of IP ownership: China's first-to-file trademark system favors those who act first. See China Trademark Registration Should be the FIRST Thing You Do.

1. Key IP Protection Actions We Take with Clients Looking to Leave China (or Staying):

File new trademarks for core brand names and product lines.
Register defensive marks to block infringers.
Transfer the client's IP to an overseas (non-Chinese) entity. If your WFOE holds your China IP, delaying this transfer can expose your company to serious risk.
Update licensing agreements to reflect post-WFOE relationships.

2. Contract Revisions to Protect IP

We also revise some or all of our clients' existing commercial contracts with their Chinese distributors, manufacturers, logistics partners, and others to contractually protect their IP once the WFOE is gone. This includes:

Adding or strengthening trade secret, IP, and software protections.
Adding damages and clawback provisions for their mold and tooling assets. See On the Importance of China Mold Ownership and Protection Agreements.
Revising dispute resolution provisions to reflect future situations. See A Guide to Dispute Resolution Clauses in International Contracts.

We have no qualms about this. An American lawyer's duty is to protect their clients, and preventing preventable harm is not unethical — it's necessary.

Many companies have come to us after hitting roadblocks with their local Chinese counsel. Chinese lawyers will often either refuse to draft exit-protective contracts or agree to do so only if allowed to first disclose the client's plans to the Chinese counterparty.

As we noted in Part 2 of this series, this stems from what we as American lawyers see as an inherent conflict Chinese lawyers face when representing a foreign company against a Chinese company. Chinese lawyers are required to act in the best interest of the Chinese state, the Chinese Communist Party, and the Chinese people — not foreign companies.

This limitation compromises a lawyer's ability to vigorously represent you and your foreign company during a China withdrawal. This has become increasingly evident in the last few months, especially for American companies.

For additional practical insights on protecting your IP against China before you leave, we suggest you read the following:

Data Compliance During a WFOE Shutdown in China

If your company handles any digital data, your China exit should include a legally sound data protection and transfer strategy. Failing to comply with China's data laws can result in penalties, business disruptions, or worse — personal liability for staff.

Here's what needs to be on your China exit checklist regarding data:

1. Understand China's Data Localization Laws

Chinese laws require certain types of personal and business-critical data to be stored inside China. Before attempting any cross-border data transfers, you must assess whether your data qualifies as "important" or "sensitive" under Chinese data security regulations.

2. Plan Secure Data Deletion or Migration

Companies need a documented plan for deleting or securely transferring data. This is especially important if your company is exiting China entirely.

3. Obtain Necessary Government Approvals

Transferring personal information or business-critical data out of China may require security assessments and Chinese government approval.

4. Post-Exit Access Management

Don't forget to revoke access. Former employees, partners, or vendors may still have login credentials to cloud systems or ERP software unless properly locked out.

Lightening Your China Footprint: A Post-Exit Risk Reduction Strategy to Retain China Market Access

For companies that have already exited China — or are in the process of doing so — the new challenge is how to restructure global operations in a way that retains China market access while meaningfully reducing China-related risks.

This trend is no longer emerging. It's here. In our 2022 post, Your Company and China: Should You Divest, Decouple, or Double-Down?, we laid out the growing pressure on foreign companie. Since then, that pressure has evolved into a defining business theme.

Today, many of our clients are (or have already):

Closed their Hong Kong offices, recognizing that Hong Kong's legal autonomy is nearly gone. See In Memory of Hong Kong. Some have set up new offices in Singapore. A few relocated to Bangkok. Most have simply exited Asia entirely.
Removed key personnel from Mainland China and Hong Kong to avoid exit bans or regulatory targeting. See China Exit Bans: You Can Check Out Any Time You Want, But You Can't Ever Leave.
Transferred China IP ownership to companies based in jurisdictions safer than China.
Pivoted to asset-light operational models, using licensing or distribution agreements to sell into China. See So Many Choices for Selling Your Products into China.

One Goal, Many Paths: Right-Sizing Your China Business and its Risk Exposure

Whether you're scaling back sourcing, restructuring equity stakes, or switching to indirect sales channels, the goal is clear: retain China market access without bearing the full weight of Chinese legal and political risk.

Your approach will depend on your size, industry, and internal resources. Here's what we typically see, based on company size:

1. Multinationals

Have in-house legal and compliance teams.
Already have at least some manufacturing diversification across several countries. Rarely discuss potential China replacement countries with us.
Already have layered holding structures and entity firewalls — usually including, at minimum, the main company, an import entity, and an IP holding company, ideally formed in jurisdictions where it is difficult for the Chinese government and its entities (see Sinosure) to quickly identify ownership online.
Annual geopolitical risk reviews — often with outside expert assistance. For example, a couple of our Fortune 500 clients conduct annual China risk assessments, with lawyers from our firm participating in part of the process.

2. For Mid-Sized Companies

May need help unwinding or restructuring a Joint Venture.
Use outside counsel for contract and IP strategy.
Often seek assistance from our lawyers in developing diversification strategies. They're typically interested in our recommendations on outside experts to assist with this, and likely to retain and pay for outside expertise.

Often require third-party support for China HR, tariff and duty assistance, and for supply chain and logistics assistance.

3. For Small Businesses and Startups

Often operate lean, with no in-country infrastructure and limited international expertise. Many have no clear idea how to leave China and are often misinformed about the risks and relevant laws. For example, some have dangerously incorrect assumptions about what qualifies as a made-in-China product or how to legally reduce tariffs.
Face serious risks from IP theft, contract fraud, and payment defaults.
Need cost-effective legal protections to stay in the China game — without losing their shirts.
Would like to move manufacturing out of China but don't know where to start. They want someone to identify where they should produce their goods and then help find a manufacturer that won't charge significantly more than their existing Chinese supplier.

Our job is to tailor solutions to fit both the risk and the real-world capacity of each client. For additional information on reducing your China risks, check out Protect Your Business By Reducing Your China Risks.

Conclusion: Planning for a Clean, Compliant China Exit

This third installment of our four-part guide highlights two of the most commonly underestimated risks in a China exit: IP loss and data noncompliance.

Overlooking either can unravel the progress made during the compliance and dissolution process. Getting them right, however, can safeguard your global brand, protect your digital infrastructure, and position your company for long-term success.

Whether you're fully exiting China or shifting to a lighter, more risk-conscious footprint, these protections are essential. A well-structured departure — or restructuring — isn't just about avoiding problems. It's about giving your business the freedom and flexibility to re-engage with China in the future, if and when conditions improve.

In Part 4, we'll bring it all together with a comprehensive China Exit Checklist — a practical, step-by-step tool to ensure that your China exit or downsizing is not just legal, but strategic.

How To Shut Down Or Downsize Your China WFOE: Part 3 – IP, Data, And Exit Strategies

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