Key Points:

  • Greater scrutiny of representative offices continues
  • Qualifications for chief representative have been enhanced
  • Representative offices now required to go through annual review process like companies

In 2010 the China authorities promulgated important rules that changed or will change major aspects of representative offices (ROs) of non-China-based entities. On 4 January 2010 the State Administration for Industry & Commerce (SAIC) and the Ministry of Public Security (MPS) jointly promulgated the Circular on Strengthening Administration of Registration of Residential Representative Offices of Foreign Enterprises (the Circular), which went into effect on the same date. On 19 November 2010 the State Council promulgated the Regulations on Administration of Registration of Resident Representative Offices of Foreign Enterprises (the New Regulations). The New Regulations will become effective as of 1 March 2011 and replace the Measures for the Administration of Registration of Resident Representative Offices of Foreign Enterprises (the Measures) that were approved by the State Council on 5 March 1983 and promulgated by the SAIC on 15 March 1983. The New Regulations incorporated some new requirements provided under the Circular.

The key points in the New Regulations are summarized as follows:

Business Scope of ROs

The New Regulations emphasize that an RO may not engage in any profit-making activities and explicitly restrict an RO to engaging only in the following activities in connection with the business of the foreign enterprises:

  • Market investigation, display and promotional activities in connection with the products or services of the foreign enterprises; and
  • Liaison activities in connection with selling products, providing services, domestic procurement and domestic investment.

In the past, the relevant regulations permitted an RO to engage in indirect business activities including business liaison, product introduction, market research and technology exchange. By contrast, the New Regulations are more specific about the permitted scope of activities for an RO, although there is no change to the general nature of the permitted scope.

Qualifications of the Chief Representative

According to the New Regulations, the following persons may not serve as either a chief representative or other representative of an RO:

  • Anyone who has been sentenced to a criminal penalty due to committing crimes that were detrimental to the national security or pubic welfare of the PRC; or
  • The chief representative or other representative of an RO that has been deregistered, whose registration certificate has been withdrawn or that was ordered to close by relevant authorities due to any illegal activities that were detrimental to the national security or the public welfare of the PRC during the past five years.

Since 4 January 2010 a newly established RO may have no more than four representatives (including the chief representative).

Annual Inspection

Beginning in 2011 each RO must undergo an annual inspection. This is a new requirement. Previously, an RO only needed to file a simple renewal of its registration certificate each year. Under the New Regulations each RO must submit an annual report to the appropriate registration authority – i.e., the SAIC or its local counterpart (the AIC) – between 1 March and 30 June each year. The annual report must include information regarding the existence and “good standing” of the RO’s parent company, as well as information regarding the business activities of the RO and information on audited financial statements. It’s expected that the SAIC and local AICs may promulgate detailed rules for implementation of the ROs’ annual inspection soon.

AICs’ Powers and Responsibilities Clarified; Punishments Increased

The New Regulations grant AICs the following powers and responsibilities to investigate the activities of any RO that is suspected of violating the New Regulations:

  • To investigate and understand the situation by working with relevant entities and individuals;
  • To review, copy, take possession of or otherwise secure contracts, documents, account books and other materials in connection with any activities in violation of the applicable laws;
  • To take possession of or otherwise secure the tools, equipment, raw materials, products (commodities) or other property specifically used by the RO to engage in illegal activities; and
  • To check the accounts and accounting vouchers, account books, and statements in connection with any savings deposits of any RO that engages in illegal activities.

Furthermore, the New Regulations specify more clearly the liabilities of an RO in the event of a violation of any relevant law or regulation, and increase the penalties for some violations. For example, if an RO violates the New Regulations by engaging in profit-making activities, the AIC must order the RO to correct the error and may confiscate the illegal gains and the tools, equipment, raw materials, products (commodities) and other property used to engage in profit-making activities. The RO in violation can be fined an amount from RMB 50,000 (US$7,462) to RMB 500,000 (US$74,620). For more serious violations, the registration certificate of the RO may be revoked.