On March 1st 2011 New Regulations take effect on Registration of Resident Representative Offices of Foreign Enterprises (“Regulations”).
The Regulations clarify the Circular on Further Strengthening the Registration Administration of Foreign Enterprises’ Resident Representative Offices issued by the State Administration for Industry and Commerce (SAIC) and the Ministry of Public Security on January 4, 2010, and will replace the Measures for the Administration of Registration of Resident Representative Offices of Foreign Enterprises that were promulgated by SAIC all the way back in March 15, 1983 (“Previous Regulations”).
These Regulations tighten the rules on establishment and operation of resident representative offices of foreign enterprises ("Representative Offices") by defining the non-profit nature and business scope of Representative Offices, imposing more compliance requirements such as annual reporting system and specifying stricter penalties.
Highlights of these Regulations are listed below:
1 Non-profit Activities
The Regulations define Representative Offices as entities, which have no legal person status and engage in non-profit activities in connection with the business of foreign enterprises. According to Article 13 of the Regulations, Representative Offices may not engage in any for profit activities, unless otherwise provided by international treaties or agreements concluded or participated in by China.
Article 14 of the Regulations provides that Representative Offices may engage in the following activities in connection with the business of foreign enterprises:
(a) market investigation, display, publicity activities in connection with the products or services of foreign enterprises; and
(b) liaison activities in connection with product sales, provision of services, domestic procurement or domestic investment by foreign enterprises.
The Regulations also state that if the engagement in the above business activities by the Representative Office requires approval in accordance with any laws, regulations or provisions of the State Council, then such approval must be obtained.
In addition, the Regulations provide greater teeth in the form of penalties for violation of the above rules. If a Representative Office violates the Regulations and engages in for profit activities, then the Registration Authorities shall order them to correct their behavior and may confiscate the illegal gain as well as any tools, equipment, materials, products (commodities) or other property used to engage in for profit activities. In addition, the authorities can levy a fine of more than RMB50, 000 but no more than RMB500, 000. In serious circumstances, the authorities can revoke the Registration Certificate.
Even if Representative Offices steer clear of for profit activities there can still be sanctions if engaging in activities other than the business activities provided for in Article 14. In such cases, the Registration Authorities may order them to make correction; where they fail to make corrections, a fine of more than RMB10, 000 but no more than RMB100, 000 may be imposed. This is a far cry from previous penalties. If the circumstances are serious then the Registration Certificate can be revoked.
2 Annual Report
Article 6 of the Regulations requires Representative Offices to provide an annual report to the Registration Authorities between March 1 and June 30. The content of such annual report shall include the current status of the foreign enterprise, the business activities of the Representative Office and the financial details audited by an accounting firm and other information.
If the Representative Office provides false information in its annual report, the Registration Authorities may order a correction and impose a fine of more than RMB20, 000 but no more than RMB200, 000. In serious cases, the Registration Certificate can be revoked.
A failure to submit an annual report as required may result in a fine of more than RMB10, 000 but no more than RMB30, 000.
(a) Numbers of representatives
According to Article 11 of the Regulation, the foreign enterprise shall appoint one (1) chief representative. In addition, the foreign enterprise may appoint 1 to 3 representatives according to its business needs. In other words, Representative Offices should not have more than four representatives.
(b) Qualifications of representatives
Article 12 of the Regulations provides the circumstances under which a person may not be chief representative or other representative: (i) national security concerns; (ii) chief representatives or other representative of a Representative Office which had been revoked in the last five years; or (iii) other circumstances as provided for by SAIC.
4 Other New Rules
In addition to the above critical items, the Regulations also address several other issues, including:
(a) Application documents for establishment registration
Compared to the Previous Regulations, the Regulations require two more application documents for establishment. Namely (i) the certificate of the foreign enterprise’s domicile and the certificate of legal operation for more than two years; and (ii) the articles of association or the organization agreement of the foreign enterprise.
The certificate of legal operation for more than two years will make it difficult for small start-ups to establish Hong Kong holding companies and then set up a Representative Office in China.
(b) Resident period
The Previous Regulations provided that the validity term of the registration certificate is one year, and the registration certificate was to be renewed every year. However, there are no such provisions in the Regulations. The Regulations only provide that the resident period of a Representative Office may not exceed the duration period of the foreign enterprise, and does not have any explicit provisions with respect to the maximum period or validity term of the registration certificate. Whether a foreign enterprise can freely apply for the resident period to the extent of the duration of the foreign enterprise needs to be further clarified by the registration authorities in practice.
(c) Publication of the establishment registration
The Regulations provide that the registration authorities shall record registration details of a Representative Office in public registrars. Further, the Regulations provide that foreign enterprises shall announce the establishment or change of the Representative Offices to the general public via media as designated by the registration authorities. The specific procedures of such announcements and the definition of "designated media" will need further clarification by the registration authorities once the Regulations are in force.
The Regulations proceed with the trend of the role of a foreign enterprise’s representative office being very limited in China. The compliance requirements and tweaking of establishment criteria show an interest to crackdown on foreign investors who “operate” in China via Representative Offices.
Existing Representative Offices will need to prepare to more towards compliance. Foreign Enterprises (entrepreneurs) will need to weigh the pros and cons of a Representative Office against other options (such as a WFOE) before making a decision. The Representative Office will in all likelihood retain a role in China’s foreign investment environment, however, this role is much more likely to resemble the original intention of representation rather than the actual implementation, in which Representative Office would often engaging in actual business.