State Administration for Industry and Commerce and the Ministry of Public Security jointly issued a notice (the “Notice”) on January 4, 2010, which will have major impacts on the registration of the resident representative offices of foreign enterprises in China (“Rep Offices”). Rep Offices are a common initial step by potential foreign investors in China.
A Rep Office Can Only Have Four Representatives or Less
According to the Notice, a Rep Office can employ no more than four representatives (??) (including the chief representative). Existing Rep Offices which currently have more than four representatives cannot add any new representatives. For existing representatives above four, the authorities are “grandfathering” the excess representatives, with the result that it will not be necessary to commence deregistration immediately.
In practice, most representatives in the Rep Offices are foreign employees of the parent company who need the title of “representatives” to obtain the visas and work permits in China. The Notice will effectively restrict the number of foreign employees a foreign company may assign to China through its Chinese Rep Offices.
“Foreign” Documents Should be Notarized and Verified
The Notice also requires the local administration for industry and commerce (“AIC”) to strictly enforce the legal requirements for notarizing and verifying legal documents issued outside China.
According to the Notice, when setting up a Rep Office or changing the name of a Rep Office, the applicant should submit (i) official incorporation documents evidencing that the parent company has existed for two years5 or more; and (ii) recommendation letters issued by a financial institution which has business relationship with the parent company. These documents must be notarized and then authenticate by the Chinese embassy or consulate in the relevant country. This process, which in the U.S. requires interaction with state authorities and the U.S. Department of State, as well as the Chinese embassy, can take more than a week, even when things move efficiently.
The Registration Certificate Will be Effective for Only One Year
According to the Administrative Measures on Registration of the Resident Representative Offices of Foreign Enterprises6, the Registration Certificates for Rep Offices should be effective for one year. However, in practice, the Registration Certificates issued by AICs could have effective terms of 3-10 years.
After the Notice took effect, AICs can now issue only one-year-effective Registration Certificates for Rep Offices. For those Registration Certificates with effective terms of more than one year, AICs will change the Certificates when the relevant Rep Offices apply to change or extend their registration.
It is advisable for all the Rep Offices in China and their respective foreign parent companies to be aware of the above changes and comply with the new requirements when setting up new Rep Offices or changing the registrations of existing Rep Offices. On balance, the Notice makes the Rep Office a less flexible and more limited form of doing business. It may make early consideration of the establishment of a wholly-foreign-owned-enterprise (China’s version of a wholly owned subsidiary) more necessary.