Administrative Regulations for the Registration of Resident Representative Offices of Foreign Enterprises

Issuing Body: State Council
Issuing Date: November 19, 2010
Effective Date: March 1, 2011

Continuing the Chinese government's efforts to strengthen oversight of resident representative offices established by foreign enterprises inside China, the State Council has issued comprehensive new rules that govern everything from the allowable scope of business activities to the annual report schedule to the permissible number of representatives in an office (four). The Administrative Regulations for the Registration of Resident Representative Offices of Foreign Enterprises (Representative Office Registration Regulations) were enacted on November 19, 2010, and become effective March 1, 2011. The new regulations replace the Administrative Measures Concerning the Registration of Resident Representative Offices of Foreign Enterprises, which the State Council issued in March 1983.

The Representative Office is a common—but very limited—structure used by foreign companies to do business in China. (Representative Offices cannot, for example, sign contracts or engage in profit-making activities.) Responding to perceived abuses of the Representative Office structure, in January 2010 the State Administration of Industry and Commerce (SAIC) and the Ministry of Public Security jointly issued the Circular on Further Strengthening the Administration of Registration of Foreign Enterprise Resident Representative Offices (Representative Offices Circular), which tightened regulations governing Representative Offices. Six weeks later, the State Administration of Taxation issued the Provisional Measures for the Administration of Taxation of Foreign Enterprises' Resident Representative Offices, which effectively increased tax rates on Representative Offices and eliminated previously available tax exemptions. China Law Update summarized those rules in our March and April 2010 editions, respectively.

Key provisions of the Representative Office Registration Regulations are summarized below.

Definition of Representative Office and Allowed Activities

A Representative Office is an entity established by a foreign enterprise in China that is allowed to conduct activities related to the foreign enterprise's business. A Representative Office cannot have legal person status; as a result, it cannot sign business contracts on behalf of the foreign parent. The foreign parent is liable for acts of the Representative Office.

Representative Offices are allowed to conduct the following non-profitable activities:

• Market research, display, and promotion activities related to the products or services of the foreign enterprise;
• Liaison activities related to the sale of products, services, domestic sourcing, and domestic investments of the foreign enterprise.

Maximum Number of Representatives and Term of Existence

The Representative Office Registration Regulations provide that a Representative Office must have one chief representative, and may have one to three additional representatives as needed. The regulations also stipulate that the foreign enterprise must have been in existence for two years before it can establish a Representative Office in China. These two requirements are in line with the Representative Offices Circular issued in January 2010.

Qualifications of Representatives

A person is not qualified to be either a chief representative or representative if he or she:

• has previously been charged with damage to the national security or public interest; or
• was a chief representative or representative of a Representative Office that, during the past five years, had its establishment registration cancelled or registration certificate revoked, or that was ordered to close by authorities for engaging in illegal activities that were detrimental to the national security or public interest.

Registration Requirements

The Representative Office Registration Regulations specify the documentation required for registering the establishment and closing of a Representative Office. The Representative Office is required to update its registration with respect to changes, such as name, address, or chief representative, within 60 days of such changes.

According to the regulations, the SAIC and its local offices must make decisions about whether to approve the establishment of a Representative Office within 15 days of accepting the application. The rules allow ten days for processing changes or de-registration of a Representative Office.

Requirements on Annual Report

Representative Offices are required to submit annual reports to AIC branches between March 1 and June 30 of each year. The annual report should cover the following:

• ongoing legal existence of the foreign enterprise;
• description of the Representative Office's operations; and
• audited financial information of the Representative Office.

These requirements obviously increase the regulatory burden and administrative cost of operating a Representative Office.

Penalties for Non-Compliance

Penalties for non-compliance with the rules governing Representative Offices are significantly increased.

• Conducting profit-making activities: fines of RMB50,000 to RMB500,000.
• Failure to register the establishment of a Representative Office: RMB50,000 to RMB200,000.
• Failure to submit an annual report or update changes in the office's registration: RMB10,000 to RMB30,000.

Information Sharing among Authorities

AIC offices are directed to share information regarding Representative Offices with other authorities, presumably such as customs, public security bureaus, and tax bureaus. Interaction among different authorities will subject Representative Offices to more stringent regulation.

Conclusions

Representative Offices are now under more stringent administration and supervision by the Chinese government. The stricter rules, steeper fines, and increased cooperation among government agencies are partly a response to perceived non-compliance with previous regulations, particularly with foreign companies using Representative Offices as a cover to conduct impermissible business activities and evade taxes.

With the issuance of these comprehensive rules, foreign investors that have Representative Offices in China must pay greater attention to issues of compliance. Investors considering whether to establish a Representative Office in China are likewise advised to pay attention to the regulations, and particularly to the limitations on allowable business activities.

According to China Law Update's phone inquiry with the State Administration of Industry and Commerce, detailed implementing rules for the Representative Office Registration Regulations are in the works, and will be issued before March 1, 2011.