The co-writer, Katrina McDermott, is a junior at the University of Pennsylvania in the United States and majoring in International Relations. During summer 2020, she was an intern at Yingke Law Firm.
In recent years, due to the sustained and rapid growth of China’s economy, more and more foreign investors are optimistic about its future development and have established business ventures in China. Many of these business ventures have set up a representative office. The resident representative body of a foreign enterprise (the “representative office”) is one of three ways foreign enterprises can exist in China. The three forms are the following: (1) representative office, (2) a branch of a foreign enterprise (3) an independent, Chinese company that is a subsidiary of a foreign enterprise. Only the third form is a separate legal entity from the enterprise under Chinese law. In order to steadily promote investment projects, many foreign enterprises first set up a representative office in China and increase investments after becoming familiar with the market and business environment. Then, (1) the enterprise will formally apply to engage in production and business activities through a branch office or (3) set up subsidiary in China. This article will briefly describe how a foreign enterprise can set up a resident representative office in China.
Article 2 of the Regulations on the Registration and Administration of Resident Representatives of Foreign Enterprises (revised in 2018 and hereinafter referred to as the “Registration Regulations”) stipulates that the resident representative offices of foreign enterprises are offices established by foreign enterprises in accordance with the provisions of these Registration Regulations to engage in nonprofit activities related to the business of foreign enterprises within the territory of China. The representative office is not qualified as a legal entity.
Because the representative office is not a legal entity, its civil liability is borne by the foreign enterprise that established the representative office.
Article 13 of the Registration Regulations stipulates that a representative office shall not engage in profit-making activities. If there are other provisions in international treaties and agreements concluded or acceded to by China, those provisions shall prevail, except for the clauses on which China has declared reservations.
Article 14 stipulates that a representative office may engage in the following activities related to the business of a foreign enterprise: (1) market research, display and publicity activities related to the products or services of foreign enterprises; (2) liaison activities related to the sale of products, service delivery, domestic procurement and domestic investment of foreign enterprises. If the administrative regulations or the State Council requires approval to carry out the business activities specified in the preceding paragraph, approval shall be obtained. In summary, representative organizations may not engage in profit-making activities unless otherwise stated in international treaties and agreements concluded or acceded to by China.
Article 2 of the Interim Provisions of the State Council of the People’s Republic of China on the Administration of Resident Representatives of Foreign Enterprises (“Interim Provisions”) stipulates that if a foreign enterprise needs to set up a resident representative office in China, it must apply for approval and go through the registration procedure. Without approval or registration, no resident business activities may be carried out. Article 4 stipulates that it should be submitted to the relevant competent committees, departments or ministries for approval in accordance with the nature of the business.
However, general industries do not need approval before setting up a registration office rather they only need to register at the administrative office, while special industries need approval before registration. Special industries refer to industries such as publishing, radio, film and television, banking, securities, insurance, air transport, legal services for lawyers, etc. These special industries need to be approved by the laws, administrative regulations or the State Council before establishing a representative office.
Article 23 of the Registration Regulations stipulates that a foreign enterprise which needs approval from registration authorities shall apply to the registration authority for the establishment of registration within 90 days from the date of approval and submit the relevant approval documents.
The Notice of the Shanghai Municipal Administration of Industry and Commerce on the Direct Registration of Resident Representatives of Some Foreign (Regional) Enterprises stipulates that from July 1, 2004, the establishment of resident representative offices of foreign (regional) enterprises must entrust a company with an independent registration agency qualifications to handle the relevant registration procedures on their behalf. At present, this stature is still active and valid.
The Beijing Municipal Market Supervision Administration issued a 2019 edition of the application for registration of the establishment of a resident representative office of foreign (regional) enterprises that clearly states a representative or employee of the enterprise or a lawful registration agency representative can handle the registration procedures of resident representative offices of foreign enterprises.
In summary, representative office established in the city of Shanghai still needs to entrust a company with agency qualifications to go through the relevant registration procedures on its behalf. On the other hand, representative offices in Beijing can be registered by either an independent agency or the enterprise. In other cities, there is no clear regulations on who should complete the registration procedure most likely since representative offices are commonly set up in Beijing and Shanghai.
