Establishment of a Representative Office

Establishment of a Representative Office The Representative Office (RO) is one of the common business vehicles through which a foreign company can establish their first presence in China. The relative simplicity and comparatively short time frame required to establish such an office is the main reason for its popularity. A Representative Office (RO) is a relatively low risk initiative in comparison to alternative market entry vehicles, allows a certain level of control over China business activities through the employment of staff, and is often taken by foreign companies as the first step in developing full commercial operations in China. A China Representative Office is not an independent PRC legal entity, but rather a liason between the headquarters of the foreign enterprise overseas and Chinese government agencies, trade organizations and prospective Chinese business partners. The parent enterprise will be legally responsible for the activities of its representative office. For foreign companies looking to sell into the China market, a RO allows foreign companies to become familiar with the market, particularly the demand for their products and services and specific requirements of local customers. A RO further allows foreign companies to promote their brand and start to develop key relationships. Finally, a RO allows foreign companies to better understand the operations side of business in China, including costs, procurement, laws & regulations and market practices. Foreign companies procuring goods in China also use ROs, with the RO handling sourcing and quality control, complemented by a Hong Kong or FTZ Trading Company that handles the actual trading activities. As a practical matter, it is necessary to establish a formal Representative Office for a foreign company to do the following in China: Open a office and display signs with the company s name or using a company chop; Lawfully employ Chinese nationals; Open business bank accounts; Obtain multiple entry visas from the Chinese Consulates overseas; Import office equipment and supplies; Import personal effects of resident company representatives; Use business cards showing local contact information. Representative Offices are prohibited from engaging in direct business operations and violations may result in fines and closure of the office. In practice, actual fines and sanctions are somewhat discretionary and determined on a case-by-case basis. There is no precise definition of direct business operations. However, it is clear that the Representative office, as it is not a legal entity, not have the legal standing to directly enter into contracts with other entities on behalf of its parent enterprise. Special restrictions apply with respect to representative offices of financial institutions and other restricted categories of business. The apparent intention of limiting representative offices to non-direct business activities is to ensure that the representative offices act on behalf of the foreign-based companies they represent and not on their own behalf as separate business entities. Thus contracts (other than those relating to its own administration, such as its office lease) should be signed in the name of its parent enterprise or one of its affiliates and should also show an address outside China for the relevant foreign party. Any sale and subsequent billing and collection of money for technical, consulting, inspection, or other services should similarly be carries out by the parent enterprise. A representative office may only engage in activities within its registered business scope. The following types of activities within the business scope of the parent enterprise are permissible: 1

(a) conducting business liaison for the parent enterprise; (b) introduction of products; (c) market research; and (d) technological exchanges in China. In our experience, a representative office also coordinates visits and exchanges of personnel, and conducts negotiations on behalf of its affiliate companies/parent enterprise in the PRC. Figure 1 Commercial Representative Office Flow Mother Company Operational issues: Rep. Office: Sales Contracts Invoices in USD/ Euro, LOC, etc... China Rep. Office Distribution Agreement Invoices USD/ Euro Sales Contract, LOC, etc No invoicing (from HQ). All cash payments to HQ. All contracts to HQ. Sales Coordination Logistics & Warehousing Coordination Promotion & B. Development Import / Export Company Warehouse Import / Export Company Distribution network Regional Distributor Store Store Store Store I. Application and establishment process of a China Representative Office The foreign company applying to establish the RO must comply with a number of stipulated establishment criteria. In particular, the applicant must (i) be lawfully registered in its home country; (ii) enjoy a good business reputation ; (iii) provide authentic and reliable documents as required by the relevant laws and regulations; and (iv) handle the relevant establishment procedures in accordance with the relevant laws and regulations (approval and registration). Furthermore, the relevant government approval authorities may also insist that the applicant has been in business for a specified period of time (usually one year) and may also wish to see evidence of prior business dealings between the applicant and China. These requirements are generally flexible and can usually be met by the applicant with careful preparation. In May 2004, China s foreign RO regulations (relating the establishment, change and termination procedures) were simplified for most industries. The previous two-step application and registration process was consolidated into a one-step, only requiring the involvement of one government body. 2

