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China Tightens the Regulations of the Representative Offices of Foreign Enterprise
The State Council released the Regulations on the Administration of Registration of Resident Representative Offices of Foreign Enterprises (the "Regulations") on 19 November 2010 to tighten the regulation of the Representative Office ("RO") registrations effective from 1 March 2011. This is aimed to replace the prevailing Measures for the Administration of Registration of Resident Representative Offices of Foreign Enterprises that were approved by the State Council on 5 March 1983. Taxand China analyses the regulations provided in the detailed regulation measures.
Emphasise that ROs cannot engage in any profitable activities
According to The Regulations, ROs may engage in the following activities in connection with the business of the foreign enterprises:
- market investigation, display, publicity activities in connection with the products or services of foreign enterprises
- liaison activities in connection with the products sales, services provision, domestic procurement and domestic investment of foreign enterprises
The Regulations specifically states that ROs cannot engage in any profitable activities if not otherwise prescribed by international conventions or agreements concluded or participated in by China. Violation against the Regulations would lead to an administrative penalties of more than RMB50,000 but no more than RMB 500,000, and relevant gains and tools, equipment, raw materials, products (commodities) and other property that are specially used for engaging in profitable activities would be confiscated. In serious cases, the Registration Certificate would be revoked.
Prescribe annual reporting obligations on ROs
The ROs shall provide an annual report to the registration authorities (i.e., the in-charge Administration of Industry and Commerce) between 1 March and 30 June. The content of this annual report will include the status of legal incorporation and existence of the foreign company, the business operation of the RO, as well as information on the expenses and receipts and payments of the RO audited by a PRC CPA firm.
Provide specific administrative measures that competent authorities might take during the administration procedures
When investigating the activities of the ROs that are suspected of a violation of the Regulations, the registration authorities may legally exercise the following duties and responsibilities:
1. To investigate and understand the situation from relevant entities and individuals
2. To consult, copy, seal up and/or detain the contracts, documents, account books and other materials in connection with the activities in violation of the laws
3. To seal up or detain the tools, equipment, raw materials, products (commodities) and/or other property that are specially used for engagement in illegal activities
4. To inspect the accounts and the accounting vouchers, account books and statements of account in connection with the savings of the ROs that engage in illegal activities
The Regulations prescribe new provisions on the registration of RO and operations terms that the foreign enterprises shall provide a legal certificate that proves the foreign enterprise has been incorporated for more than two years as the Articles of Association or Organisation Agreement along with other application documents in the establishment process.
New provision on the qualification of Chief Representative and Representative
The following persons may not be appointed as Chief Representative or Representatives of the RO:
- those who are sentenced due to being detrimental to the national security or social pubic benefits of the People's Republic of China
- those who are Chief Representatives or Representatives of the ROs that have been legally revoked, cancelled or ordered to close by relevant departments due to committing any type breach activity that is considered to be detrimental to national security or social public benefits of China and are less than five years old since the date of such revocation, cancellation or order
- The maximum number of Chief Representatives or Representatives is 4. For existing ROs with representation of more than 4, the representative can work till their current work permit expires
- New provisions also require that the registration matters of ROs will be a matter of public record
The Regulations indicate that the government authorities will put more emphasis on the administration of ROs which will be taken into consideration for multinational enterprises who have ROs in China or contemplate to setting up ROs in China. RO is not a welcomed form of investment in comparison to setting up a Foreign Investment Enterprise in China.
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