New rules add burdens on foreign rep offices
December 14, 2010 | BY
clpstaff &clp articles &Government prefers alternate forms of investment
Foreign companies with interests in China should re-evaluate various investment options and avenues in light of new PRC regulations regarding foreign companies' representative offices.
On November 25, the State Council published the Regulations for the Administration of the Registration of Resident Representative Offices of Foreign Enterprises (国务院外国企业常驻代表机构登记管理条例).The scope of the rules encompasses the administration and registration of representative offices of foreign companies excluding those of Non-governmental organisations (NGOs), law firms, insurance firms, and accounting firms.
While the regulations are not expected to come into effect until March 2011, Hong Kong-based Gide Loyrette Nouel partner Rebecca Silli warns that local authorities may begin to implement these rules before the date. When considering foreign representative offices, she advised: “Foreign companies need to pre-empt problems arising from the rules and plan strategy in China from a longer-term perspective.”
Silli explains that the new rules are a sign and method of Chinese authorities limiting the use of representative offices by foreign companies. Instead, they prefer that foreign companies invest into the country through corporate subsidiaries in the form of a wholly foreign-owned enterprise.
There are a few key changes foreign companies should be aware of, says Silli. One change is that the regulations stipulate that representative offices need to be established by companies in operation for at least two years.
While this particular regulation was already a requirement under a January 2010 notice, “it is clear that all foreign companies, which is now defined to include those companies in Hong Kong, Macau and Taiwan, now have to comply with this requirement,” said Silli.
Another change is the shift from a three-year term of registration to a single-year term of registration through the new requirement of an annual review. “This change represents additional administrative and financial burdens on foreign companies to maintain their representative offices,” said Silli.
A third notable change is the limiting of the number of foreigners working in these offices to four representatives, which will affect the operational scope of each of these offices.
The new legislation restricts activities of representative offices to performing market surveys, product or service display and promotion and liaising on behalf of their parent companies. The new rules emphasise and reaffirm previous regulation that these offices may not engage in profit activity. JK
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