The previous Two-Step Application Process needed first the preparation and filling of the application materials and then handle them to the local government foreign trade departments authorized by the Ministry of Commerce (MOFCOM, formerly MOFTEC) for approval. Once approval has been obtained, the second step involved undertaking registration procedures with the local State Administration of Industry of Commerce (SAIC). With the 2004 introduced one-step process, it s the local SAIC that handles both the application and registration. Without such approval and registration, a foreign enterprise is not permitted to establish a representative office, or engage in the related activities, within the PRC, and the foreign enterprise may be fined and/or ordered to terminate its business activities. There is no need to have an accredited Chinese agent (excluding Shanghai) to do the application of RO registration, anybody can submit the application to the Administration of Industry and Commerce. But because of the special documents requirement, the application could be returned several times, resulting in coming and going for a long time. In reality, although it's not a request to do the registration through a designated foreign-service unit, it s better to use an accredited Chinese agent in order to get a successful registration and save time. In Beijing the cost charged by FESCO for RO registration is about RMB11,140 and in Shanghai about RMB 10,000. In general, the application and registration process requires about a 2 weeks period, and the whole Representative office set out usually takes about 2 months-period. Figure 2 Representative Office Application & Registration Procedure I. Application & Registration Local Administrative Bureau of Industry and Commerce Time Required About 2 weeks, depending on local regulations II. Other Registration Formalities About 2 months Public Security Bureau Administration for Code Organization Statistics Bureau Bank and Administration for Foreign Exchange Taxation Bureau Customs The change in China s foreign RO regulations affected foreign companies engaged in manufacturing, trading, consulting, contracting, advertising, investing, leasing and goods transportation agency (including freight forwarding). More tightly regulated industries, where ROs have been subject to approval by a ministry or a bureau other than MOFCOM, won t be impacted by this change. Exceptions are in the securities industry, where the registration no longer requires approval by the China Securities 3

Regulatory Commission (CSRC), and in the insurance industry, where the registration no longer requires approval by the China Insurance Regulatory Commission (CIRC). Table 1 Tightly Regulated Industries and Relevant Approval Bodies Industry Manufacturing and trading Telecommunications and IT Banking and finance Insurance Legal Accounting Airlines Media and Entertainment Approval Authority MOFCOM (Or its designated local authority) Ministry of Information Industries (MII) (Or its designated local authority) People s Bank of China (PBOC) China Insurance Regulatory Commission (CIRC) Ministry of Justice (MOJ) Ministry of Finance (MOF) Ministry of Civil Aviation (MCA) Ministry of Culture (MOC) Faster processing can be expected under the new one-step registration procedure. However, actual implementation of this change in China s foreign RO regulations has not been immediate. The main documents required to be submitted in connection with the application for the establishment of a foreign party s representative office are the following: a) an application letter signed by the chairman of the board of directors or the general manager (original document); b) the constitutional documents and supportive documents sanctioning the legal incorporation and operation (e.g. incorporation certificate, annual report, and tax statements) by the authorities of the relevant jurisdiction where that the foreign party was established (notarized copies); c) a credit reference letter from a bank with which the foreign party has regular business contact, advising on the credit-worthiness (notarized copies); d) letters of appointment of the chief representative (i.e. the person held in charge of the representative office at law) and other representatives signed by the chairman of the board of directors, or general manager with their respective CV s and identification papers (original documents). If the chief representative is the chairman of the board, the letter of appointment must be signed at least two directors of that foreign party. If the chief representative is a PRC national a special approval letter by the designated foreign service unit (FESCO tec.) in favour of such chief representative has to be submitted with the application (which will often require the foreign Sponsor to enter into a service agreement with FESCO) e) a lease contract (with more than 1 year period) showing the address of the representative office and the relevant title documents. Relevant local Chinese approval authority may require additional documents. While the maximum term of a representative office is three (3) years from the date of issue of the certificate of approval, the registration certificate is valid for one (1) year, and will have to be renewed annually. To renew its registration, a representative office must submit to the Chinese registration authority an application for renewal and an annual report of its business operations (in Chinese), within thirty (30) days prior to the expire date. In our experience, extensions of the term of a representative office are fairly routine. II. Post Establishment Registration and Filing Procedure After a foreign enterprise's representative office ("RO") is approved and has received its Registration Certificate, PRC laws and regulations require the RO, and in certain cases, its personnel, to carry out 4

