China’s crackdown on representative offices

China has introduced unprecedented restrictive measures on representative offices of foreign companies. Nicolas Groffman looks at the ramifications of the new laws. 

On January 4, 2010 China’s State Administration for Industry and Commerce (“SAIC”) and the Ministry of Public Security (the “Police”) jointly issued the Notice on Strengthening Administration for Registration of Foreign Enterprises Resident Representative Institutions (the “Notice”).

SAIC has in the recent past expressed its concerns over non-compliance by foreign representative offices. According to certain SAIC investigations, a large number of foreign representative offices engage in business activities where they are not permitted to do so. Moreover, non-compliance in registration requirements are common.

(There is evidence to suggest that administrative non-compliance in the past had the tacit consent of local branches of the SAIC, because local governments often had targets for foreign establishment and potential investment in their jurisdictions.)

The Notice aims to end leniency and introduces new compliance requirements.

IN SUMMARY, THE NOTICE PROVIDES:

1. Stricter Registration Requirements

These include:

• offshore company must have been in existence for at least two years;

• a certificate of incorporation and a capital credit certification, both of which must be notarized by a public notary in the company’s home country and legalized by the Chinese embassy or consulate there;

• current proof of existence of offshore company must be provided.

2. One Year Term

The Notice reiterates a unified term of registration being one year. It further notes that any representation office currently registered for more than one year will be limited to the one year term when it applies for renewal or amendment to its registration certificate.

3. Restriction on the Number of Representatives

The Notice imposes a limit on the number of representatives to four (including the chief representative). For those representative offices with more than four representatives, they will not be immediately required to reduce the number of representatives, but they will not be allowed to replace any outgoing representatives in excess of the quota.

4. Enhanced Scrutiny on Operations The Notice also urges the relevant authorities to crack down on any irregularities and illegal activities carried out by representative offices. Local AICs are required to conduct on-site spot checks within three months of registration.

5. Strengthen Co-ordination amongst Authorities The intention is evidenced by the fact that the Notice is jointly issued by SAIC and the Police. AICs are required to work closely with local Police to deal with any violations. In general, the Notice signals the government’s intention to “clean up” foreign representative office operations and to take stricter action with anything that smells of non-compliance.

The stated motivation is to strengthen the administration of representative institutions and maintain market economic order. In practice, this is going to force companies with large scale representative offices to set up companies (joint ventures or wholly foreign owned enterprises).

Some commentators see this as part of an effort to limit the number of foreigners working long-term in China, since the restriction applies mainly to foreigners. This is not an unreasonable view, because any foreigners working for a representative office must be registered as “representatives”.

Chinese employees, however, need not be registered as representatives (unless serving as chief representative), and so one way of dealing with the restriction is to hire more Chinese to replace foreigners. Since the early 1980s there has been no limit on the number of representatives allowed, and many foreign companies have set up representative offices with far more than four representatives.

The Notice will now force those companies that legitimately need more representatives to consider setting up larger numbers of entities in China, or at least establishing a corporate presence in China. Some other commentators regard this as the government’s effort to recoup lost tax revenues from those foreign enterprises carrying out profitable business activities in China using a tax exempted vehicle such as a representative office.

The Notice also stresses the term of a representative office certificate is limited to one year.
In the past, the one year registration period has been largely ignored by the local AICs. Registration certificates for foreign representative offices have been issued by local AICs according to their own practices ranging from three to five years or even up to 10 years. Previously, for example, Shanghai allowed registration for several years as a matter of policy, but we understand from the Shanghai AIC that the Notice now prevents this.

It is anticipated that SAIC will amend the existing Administration Measures on the Registration of Foreign Enterprises Resident Representative Institutions (promulgated by SAIC in 1983) later this year which will provide more detailed information and requirements on the subject matter.

*Nicolas Groffman is a partner with Mallesons Stephen Jaques’ Beijing office. Nicolas is qualified as a solicitor in England and Wales and speaks fluent Mandarin. He has been practising in China for over 10 years.

 

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