Almost six months after the Legal Affairs Office (LAO) under China’s State Council started seeking public comments on a set of draft regulations on the registration of foreign enterprises’ resident representative offices in China (Representative Offices), the regulations are still in the making. On August 29, 2008, LAO published the Administrative Regulation on the Registration of Resident Representative Offices of Foreign Enterprises (Draft for Comments). The finalized Regulations will replace the Administrative Measures on the Registration of Resident Representative Offices of Foreign Enterprises, which were promulgated in 1983.
Compared with the Measures, the Draft Regulations contain a variety of new detailed rules. These rules reflect the changing practice of the registration of Representative Offices, and aim at conform to the commitments China made when it entered the WTO.
Status of a Representative Office
Under the Draft Regulations, a Representative Office of a foreign enterprise is an office established in China that engages in non-profit activities related to the foreign enterprise’s business. A Representative Office is not a legal person in China, and it may not engage in profitable activities unless the international treaties and conventions binding on China provide otherwise.
The Draft Regulations lay out certain typical activities that a Representative Office is permitted to carry out, including: market surveys, exhibitions, or promotions of the products or services provided by the foreign enterprise; and communication activities related to the foreign enterprise’s sale of products and supply of services, or to domestic purchases and domestic investments that it has made.
In addition, the Draft Regulations generally permit a Representative Office to participate in activities that are allowed under the international treaties and conventions to which China is a party, as well as activities that PRC laws and regulations or the State Council allow the Representative Offices to engage in.
Detailed Registration Rules
The Measures only lay out general procedures for the registration of a Representative Office. Therefore, the administrations of industry and commerce (AICs) at various levels that handle the registrations, as well foreign companies considering setting up Representative Offices in China may find the Measures to be vague. In contrast, the Draft Regulations go into much more detail on the registration rules.
For example, the Draft Regulations specify how a Representative Office should be named. Specifically, the registered name of a Representative Office should take the format of “nationality + foreign company name + resident city name + Representative Office.” In addition, the registered name should not overlap with the names of any other existing international organizations, Chinese government agencies and public institutions, and should not be in conflict with state security and public interest, or any prior rights of other parties. The Draft Regulations also introduce for the first time the qualification of the chief representative and the representative of a Representative Office. Under the Draft Regulations, any person with no or limited civil capacity may not serve as a chief representative or a representative. In addition, those who have been convicted of certain crimes may not take either of those positions within five years after they serve their sentences.
The Draft Regulations contain more information requirements for establishing a Representative Office. In addition to the requisite materials stipulated in the Measures, the Draft Regulations require applicants to submit additional materials, such as the articles of association of the foreign company, and documents evidencing that an office space may be lawfully obtained for its use. The Draft Regulations also require a Representative Office to submit annual reports.
Relaxed Restriction on Operations
Unlike a foreign-invested entity, either an equity joint venture (EJV), cooperative joint venture (CJV), or wholly foreign-owned enterprise, a Representative Office generally may not engage in profitable activities. However, there are exceptions in certain fields, because China promised to open these fields at the time of its entry into the WTO. The areas include legal services (excluding Chinese legal practice); accounting, auditing and bookkeeping services; and management consulting services. Therefore, Representative Offices providing these services are allowed to generate profit.
The Draft Regulations state that the chief representative and the representative of a Representative Office may execute a contract on behalf of the foreign company establishing such a Representative Office, if the foreign company authorizes them to do so in writing. This relaxation may facilitate the operation of the Representative Office.
In sum, the Draft Regulations, by offering considerably more detailed rules, may help reduce uncertainties in the registration of a Representative Office. On one hand, foreign companies are faced with heightened duties; on the other hand, with the formalization of the regulatory framework, the procedure will be more transparent and the regulatory authority will be less arbitrary in exercising its powers.