New Legal Regime Of Representative Offices In China - Practical Implications

Monday, May 2, 2011 - 11:51

Early last year, the State Administration for Industry and Commerce ("SAIC") and the Ministry of Public Security ("MPS") of the People's Republic of China ("PRC") jointly issued a Circular on Further Strengthening Administration of the Registration of Resident Representative Offices ("RO") of Foreign Enterprises ("Circular"). On 10 November 2010, the PRC State Council ("State Council") formally promulgated the Regulations for the Administration of the Registration of Resident Representative Offices of Foreign Enterprises ("Regulations") which came into effect on 1 March 2011, incorporating the provisions of the Circular and repealing the previous Measures of the SAIC Concerning the Administration of the Registration of Resident Representative Offices of Foreign Enterprises (promulgated on 5 March 1983 and effective on 15 March 1983). The Regulations demonstrate the PRC government's determination to strengthen its control over ROs in China. In order to implement the new Regulations, the SAIC issued two notices in February, 2011, to announce the adoption of a new set of forms for RO registration and RO annual report as well as to emphasize the importance of implementing the new Regulations.

It is not uncommon for foreign investors to opt for the RO vehicle for their first entry into China in order to test the waters. Traditionally, ROs are relatively simple and quick to set up and they enjoy relatively lower costs of operation compared to other vehicles, such as wholly foreign-owned enterprises and joint venture companies. The aim of this article is to briefly introduce the new legal regime regarding ROs in China and to share the authors' recent practical experience in relation to RO set-up and operation for potential foreign investors' and practitioners' reference. The issues as discussed in this article are not meant to be exhaustive though, given the rapid development of PRC laws and policies and the transitional nature of the China economy.

1. Permissible Activities of ROs

ROs in China were generally not allowed to engage in "direct business activities" but there was no precise definition as to what ROs could do in China. In practice, it was necessary to check with PRC authorities from time to time.

Under the new legal regime, however, it is clearly set out under Article 14 of the Regulations that an RO may engage in the following activities relating to the foreign enterprise's business:

i. market surveys, exhibitions and publicity activities relating to the foreign enterprise's products or services; and

ii. liaison activities relating to: (a) the foreign enterprise's product sales, (b) service provisions, (c) domestic procurements and (d) domestic investments.

Apart from Article 14 of the Regulations, foreign enterprises that would like to set up ROs falling within specific industries may also need to refer to the relevant regulations that were released and issued for the administration of the ROs in the specific industries (if any), or to further check with relevant PRC authorities as to whether a particular RO will require any other specific prior approvals before it can engage in the aforesaid activities. Prior approvals may be required particularly for those foreign enterprises that fall within certain specific industries or sectors (e.g. financial sector, insurance sector, securities sector). In any event, the new legal regime makes clear the scope of permissible activities of ROs.

2. Renewal of Registration Certificates of ROs

Under the old legal regime, ROs were generally required to renew their RO registrations annually. For instance, in the Guangdong Province, an RO generally got a new registration certificate with a valid term of one year and a residence term of three years after each annual renewal.

Now, Article 16 of the Regulations stipulates that the residence term of an RO shall not exceed the term of existence of the foreign enterprise. Some commented that Article 16 brought ROs in line with the concept of "perpetual" existence of companies in many other jurisdictions, which usually do not specify any term for normal companies. Following from this, Article 16 seems to imply that the annual RO registration is no longer required, so long as the foreign enterprise still exists. However, this is not the case. The Regulations impose an "annual report" ongoing obligation on ROs. ROs are still required to comply with the "annual" report obligation and to renew their registration annually, notwithstanding the "perpetual" existence concept as stipulated under Article 16 of the Regulations. Please refer to Item 7 for further details about the annual report obligation.

As a related note, for those ROs that require prior approvals, they may be approved for various residence terms depending on the industry or sector of the foreign enterprise. In this regard, foreign enterprises should pay attention to the residence term as stated in the prior approvals of their ROs and should be reminded to renew the same before expiry of such residence term, in accordance with applicable industry-specific rules and regulations.

3. Two-Year Existence of Foreign Enterprises

The new legal regime requires a new additional proof of two-year existence of the foreign enterprises. Pursuant to Article 23 of the Regulations, when applying to establish an RO, one of the documents that a foreign enterprise needs to submit to the registration authority is proof of its domicile and proof of lawful business operations evidencing that it has been in existence for at least two years. In some common law jurisdictions, it is practically possible for someone to purchase a so-called shelf company which has been in existence (i.e. incorporated) for two years. Would this satisfy the said requirement under the Regulations? What is the meaning of "lawful business operations" under Article 23 of the Regulations? These questions have not yet been clearly answered by the PRC authorities. Foreign enterprises will probably need to wait for further implementation rules and clarifications to be issued by relevant authorities to clarify such issues. In practice, it may be necessary to make no-name enquiries with relevant PRC authorities to ascertain the updated position from time to time. To be prudent, foreign enterprises should always double-check the local requirements or seek clarifications from PRC authorities for any uncertain issues before proceeding.

