Foreign Direct Investment

This overview briefly sets out the law and procedures relating to the registration and operation of a resident representative office ("representative office") by a foreign enterprise in the People's Republic of China ("PRC" or "China"). The information contained herein is based upon our working experience with and understanding of relevant PRC legislation which is publicly available as of 1 January 2008.


This overview is not intended as an exhaustive discussion of the establishment and operation of a representative office in the PRC, but rather to provide general information for reference purposes. As Chinese law is evolving rapidly, readers are advised to seek further information and legal advice when considering the establishment of a representative office in the PRC.

INTRODUCTION

Many foreign enterprises have established representative offices in China as the first step of their entry strategy into the country. Through a representative office, a foreign enterprise can engage in a limited range of activities which may form the basis for the enterprise to become further involved with China.

Representative offices of foreign enterprises generally need only to be registered with local authorities in order to be established. Prior establishment approval is required for representative offices in certain industries.

A representative office is not a separate legal entity. It does not possess registered capital and only requires the injection of minimal funds at the outset. Furthermore, unlike in many other jurisdictions, representative offices in China are usually not tax exempt.
 

APPLICABLE LEGISLATION

The main legislative provisions governing the establishment and operation of representative offices in the PRC are:

the Provisional Regulations of the PRC State Council Concerning the Administration of Resident Representative Offices of Foreign Enterprises; and
the Measures of the State Administration for Industry and Commerce Concerning the Administration of the Registration of Resident Representative Offices of Foreign Enterprises.
Additional rules apply to representative offices of foreign enterprises which engage in particular industries or business sectors such as financial institutions, insurance institutions, and securities organisations. These State-level provisions have further been supplemented by local regulations and practice.


PERMISSIBLE ACTIVITIES

Representative offices in the PRC are prohibited from engaging in "direct business activities". Our discussions with relevant Chinese authorities indicate that "direct business activities" include such activities as direct sales, production and manufacturing. A representative office may be fined or ordered to cease operations if it has violated the prohibition to carry on direct business activities.

In practice, the activities in which a representative office may engage include, without limitation:

liaison with potential Chinese customers on behalf of its overseas head office and other companies;

hosting of delegates from its head office;

liaison with Chinese government organisations;

collection of data and appointment of local market study organisations to undertake market surveys for its head office;

promotion of trade name;

market research and business development; and

management of warranty and after-sale services.
 

ESTABLISHMENT PROCEDURE

The process for setting up a representative office differs depending on the industry sector of the head office. If the representative office is established by a trading company, a manufacturer, a contractor, a consultancy company, an advertising company, an investment company, a leasing company, a rail freight operator, a freight forwarder, a tobacco company or other economic and trade organisation, the applicant company can directly proceed to the State Administration of Industry and Commerce or its designated local bureau (collectively referred to as the "registration authority") to register the representative office. If the applicant company is a financial institution, an insurance company, an air or sea transportation company, a sea transportation agent, a travel agent, etc. the applicant company must first apply to the PRC authority in charge of its industry for approval to establish the representative office. Only after the approval authority has issued an approval document may the applicant register with the registration authority.

Approval process

A foreign enterprise in an industry where prior approval is required must submit the required application documents to the approval authority. Most approval authorities have issued detailed rules on the mandatory application documents. For example, the Measures for the Administration of the Resident Representative Offices in China of Foreign Insurance Institutions prescribe in detail the documents which a foreign insurance company must submit to the China Insurance Regulatory Commission. The documents include an application letter signed by the Chairman of the Board or the General Manager of the insurance company, a photocopy of its business licence, its Articles of Association and the name list of the members of the Board of Directors, management personnel or principal partners, annual reports of the last three years, a resume of the designated chief representative, etc. Some of these documents need to be notarised or verified by the resident embassy or consulate of the PRC in the applicant's home country.

If the examination and approval authority approves the application, it will issue an Approval Certificate for the establishment of the representative office ("Approval Certificate").

Registration

In the case of representative offices which require prior approval, the applicant company must apply for registration within 30 days of the date on which the Approval Certificate is issued. Failure to do so will result in the revocation of the Approval Certificate. In the case of representative offices which do not require prior approval, the applicant company can proceed directly to the registration authority without having to obtain an Approval Certificate. A prescribed set of documents should be submitted to the registration authority for the purpose of the registration. The documents should be submitted by authorised staff of the applicant
company or an authorised registration agency. If satisfied with the documents submitted, the registration authority will issue a Registration Certificate for the representative office ("Registration Certificate"), upon which the representative office is officially established. The registration authority will also issue a Chief Representative Certificate to the Chief Representative of the representative office as well as a Representative Certificate to each of the other Representatives (if other Representatives have been appointed).
 