Article 3 of the Provisional Provisions stipulates that when a foreign enterprise applies for the establishment of a resident representative office in China, it shall submit the following documents and materials: first, the application signed by the chairman or general manager of the enterprise including the name of the resident representative’s office, the person in charge, the scope of business, the duration of residence, the place of residence, etc.; in addition, enterprises within the financial industry and insurance industry must also submit the annual report on the capital, profits and losses of the head office, the articles of association of the organization and a list of the board of directors.
Article 23 of the Registration Regulations stipulates that a foreign enterprise applying for the establishment of a representative office shall submit to the registration authority the following documents and materials: (1) the application for registration of the representative office; (2) the certificate of residence of the foreign enterprise and the legal business certificate that must have existed for more than 2 years; (3) the foreign enterprise’s articles of association or the organization agreement; (4) the appointment documents of the chief representative and representatives of the foreign enterprise; (5) the certificate of identification and resume of the principal representative; (6) certificate of capital credit issued by financial institutions that have business dealings with the foreign enterprise; and (7) the certificate of legal use where the representative office is located.
In accordance with the principle that the new law is superior to the old law and the special law is superior to the general, the provisions of the Registration Regulations shall prevail over the laws implemented in 1980, even though the 1980 laws are still in effect.
Article 23 of the Regulations on the Administration of Registration stipulates that if the establishment of a representative office requires approval from the law, administrative regulations or the State Council, the foreign enterprise shall apply to the registration authority for the establishment of registration within 90 days from the date of approval and submit the relevant approval documents.
Article 24 stipulates that the registration authority shall, within 15 days from the date of accepting the application, make a decision on whether or not to grant registration and may solicit opinions from relevant departments as needed before making a decision. If a decision is made to grant registration, it shall issue a registration certificate and a representative certificate to the applicant within 5 days from the date of the decision. The date of issuance of the registration certificate is the establishment date of the representative office. If the decision is made not to register, a rejection notice shall be issued to the applicant within 5 days from the date of the decision and explain the reasons for the rejection.
If the business scope of the foreign enterprise belongs to general industries, the enterprise can register first and then apply for examination and approval later in the process after receiving registration. If the business scope belongs to special industries, the enterprise should apply for examination and approval first, and then apply for registration within 90 days after approval.
To sum up, the process of setting up a representative office is as follows: 1. apply to the relevant competent department for approval (if required); 2.apply for registration within 90 days after approval (if any); 3. make a decision on whether to approve the registration within 15 days; 4. grant registration and issue a registration certificate and a representative certificate within 5 days or issue a rejection notice.
Other specific documents and items needed for establishment registration include engraved official seal, foreign exchange license, tax registration, customs registration, employment permits for foreign representatives, residence permits for foreign representatives, work visa for foreign representatives, etc. After approval from the registration office, the registration process ends, and the representative office will be granted a registration certificate of resident representative offices of foreign (regional) enterprises (referred to as registration certificate) and the representative certificate of resident representative offices of foreign (regional) enterprises (referred to as representative certificate).
Article 11 of the Provisional Provisions stipulates that when a resident representative office rents a building or hires staff members, it shall entrust the local foreign affairs service unit or other units designated by the Chinese government to handle it.
Violation of this provision will result in the lease contract and employment contract being voided for violating the mandatory provisions of the laws and regulations. In judicial practice, a large number of cases have found that labor contracts signed by the representative office directly with laborers without the relevant foreign affairs service unit is invalid according to this provision.
For example, on September 3, 2019, the intermediate people’s Court of Nanjing City, Jiangsu Province made the (2019) Su 01 Minzhong No. 6723 judgment.
Completing these seven steps and knowing the relevant laws and regulations is critical to the success of establishing foreign enterprise in China. And this article is a very simplified summary of this process and does not capture the full complexity of the process. Additionally, laws and regulations are often updated and revised. Therefore, it is highly recommended to seek out Chinese legal counsel with extensive knowledge and experience with Chinese foreign enterprises.
Laws and regulations referenced: