New regulations regarding representative offices (“ROs”) became effective this month (the “New Regulations”), (Regulations on the Administration of the Registration of Resident Representative Offices of Foreign Enterprises, promulgated on 19 November 2010 by the Order of the State Council of the People’s Republic of China.) providing clarity on permitted RO activities and calling for stricter compliance and new administrative processes.
In 1980, the People’s Republic of China (the “PRC”) first allowed the establishment of ROs (Interim Regulations of the People’s Republic of China Concerning the Control of Resident Offices of Foreign Enterprises, promulgated on 30 October 1980 by the State Council). However, many non-PRC companies establishing ROs in the PRC (“Head Offices”) were not compliant in the establishment and ongoing administration of PRC-based ROs: ROs submitted inaccurate registration documentation, engaged in profit generating activities and were not properly registered. As a result, the PRC State Council has passed the New Regulations in an effort to strengthen the administration of ROs and steer Head Offices in the direction of establishing companies through direct investments in the PRC.
As of 1 March 2011, the New Regulations took effect and replaced the 1983 Regulations, (Procedures for the Registration and Administration of Residential Representative Offices of Foreign Enterprises in China,promulgated on 15 March 1983 by the State Administration for Industry and Commerce.) introducing dramatic changes in the administrative protocol for existing and new ROs. The New Regulations should be considered in conjunction with the January 2010 Regulations (Notice on the Further Strengthening of the Administration of Registration Administration Measures of Permanent Residential Representative Offices of Foreign Enterprises, issued on 4 January 2010 by the State Administration of Industry and Commerce and the Ministry of Public Security.)
Flexible Duration, Annual Reports
Under the 1983 Regulations, an RO’s registration certificate could have an annually renewable term of one year. In practice, however, many local offices of the AIC adopted their own policies and issued registration certificates for periods of three to ten years. Indeed, the Shanghai AIC issued registration certificates valid for three years as a matter of internal policy.
The New Regulations allow Head Offices to stipulate longer terms of operation for their ROs, but under the condition that ROs file annual reports (Such annual reports should include the status of the foreign Head Office, business activities carried out by the RO, an audited statement of income and expenses, and any other relevant information.) between 1 March and 30 June each year.
Clarification of Allowed Activities
The New Regulations lay out specific activities in which ROs may engage, eliminating any doubt about which activities are and are not allowed.
Thus, when assessing their specific, long-term needs in the PRC, Head Offices should consider that ROs may perform marketing activities related to research, presentation, and publicity, and liaison activities related to services, purchases, or investments. ROs are not approved to enter into contracts, engage in profit generating activities, or conduct other activities beyond the allowed scope (Profit generating activities may be allowed where the PRC has expressly agreed to such activities in an international agreement or treaty.).
Registration
The New Regulations make the AIC the sole approval authority for ROs in most industries (Some ROs, such as those offering auditing, accounting and bookkeeping services, and foreign legal services, still require additional approvals from other authorities.). This clarifies those authorities which have jurisdiction over the registration process (Previously, certain ROs also required approval from the Ministry of Foreign Trade, the People’s Bank of China, the Ministry of Communications, the General Administration for Civil Aviation, and other commissions, ministries or bureaus.). The time frame for acceptance or rejection of a registration application is also more concrete, requiring only 20 days.
Previously, newly incorporated Head Offices could register ROs in the PRC; however, the New Regulations require that a Head Office be in existence for at least two years prior to registering an RO. This restriction encourages only established Head Offices to register ROs, and encourages all to consider alternative legal structures, such as joint ventures (“JV”) or wholly foreign owned enterprises (“WFOE”). WFOE and JV structures may be desirable for other reasons (e.g., expanded business scopes, ability to issue official invoices, ability to generate profits, limited liability protection, etc.), but they also require a substantial amount of registered capital and are generally more complex to establish and operate.
Under the 1983 Regulations, many ROs provided inaccurate registration documentation. In an effort to eliminate such inaccurate submissions, the New Regulations and the January 2010 Regulations now require a variety of documentation, some of which must be notarized and authenticated by the home country of the Head Office, which can be a time consuming and laborious process.
Foreign Staff Caps
In the past, many Head Offices have used ROs as a means to place a number of non-PRC employees on the ground in China. Under the New Regulations, however, non-PRC employees are now limited to the positions of chief representative and representatives, and there can be no more than four non-PRC employees in total. Those ROs which already exist with more than four non-PRC representatives will be grandfathered in, but will not be permitted to replace any non-PRC representatives in excess of the allowed four through attrition.
Amendments
Amendments to corporate records of Head Offices were not consistently registered with the AIC, resulting in inaccurate and outdated records. To fix this problem, the New Regulations stipulate that changes in authorized signatories, the liability status of the enterprise (i.e., limited or full), capital (e.g., assets), business scope, and representatives be recorded within 60 days.
Deregistration Clarified
In the past, many ROs failed to properly deregister, meaning that debts were left unpaid and the ROs and their Head Offices left unaccountable. The New Regulations aim to eliminate this by laying out clear instructions on when and how to deregister, and stricter penalties for noncompliance.
An RO must deregister where its Head Office orders its dissolution, its Head Office ceases to exist, the RO’s approval is cancelled, the RO is ordered to close, or the RO will discontinue its business after its term of operation ends. ROs which fail to properly deregister may be fined an amount ranging from RMB10,000 to RMB30,000. Furthermore, if an RO is ordered to deregister for committing harmful activities, the Head Office will not be permitted to establish another RO within the PRC for five years.
Penalties Specified
The New Regulations also introduce increased penalties for noncompliance. Such penalties include the forfeiture of all proceeds and property of the RO (Where profit generating activities have been conducted.), revocation of the RO’s registration certificate, blacklisting of the Head Office, and fines ranging from RMB20,000 to RMB200,000. Under the New Regulations, fines also extend to directly responsible individuals and range from RMB1,000 to RMB10,000.
Desirability of ROs
Taking the new changes into consideration, Head Offices must consider whether ROs are a fitting business structure for their company. Non-PRC representative caps, a lack of trading rights, increased costs of administration and compliance, and the prohibition of profit generating activities could present major obstacles, especially if a Head Office hopes to eventually expand its operations in the PRC.
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