certain administrative registrations and filings. The standard post-establishment procedures prescribed by the national authorities are set out below. 1. Local Public Security Bureau ( PSB ) ( 公 安 局 ) 1.1 Filing and Registration Record ( 备 案 登 记 簿 ) Within 10 days of the issuance of the Registration Certificate, the RO is required to file with the competent local PSB: (a) the Approval Letter; and (b) the Registration Certificate The PSB will issue a Filing and Registration Record ( 备 案 登 记 簿 ). 1.2 Office Chops The RO is further required to apply for office chops with the competent local PSB, and has to provide the following documents: (i) Application letter signed by legal representative; (c) Filing and Registration Record; and (d) 1 original and 1 photocopy of personal identification or passport ("ID") of individual(s) authorized (a simple introduction letter of the Company would suffice) to apply to make the chop. The PSB will allow the RO to have the chops made at a designated unit. 2. Local technical supervision bureau ("TSB") ( 质 量 技 术 监 督 局 ) The RO has to apply for the Enterprise Organization Code with the competent local TSB, and has to provide the following documents: (i) Application form; (ii) Registration Certificate, 1 original and 1 copy; (iii) 1 copy of ID of the chief representative of the RO; (iv) Approval Certificate; and (v) Office Chop. The competent local TSB will issue a Certificate of Enterprise Organization Code ( 组 织 机 构 代 码 证 ) (also referred to as "IC Card"), providing 1 original, 1 copy and 1 electronic copy. 3. Local administration of foreign exchange ("Safe") ( 地 方 外 汇 管 理 局 ) The RO has to register with the competent local Administration of Foreign Exchange. The following documents have to be submitted for such registration: (i) Registration Form; (ii) Registration Certificate; (iii) Approval Letter, Approval Certificate; (iv) Certificate of Enterprise Organization Code; and (v) Office Chop. The AFE will issue (i) a Foreign Exchange Account License ( 外 汇 帐 户 开 户 许 可 证 ) and (ii) a Foreign Exchange Registration Certificate ( 外 汇 登 记 证 ). 4. Local bank The RO is required to open an Renminbi (RMB, official currency of China) and a foreign exchange bank account. The following items are required: (i) Registration Certificate; (ii) Approval Certificate, Approval Letter; (iii) Certificate of Enterprise Organization Code; (iv) Foreign Exchange Account License; (v) Foreign Exchange Registration Certificate; (vi) Evidence of Tax Registration; (vii) the Office chop, finance chop and the chief representative's chop; 5

(viii) ID (1 original and 1 photocopy) of the legal representative; (ix) Introduction letter of RO; and (x) ID (1 original and 1 copy) of each individual of the Company's finance staff that is authorized to open accounts. The bank will issue account books for (i) a foreign exchange account and for (ii) a RMB account. 5. Local tax bureau ( 地 方 税 务 局 ) The RO has to register within 30 days of the issuance of the Registration Certificate with the competent local Tax Bureau. It needs to submit the following documents: (i) Registration Certificate; (ii) Approval Letter; (iii) Evidence of Bank Account (account book); (iv) Certificate of Enterprise Organization Code; and (v) ID of the individual filing the application. The competent local Tax Bureau will issue (i) a local Tax Registration Certificate ( 地 税 登 记 证 ) and (ii) a State Tax Registration Certificate ( 国 税 登 记 证 ). 6. Local customs bureau ( 海 关 ) The RO is required to register with the local Customs Bureau and has to provide the following: (i) Registration Certificate. (ii) Approval Letter; (iii) Certificate of Enterprise Organization Code; and (iv) any other documents Local Customs Bureau may require. The competent local Customs Bureau will issue a Customs Registration Certificate( 海 关 登 记 证 ). 7. Procedures in regard to foreign employees ROs that plan to employ foreign nationals are required to comply with the following procedures: (a) Directly obtain the Work Permit ( 中 华 人 民 共 和 国 外 国 人 就 业 许 可 证 书 ) from the local Labour and Social Security Bureau ("LSSB") on submission of the following documents: (i) Curriculum Vitae of the prospective foreign employee; (ii) Employment Proposal; (iii) Report on the reason of employing a foreign person for the job; (iv) The prospective employee's qualification for the job; (v) Health status of the prospective employee; (vi) Employer's business Approval Certificate; (vii) 5 passport photos (2 inch sized); and (viii) any other documents required by PRC laws and regulations. (b) Apply for a Working Visa from the Chinese Embassy in the proposed foreign employee's home country. (c) Within 15 days after the foreign employee arrives in China, he/she shall apply to obtain the Working Certificate from the local LSSB on submission of the following documents: (i) Work Permit; (ii) Employment contract; (iii) Passport; and (iv) 5 passport photos (2 inch sized); (d) Within 30 days after the foreign employee arrives in China, he/she shall apply to the local PSB for a Foreigner Resident Permit ( 外 国 人 居 留 证 )on submission of the Working Certificate. 6