February 9, 2010
Previously published on February 1, 2010
The State of Administration of Industry and Commerce (“SAIC”) and the Ministry of Public Security (“MPS”) recently issued a Circular on Further Strengthening Administration of Foreign Enterprises' Permanent Representative Offices ("Circular"). The Circular states that authorities have discovered that the representative offices of some foreign companies operating in China have been engaged in unlawful practices, including changing registration particulars without proper filing, filing fake documents and operating beyond their approved business scope. The purpose of the Circular is to make sure that the local branches of the SAIC and MPS enforce the law properly so as to eliminate such unlawful practices and to limit the number of foreigner registered as representatives in such offices.
Most of the provisions in the Circular are a reiteration of the existing laws and regulations but the Circular does impose some new requirements with respect to the registration and operation of representative offices:
1. Documents required for establishment of representative offices
The Circular requires that a foreign company must produce notarized and legalized copies of its certificate of incorporation which show that the foreign company has been incorporated for at least two years. Notarized and legalized copies of a foreign company's certificate of incorporation have long been required for the registration of foreign representative offices in China but previously there was no requirement to prove that the foreign company had been incorporated for at least two years. This means that now a foreign company which has been incorporated for less than two years will no longer be able to set up a representative office in China.
2. Term of representative offices' business registration certificates
Under national regulations, a representative office's business registration certificate shall be valid only for one year and shall be renewed each year. However, in some places in China such Shanghai, the local AIC branches do issue representative offices business registration certificates with a term of three years. The Circular requires that local AIC branches must strictly follow the national regulations and issue representative offices' business registration certificates with a term of only one year. This will increase the costs of maintaining a representative office in China because the representative office will have to file for renewal of its registration certificate each year.
3. Renewal of representative offices' business registration certificates
Under the Circular, where an existing representative office applies for renewal of its business registration certificate, it must produce documents to show that its head office outside China remains in existence. This was not required previously and will complicate and increase the expense of renewing a representative office's business registration certificate.
4. Number of representatives
Previously there were no restrictions on how many representatives a representative may register with the SAIC. However, the Circular has changed this practice and now in principle a representative office is not allowed to register more than four representatives (including the Chief Representative). This will cause difficulties to foreign companies which need to have more than four expatriates based in a representative office in China.
5. On-site inspection
The Circular requires that local AIC branches must conduct an on-size inspection of a newly established representative office within three months after the representative office gets its business registration certificate. The purpose of this is to ensure that representative office's registration particulars are consistent with what have been filed with the SAIC.
Although most of the requirements of the Circular are not new, the enhanced scrutiny of the operation of foreign representative offices in China and the additional burdens of registration and renewal imposed by the Circular will lengthen the time and increase the cost of operating a representative office in China.
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