China Issues New Rules Governing Representative Offices

The PRC government recently announced new rules and policy changes that affect the registration and operation of foreign representative (rep) offices in China. The new rules, issued jointly by the State Administration of Industry and Commerce (SAIC) and the Ministry of Public Security, could significantly affect how foreign companies structure their rep offices in China and may create human resources challenges for existing rep offices.

Staffing restrictions

Released on January 4 and effective immediately, the Notice on Strengthening the Administration of Foreign Enterprise Representative Office Registration changes a few requirements for rep offices in China. The new notice states that rep offices may employ up to four foreign representatives, including the chief representative. Previously, there were no limits on foreign representatives. The notice does not clarify whether rep offices that currently employ more than four foreign employees must reduce the number. Anecdotal reports, however, suggest that rep offices may not have to cut foreign employees immediately. But if a rep office that has more than four representatives releases one of its representatives and wants to recruit a replacement, it will likely be unable to do so.

The notice also requires that the overseas headquarters be established in its home market for at least two years before setting up a rep office in China. (There were no minimum time requirements under the old rules.) In addition, the notice reduces the validity periods of rep office registration certificates from three years to one year.

Greater administrative hurdles?

Previously, rep office licenses were valid for up to three years. The new rules require rep offices to renew their registration certificates annually, which places added cost and administrative burdens on companies. Existing SAIC regulations require rep offices to produce attested incorporation documents that verify their overseas headquarters’ existence each time these offices apply to renew their registration certificates in China. These documents must also be notarized by the PRC embassy or consulate general that has authority over the headquarters’ jurisdiction of incorporation. In addition, the financial institution that handles the headquarters’ corporate banking in the company’s home country must submit a statement that confirms the company’s financial soundness. All of these documents must be translated into written Chinese by a SAIC-appointed translation company before they are submitted to a local administration of industry and commerce (AIC) branch.

According to the new notice, SAIC will honor all registration certificates (even those whose validity periods exceed one year) that were issued prior to the notice’s January release. Subsequent registration certificate renewals will be valid for only one year.

Increased scrutiny

Current SAIC regulations forbid rep offices to conduct profit-making business activities, such as sales, in China and generally limit them to conducting market research and sourcing functions and facilitating market entry on behalf of their corporate headquarters. To ensure compliance, the new notice authorizes AICs to inspect rep offices within three months of receiving their registration certificates. If AIC inspections discover that a rep office has engaged in direct business operations outside the scope of PRC law, the office may be subject to administrative fines. Moreover, if an AIC finds that a rep office has moved without updating its registered business address or has not followed the legal requirements governing rep office registration, its transgression may be placed into the “enterprise credit classification and supervision system,” which SAIC created in 2003 to track the credit information of enterprises across China.

[author]This article is adapted from a report that first appeared in China Market Intelligence, the US-China Business Council’s (USCBC) members-only newsletter. To find out more about USCBC member company benefits, see www.uschina.org/benefits.html.[/author]