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2011-01-30 | Nanjing
The New Regulations for Administration of Registration of Resident Representative Offices of Foreign Enterprises in China
On Nov. 19, 2010, a new legislation was promulgated by State Council of People’s Republic of China, The Regulations for Administration of Registration of Resident Representative Offices of Foreign Enterprises (hereinafter referred as Regulations), which is formulated with the purpose of strengthening the administration on representative offices of foreign enterprises (hereinafter referred as ROs) in China. The Regulation will come into effort on March 1, 2011 and will replace the existing rules issued by the State Administration for Industry and Commerce in 1983 on the same day, which is Measures on the Administration of the Registration of Resident Representative Offices of Foreign Enterprises (hereinafter referred as Measures).
Compared with the Measures, the Regulation tightens the administration on establishment and operation of ROs and imposes stricter supervision on ROs, such as annual reporting obligation and restriction of mother-company.
The important exchanges are as follows:
- Non-profit Nature
It is stressed again in Regulation that ROs have no legal person status and shall only engage in non-profit activities in connection with the business of mother-company. According to resources, the most common crime committed by ROs is to engage in business activities, which is the main reason to bring about the legislation of Regulation. It can be proved the attitude of legislators towards the non-profit nature of ROs by seeing the stricter penalties. ROs will suffer a fine of up to RMB 500,000 (increased from RMB 20,000) if operating profit business and in serious cases the registration certificate can be revoked.
- Requirement of the Mother-Company
Any foreign company plans to establish a RO in China must have been in lawful existence for at least two years and shall file the proof.
Further more, a proof of creditworthiness issued by a financial institution that has business relationship with the foreign company is also required to file to registration authority, which is Administration for Industry and Commerce (hereinafter referred as AIC).
In terms of Notice on Strengthening the Registration Management for Residential Representative Offices of Foreign Enterprises (hereinafter referred as Notice) issued by State AIC and Ministry of Public Security in Jan of 2010, the two kinds of proofs mentioned above shall be notarized by a notary public in the home country and authenticated by the Chinese embassy or consulate there.
Consequently, it is impossible to establish a RO using a new offshore holding company or special purpose company.
Please be noted that for the purpose of this Regulation, foreign company means a profit-making organization established outside China in accordance with laws of a foreign country and companies from Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan are also treated as foreign companies.
- Annual Reporting Obligation
ROs are required to submit an annual report to the competent local AIC between March 1 and June 30 each year to report legal existence of the mother-company, details of the business operation and the audited statement of receipts and expenditures together with other relevant information.
Any delay in submitting the annual report and the audited financial statements will be subject to fines up to RMB 30,000.
- Business scope of ROs
The regulation defines the business scope of ROs in Article 14, which are market survey, exhibition, and publicity activities relating to the products and services of foreign parent enterprises; and connection activities relating to the foreign enterprise’s product sales, service provision, domestic procurement, and domestic investment.
Any RO takes non-profit operations falling outside the business scope can be subject to a fine of up to RMB 100,000 (increased from RMB 5,000).
- Limitation on the Number of Representative
There shall be no more than four representatives for each RO, including one chief representative. This new restriction will affect both existing and new ROs.
- Resident Period
In the Measures, the validity term of the ROs is only one year and the license shall be renewed every year. The Regulation, however, deleted such clauses and provides that the resident period of a RO may not exceed the term of the mother-company. It will be clarified in practice if ROs can freely apply for the extension of resident period.
- Publication Obligation
The Regulations provides that ROs shall announce the establishment or change of the register information to the public through medias appointed by the AIC.
Conclusion
Considering that the Regulation is not effective yet, now it is not clear that how the AIC and/or other relevant authorities will enforce the Regulation. However, with the release of the Notice, Notice of the State Administration of Taxation on Issuing the Interim Measures for the Administration of Tax Collection against the Permanent Representative Offices of Foreign Enterprises and the Regulation, it is a clear signal that the Chinese government is trying to stop the profit activities carried out by ROs. Since there are only two months left before the Regulation come into effect, it is time for foreign investors, currently or potentially, to reconsider their invest polices and to weigh the profits and costs of running a RO against other choices, such as Sino- foreign joint ventures or exclusively foreign-owned enterprises ( WHOFE ).
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