POST-ESTABLISHMENT FORMALITIES

After obtaining the Registration Certificate, the representative office should attend to a number of post-registration formalities including:

obtaining an organisation code and an Organisation Code Certificate from the General Administration of Quality Supervision, Inspection and Quarantine of the PRC or its designated local bureau;

registration with the Public Security Bureau ("PSB");

opening of a foreign exchange account with the Bank of China or another designated bank;

registration with the local as well as the state tax bureaux; and 

registration with the local customs bureau.

 

TERM OF OPERATION

Representative offices that require prior approval will be approved for a
specified term commencing from the date of issuance of the Approval
Certificate. The term for which a representative office is approved varies
depending on the particular industry or business sector of the foreign
enterprise. For instance, the Approval Certificate of a representative
office of a foreign enterprise engaging in waterway transportation is valid
for three years whereas that of a representative office of a financial
institution is valid for six years. The term of operation of a representative
office may be extended upon submission of an application to the original
approval authority before expiry of its term.

Whilst the Approval Certificate needs only to be renewed when the
approved term of operation expires, the Registration Certificate has to be
renewed annually with the registration authority.
 

EMPLOYMENT OF LOCAL AND FOREIGN STAFF

A representative office may be staffed by local as well as foreign personnel. Different rules apply depending on whether a staff member is a Chinese citizen or foreign national.

Local employees

Representative offices are required to entrust the hiring of local
personnel to a domestic foreign service unit or such other unit which has
been designated by the Chinese government.

A representative office must enter into a contract with such a unit for the
supply of staff to the representative office. There is, therefore, no direct
labour contractual relationship between the representative office and the
employee. Local staff members enter into labour contracts with the unit instead of the representative office and will receive salary and social benefits from the unit. The representative office is, however, still expected to provide directly to the staff member various other benefits such as performance and year-end bonuses, transportation, meal and clothing allowances, personal accident insurance, etc. The unit will receive a fee for the provision of its services.

Foreign employees

A representative office is not required to obtain approval for the employment of foreign personnel in the capacity of Chief Representative or ordinary Representative. Every foreign employee of a representative office should apply to the Chinese consular office of his/her country of residence for a single entry "Z" visa and, upon arrival in China, apply to the relevant
labour administration department for a Foreigner Work Permit. After obtaining a Foreigner Work Permit, the foreign employee should apply for a Residence Permit, which will serve as their multiple entry visa, at the local PSB for the employee and any accompanying family members who will be residing in China. A foreigner who intends to import any personal items
into China must also register with the local customs bureau.

Residents of Taiwan, Hong Kong or Macau should obtain a Work Permit for Taiwan, Hong Kong or Macau Personnel instead of the Foreigner Work Permit. Whilst Hong Kong or Macau residents need not obtain a "Z" visa or a Residence Permit in order to work and reside in the PRC, Taiwanese residents must obtain a multiple-entry endorsement as well as a residence
endorsement for such purposes.
 


DEACONS

Deacons is a leading business law firm providing an extensive range of legal and commercial services to local and international corporations with business interests throughout this region. With over 155 years of experience in providing legal services, our clients are assured of the integrity and stability of one of the region's oldest and most respected law firms.

Beyond Hong Kong and the People's Republic of China, Deacons has established offices or affiliates in Australia, Indonesia, Malaysia, Singapore, Taiwan and Thailand, ensuring we are conveniently located to provide market-sensitive legal advice. Our principal service areas include Banking & Finance, China Trade & Investment, Communications & Technology, Compliance Services, Construction & Arbitration, Corporate Finance & Capital Markets, Company Formation & Corporate Services, Entertainment & Media, Financial Services, Human Resources & Pensions, Insolvency & Restructuring, Insurance, Intellectual Property, Japan Services, Litigation, M&A and Commercial, Private Equity & Venture Capital and Property.

 

Whilst every effort has been made to ensure the accuracy of this publication, it is for general guidance only and should not be treated as a substitute for specific advice.
 
 
 
 

Client Testimonial

One of the best China lawyers based in Shenzhen! I appreciated this Shenzhen lawyer's service because they helped me achieved my goals, though it was a tough mission. They are English speaking lawyers, so there are absolutely no communication barrier you likely encounter elsewhere. What impressed me is these Shenzhen lawyer's quick response and professional service, two characteristics which I treasure most. Although the Shenzhen lawyers are based in south China, they represent clients across the country, so you can also call them China lawyer! - Johnson