The Representative Office is a common – but very limited – structure used by foreign companies to do business in China. (Representative Offices cannot, for example, sign contracts or engage in profit-making activities.) Responding to perceived abuses of the Representative Office structure, on November 19, 2010, the State Council passed the Administrative Regulations for the Registration of Resident Representative Offices of Foreign Enterprise, which will become effective March 1, 2011.

Under the new regulations, 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.

Some key provisions of the new regulations include:

  • In the past, many 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.
  • A Representative Office can have no more than four representatives, including one chief representative.
  • Representative Offices are required to submit annual reports to AIC branches between March 1 and June 30 of each year. The annual report should cover the following:
    • Ongoing legal existence of the foreign enterprise;
    • Description of the Representative Office’s operations; and
    • Audited financial information of the Representative Office.
  • A Representative Office is required to file with the AIC not only any changes concerning its own registration, but also changes to the authorized signatories, corporate structure, capital (assets), business scope or legal representative of the foreign enterprise within 60 days of such change occurring, or 30 days after PRC approval (if required) has been granted.
  • A Representative Office must announce its establishment and any change to its registration through media appointed by the AIC.
  • Penalties for non-compliance with the new rules are significantly increased. For example:

With the issuance of these comprehensive new rules, foreign investors that have Representative Offices in China must pay greater attention to issues of compliance. 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. For many foreign companies, establishing a Representative Office has been the most efficient first step to enter into the Chinese market to date. Beginning from next month, this form of business structure will need to be carefully considered.

Click here for a complete copy of the new regulations.