CHINA FOCUS COMPARES OLD AND NEW DRAFT REGULATIONS OF SETTING UP REPRESENTATIVE OFFICES IN CHINA.
A Representative Office ("RO") is often the first step for foreign companies to enter the Chinese market as it gives them a legal presence to conduct (limited) business in China.
The regulations governing RO date back to 1983 ("1983 Provisions"). The State Administration for Industry & Commerce has recently released a draft of new regulations ("Draft Provisions") and we would like to highlight some main aspects.
While the 1983 Provisions vaguely define the RO, the Draft Provisions define it as a foreign firm's local business office which engages in non-profit-making activities, with no legal person status and no right to engage in profitable business activities.
The regulations mention expressly - so far it was practice only - what activities the RO may engage in: market research, display and promotion activities, liaison activities in relation to sales of products, provision of services, procurement and investment within China as well as business activities that might be permitted under international treaties and agreements. While the 1983 Provisions limited the penalty for engaging in profit-making activities to RMB 20,000, the Draft Provisions are stricter regarding scrutiny and provide a penalty up to RMB 500,000 or the revocation of the business license in serious cases.
Until now, the Chief Representative is not allowed to sign any contracts on behalf of the foreign company. Based on the needs of a RO, the Draft sets forth such a right and stipulates that a Chief Representative may sign a contract on behalf of the foreign company provided that he/she has been authorized by the foreign enterprise in writing. In order to avoid unpleasant surprises we suggest the foreign company ensures that the extent of power of attorney for the Chief Representative or any other representative is clearly defined.
Further, the Draft Provisions stipulate that the name shall not conflict with any previously registered name. Whereas the 1983 Provisions only set forth what elements the name of a RO must include. Therefore, we suggest the foreign company to do a careful research before submitting the name application.
The Draft Provisions set forth that the RO is free to choose its site. However, the authorities are still legally entitled to require a RO to change its site in case such site is not in accordance with the national security and public interest. Previously, the 1983 Provisions do not set forth any particular requirements regarding the office site. While in some cities (e.g. Shanghai) a RO is obliged to rent an office space in a so-called Grade-A building (high standard building), other cities (e.g. Beijing) do not have such requirements.
The Draft Provisions clearly define the power of the authorities when dealing with an illegal case and the liability of an illegal activity.
In general the new rules have increased transparency.
Some of the differences are compared in the table below:
1983 Provisions |
Draft Provisions |
|
Re-registration |
Every 3 years |
No re-registration, valid as long as the foreign company exists |
Mother company |
Can be newly established |
Needs to be established for more than 1 year |
Annual report |
Report submission every 3 years |
Publish annual audited reports between March 1 and June 30 |
Documents |
Only the mother company's certificate of incorporation has to be notarized and authenticated by the Chinese Embassy |
Substantially more documents required |
Supervision by authority |
Almost no power to supervise the business activities; in practice no punishment for illegal activities |
Power to supervise the business activities and punish illegal activities |
Fines |
Below RMB10,000 if set up without registration with authority |
RMB10,000-100,000 in this |