Dear Sir or Madam,

Please find enclosed our update on the latest developments in Chinese Corporate Law.

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CMS, China



New Regulations on Representative Offices: time to opt for a Wholly Foreign-owned Enterprise?

From March 2011, the costs and formalities of establishing and operating a representative office in China may increase. Foreign companies and their existing representative offices in China will need to conform to shorter time limits, new reporting obligations and stricter limitations on their business scope. Tougher penalties will be imposed if related legal restrictions are violated.

For many foreign companies, establishing a representative office has been the most efficient first step to enter into the Chinese market to date. From 2011, this form of business structure will need to be carefully considered.

The Measures for Administration of Registration of Resident Representative Offices of Foreign Enterprises (“Old Regulations”) came into force almost 20 years ago and the Chinese government has only now decided to strengthen the administration of representative offices by imposing more regulatory rules.

The Regulations for Administration of Registration of Resident Representative Offices of Foreign Enterprises (“New Regulations”) were published by the State Council on 19 November 2010 and will take effect as of 1 March 2011.  The New Regulations define the nature and scope of a representative office of a foreign enterprise in more detail, making the registration procedures more burdensome.

The main changes stipulated by the New Regulations are as follows:

Business Scope and Operational Activities

The New Regulations reinforce the restrictions on the business scope of a representative office. A representative office will only be permitted to carry out market research, presentation and promotional activities in relation to its parent company’s products or services.  In addition, representative offices will also be allowed to undertake liaison activities in relation to product sale, service provision, domestic procurement and domestic investment.

Clearer guidance on the business scope implies that the current local practice of tolerating operational businesses by a representative office may no longer be continued and the authorities will pay closer attention to such activities.

Administrative Formalities

Despite the fact that some administrative formalities have been removed by the New Regulations, Chapters III and IV of the New Regulations increase the administrative burdens and expenses of establishing and operating a representative office significantly. Some new requirements were introduced in January 2010 by a circular issued by the State Administration for Industry and Commerce. These new requirements have now been standardised by the New Regulations.

The major changes are the following:

  1. Only foreign enterprises that have existed for more than 2 years can set up a representative office in the PRC.

  2. In the past, in many locations representative offices had to be located in buildings specifically designated for use by representative offices. Under the New Regulations such restrictions no longer apply. However, the competent Administration for Industry and Commerce (“AIC”) can still order a representative office to relocate in accordance with the requirements of national security and public interests.

  3. In the establishment process, the articles of association of the foreign enterprise must now also be submitted to the AIC. However, the New Regulations do not explicitly provide whether a simple copy is sufficient or whether the articles must be notarised and legalised. In the latter case, additional costs would be incurred.

  4. A representative office shall have no more than 4 representatives (chief representative included).

  5. A representative office must now submit an annual report on its business activities together with audited financial statements to the competent AIC between 1 March and 30 June each year.

  6. A representative office is required to file with the AIC not only any changes concerning its own registration, but also changes to the authorised signatories, corporate structure, capital (assets), business scope or legal representative of its parent company within 60 days of such change occurring, or 30 days after PRC approval (if required) has been granted.

  7. A representative office must announce its establishment and any change to its registration through media appointed by the AIC.

  8. A representative office must now apply for deregistration within 60 days of any official decision to shut it down.

  9. If a representative office has been ordered to shut down or its registration certificate has been revoked or canceled by the AIC, no new representative office of this foreign enterprise can be registered within the following 5 years.  The exception to this is voluntary deregistration.


Strengthening of Sanctions

The New Regulations increase the sanctioning power of the AIC:

  1. Penalties for undertaking illegal operational activities will be increased to RMB 500,000 from RMB 20,000 and the authorities have the right to confiscate the illegal income as well as the tools, equipment, raw materials, products and other assets used for operational activities. In serious cases, the registration certificate of the representative office can be revoked.

  2. Foreign enterprises operating businesses that are permitted for representative offices without being registered as such, may be fined up to RMB 200,000 (increased from RMB 10,000). 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). In serious cases the registration certificate of the representative office can be revoked.

  3. Any delay in submitting the annual report and the audited financial statements, failure to conclude activities in the name of the representative office, or any delay in filings of changes of registration with the AIC will be subject to fines up to RMB 30,000. In serious cases, the AIC has the right to revoke the registration certificate of such representative office.

In summary, the New Regulations will increase the administrative burdens and, consequently, the costs of establishing and operating a representative office. Already in the last couple of months, various regulations have been issued to strengthen the administration of representative offices. This can be seen as a clear signal that the PRC government no longer tolerates operational activities carried out by representative offices. Foreign investors who engage in operational activities in China should consider restructuring their business into the form of a wholly foreign-owned subsidiary.
       

In case you have questions or for further information, please contact

Dr Ulrike Glück
Senior Partner
Head of Corporate Practice Area Group
CMS, China
T +86 21 6289 6363
E ulrike.glueck@cmslegal.cn

or the authors of this article:

Mr. Nicolas Zhu
Senior Associate
CMS, China
T +86 21 6289 6363
E nicolas.zhu@cmslegal.cn

Mrs. Jeanette Yu
Senior Associate
CMS, China
T +86 21 6289 6363
E jeanette.yu@cmslegal.cn


 



This information is provided for general information purposes only and does not constitute legal or professional advice. Copyright by CMS, China.

CMS, China
“CMS, China” should be understood to mean the representative offices in Mainland China of CMS Bureau Francis Lefebvre, CMS Cameron McKenna LLP and CMS Hasche Sigle, working together. CMS, China is a member of CMS Legal Services EEIG, a European Economic Interest Grouping that coordinates an organization of independent member firms. CMS Legal Services EEIG provides no client services. Such services are solely provided by the member firms in their respective jurisdictions.

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