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In late 2010, the State Council of the People's Republic of China adopted new regulations (New Regulations) on representative offices of foreign enterprises (Representative Offices), replacing the 26 year old Measures for Administration of Registration of Resident Representative Offices of Foreign Enterprises (Original Measures). The New Regulations became effective on March 1, 2011, and they change how Representative Offices are permitted to function and how they are regulated.
The New Regulations expand a Representative Office's permitted activities to include the sale of the foreign home office's products, the provision of services, sourcing in China and investment in China. Pursuant to the New Regulations, Representative Offices are now expressly permitted to engage in the following activities:
- Market investigation and display and promotion activities related to the foreign home office's products or services; and
- Liaison activities related to the foreign home office's sale of products and/or services, sourcing within China and investment in China.
While profit-making activities were strictly prohibited for Representative Offices under the Original Measures, the New Regulations modify this rule and add new requirements for Representative Offices, as follows:
- Profit-making activities are permitted where China is a party to an international treaty or agreement which expressly permits such activities;
- Increased discretion to select any premises as their primary office in China – no longer need to lease space in buildings specifically designated for Representative Offices;
- Term of residence for a Representative Office in China may not exceed its foreign home office's term of existence in its country of incorporation;
- Added a new annual examination process similar to all other companies in China including a detailed annual report with evidence of the foreign home office's good standing in its country of incorporation and an explanation of the Representative Office's business activities;
- Audited financial statements are now required for the Representative Office; and
- Added stiff penalties for noncompliance, ranging from RMB50,000 to RMB200,000 per violation (approximately $7,600 to $30,450).
Although the New Regulations permit Representative Offices greater latitude to operate in China, they also demonstrate China's desire to more closely monitor Representative Offices' business activities and to assess hefty penalties for noncompliance. The New Regulations dovetail with the previous Representative Office regulations issued in 2010 on tax and registration requirements, and together these measures indicate a trend of greater oversight and scrutiny of Representative Offices by the Chinese authorities.
