Issuing Body: State Administration of Industry and Commerce, Ministry of Public Security
Issuing Date: January 4, 2010
Effective Date: January 4, 2010
Apparently responding to reports of abuses, China's top administrative regulator, the State Administration of Industry and Commerce (SAIC), has teamed with the Ministry of Public Security to tighten policies governing resident representative offices of foreign enterprises (Representative Offices) in China. Issued and effective on January 4, 2010, the Circular on Further Strengthening the Administration of Registration of Foreign Enterprise Resident Representative Offices (Representative Offices Circular) makes several key changes that affect Representative Offices, a popular and easy-to-establish legal structure through which foreign companies can operate on a limited basis in China.
Background
As an extension of foreign enterprises, Representative Offices are a commonly used business vehicle for foreign investors who are eager to establish a presence in China. Representative offices are easier to establish than other legal structures, such as a wholly foreign-owned enterprises (WFOE). However, Representative Offices operate under significant legal restrictions, as they do not enjoy legal person status and are limited to such business activities as research, coordination and serving as liaison—and are not allowed to generate business income. Some Representative Offices, however, are reported to be engaging in activities that go far beyond the permitted boundaries. Regulatory authorities are trying to crack down on these illicit activities.
The stated purpose of the Representative Offices Circular is to "strengthen the administration of representative offices and maintain market order pursuant to law." The circular also refers to "representative offices that change the registration particulars without authorization, submit falsified certificates to seek registration, engage in illegal operations, and conduct other activities that violate laws and regulations in some regions and seriously damage the administrative order of representative offices."
The new rules and requirements under the Representative Offices Circular are summarized below.
Basic Requirements
A foreign enterprise must have been in business for at least two years in order to establish a Representative Office in China, according to the Representative Offices Circular. This requirement obviously precludes startup companies from using the Representative Office structure as a way of entering China; startups will have to work under a different legal structure, such as forming a limited liability company as a subsidiary.
Term of the Registration Certificate
The Representative Offices Circular establishes a unified national structure under which the registration certificate of all Representative Offices is valid for one year. Previously, a registration certificate could be valid for as long as three years, depending on local regulations. This new restriction certainly puts an additional burden on Representative Offices to apply for a renewal of the registration certificate every year.
Limited Number of Representatives
According to the Representative Offices Circular, the number of representatives in a Representative Office shall generally not exceed four persons, including the chief representative, and shall be commensurate with the business activities that are actually being conducted in the office. Those Representative Offices that already have more than four representatives will not be permitted to add more foreign representatives.
Onsite Inspections; Punishments and Fines
Local SAIC branches are required by the Representative Offices Circular to conduct onsite inspections of newly established Representative Offices within three months after they have obtained their registration certificates. If a foreign Representative Office is found to have provided fake registration materials or has changed its address without updating that information in its registered documents, it will be punished immediately in accordance with rules that apply to each violation. Representative Offices that are found engaging in direct business operations and generating income will be punished in accordance with rules on unlicensed operations.
The Representative Offices Circular establishes maximum fines of RMB 500,000, a substantial increase above previous limits.
Given the involvement of the Ministry of Public Security in formulating these regulations, such onsite inspections of Representative Offices may also lead to the review of passports, residence permits and employment permits of those working in the office—yet another reason for those who operate and work in Representative Offices to adhere to the new regulations.
Conclusion
As a result of the Representative Offices Circular, the SAIC is expected to work more closely with the Ministry of Public Security and others to regulate the activities of Representative Offices. Foreign investors are well advised to pay close attention to the requirements and procedures for registering, operating and renewing Representative Offices in China.