4. Submission of Foreign Enterprises' By-Laws

Apart from the two-year existence proof as mentioned above, the new legal regime also requested an additional document for an RO setup application. Article 23 of the Regulations requires the foreign enterprises to submit their by-laws (or articles of association) or other constitutional documents of similar nature. The practical implication for this additional requirement is that the foreign enterprises may need to provide a Chinese translation of the constitutional documents that are not written in Chinese, and that may incur extra costs and time for the applications. Foreign enterprises should also check with the relevant authorities to see if notarization and/or legalization are required for such Chinese translation from time to time. If so, foreign enterprises will need to plan ahead and make necessary preparations well in advance as that commonly causes extra time and costs.

5. Extension of Period for Registration Application

As mentioned in Item 1, some ROs may require special prior approvals should they fall within any specific industries or sectors. In the past, foreign enterprises had to submit RO applications within 30 days upon obtaining such special approvals. Such a period has now been extended to 90 days pursuant to Article 23 of the Regulations.This may in practice give the foreign enterprises more time to prepare the documents and supporting information to be submitted to the PRC authorities with respect to their RO applications.

6. Public Announcement Obligation

Article 20 of the Regulations imposes a new obligation on foreign enterprises to announce certain RO events (such as establishment of an RO, changes of registration of an RO) via public media. Article 20 of the Regulations goes on to stipulate that in case an RO is deregistered or, in accordance with the law, the registration of its establishment is cancelled or its registration certificate is revoked, an announcement shall be made by the registration authority. Such additional obligation obviously means additional costs for the foreign enterprises. Despite the imposition of such new obligation, no further details are set out in the Regulations as to how such a public announcement should be made and how such an obligation can be fulfilled. In practice, the RO may need to refer to local rules issued by relevant local authorities from time to time in this regard, if any, or make enquiries with relevant authorities to ascertain how such obligations can be fulfilled in practice. For example, the Guangdong AIC recently released a public announcement that requires those ROs registered in Guangdong province to make public announcements in newspapers at the "sub-provincial level," such as the Nanfang Daily or Guangzhou Daily . Foreign enterprises are thus advised to pay attention to such local requirements from time to time for compliance purposes.

7. Ongoing Annual Report Obligation

As mentioned under Item 2 above, the Regulations impose a new "annual report" ongoing obligation on ROs. Article 6 of the Regulations provides that an RO shall submit an annual report to the registration authority each year between 1 March and 30 June. The annual report shall include information on the lawful existence of the foreign enterprise, details of the business-related activities engaged in by the RO, and its receipts and expenditures as audited by an accounting firm, and other relevant information. In practice, this new "annual report" obligation is quite similar to the old "annual renewal" obligation. Foreign enterprises should, however, pay attention to the new regulations or notices as may occasionally be issued by PRC authorities to see if there will be any new documentation requirements regarding the new "annual report" in the future.

As a related note, foreign enterprises should pay attention to the timing to register new changes of particulars of the ROs (e.g. change of chief representative or registered office). This is because, in practice, the PRC authorities often require that the annual reports be completed first before they can handle any registration of changes for the ROs. This may cause unnecessary delay and administrative inconvenience for some foreign enterprises, according to our past experience. The authors even came across cases whereby some newly appointed RO foreign representatives had to delay their work visa and work permit applications as the RO could not process the change of representative registration before its completion of the annual renewal procedure. This may affect the business plans of the foreign enterprises to a certain extent, and so it is advisable for the foreign enterprises to note the practical implication in this regard and plan ahead.

8. Employment of Foreign Staff

Traditionally, an RO may appoint foreign staff to serve as its chief representative or ordinary representatives. Under the old legal regime, there was no specific restriction as to the maximum number of ordinary representatives, though in practice the authority might decide the maximum number as it saw appropriate, considering the business scope, size and number of Chinese staff of the RO.

The maximum number of representatives is now made clear under the new legal regime. Article 11 of the Regulations expressly states that an RO shall have only one chief representative and no more than three ordinary representatives. The practical experience that the authors would like to share here is that, according to our recent inquiries with certain local registration authorities, notwithstanding such stipulation of the maximum number of chief and ordinary representatives under the Regulations, some authorities may require that the total number of foreign staff be in "equal proportion" to the total number of local staff. For instance, if the RO only hired two local staff, it could appoint no more than two representatives (including chief and ordinary representatives) in total. As this proportion is not specifically set out in the Regulations, it is worth checking with the authorities at the time of the RO application.

Conclusion

In the past, many foreign investors who entered China for the first time preferred setting up ROs, given their relatively lower setup and operational costs as well as quick setup time. In order to quickly establish a presence in China, some foreign investors even opted to set up an RO first, and then deregister it thereafter within a relatively short period of time and to establish a more long-term wholly foreign-owned enterprise in China.

Nowadays, RO setup and operations may not be as simple and time-saving as foreign investors might have originally thought. It could also be quite costly and time-consuming to deregister ROs in China. In view of the recent tightening control of ROs in China and extra costs and time for RO setup and operation under the new legal regime, it is advisable for foreign investors to carefully evaluate both their short-term and long-term business plans in China before determining which vehicle to establish in China and before embarking on any setup applications.

Partner Franki Cheung is the Head of Deacons' China Practice Group. Christine Wong is a Deacons Senior Associate specialising in China Trade and Investment. Minning Wei is a Legal Executive with PRC Certified Tax Agent qualification in Deacons' China Guangzhou Office specialising in China Trade and Investment.

Please email Franki Cheung at franki.cheung@deacons.com.hk with questions about this article.