On January 4, 2010, China's State Administration for Industry and Commerce ("SAIC") and the Ministry of Public Security jointly issued the Notice on Further Administration of Registration of Foreign Companies' Resident Representative Offices (the "Notice"). The Notice provides that business operations of representative offices will face higher scrutiny, companies must comply with additional requirements to establish their representative offices or renew their registration certificates, and companies will be limited in the number of representatives that they can appoint. As the Notice has implications for both new and existing representative offices, foreign companies with representative offices in China need to be aware of this development and be prepared for its ramifications.
Heightened Scrutiny on Operations
Foreign companies doing business in China should be well aware that representative offices are not permitted to "do business" in China, and are generally restricted to performing marketing or liaison functions on behalf of their parent companies. The Notice provides that local branches of the SAIC will begin to do spot checks on representative offices within three months after they have been issued registration certificates. Representative offices that are found engaging in direct operations may be subject to administrative fines. In addition, the Notice states that representative offices that are discovered to have moved without updating their registered addresses or to be operating without valid registration certificates may be subject to increased scrutiny by the authorities.
Higher Hurdles for Establishment and Renewals
Under existing regulations governing representative offices, a foreign company needs to provide an apostilled certificate of incorporation from its jurisdiction of incorporation in order to register a representative office or change a registered office's name. The process varies somewhat from location to location, but this generally requires that the certificate of incorporation be notarized and then certified by the relevant government authority (for example, in the U.S., by the relevant state of incorporation's Secretary of State), and then finally apostilled by the relevant Chinese embassy or consulate that has jurisdiction over the company's jurisdiction of incorporation. The Notice now requires that the apostilled certificate of incorporation indicate that a company has been in existence for at least two years, which will provide difficulties for foreign companies that wish to establish new companies in order to handle their representative office operations.
The Notice also limits the permitted term of a representative office's registration certificate to one year, which previously could be valid between one and three years depending on local regulations in the location of the office. In addition, the Notice adds a requirement that a foreign company must obtain and provide a new apostilled certificate of incorporation each time that it applies to renew its representative office's registration certificate.
Restrictions on Number of Representatives
A foreign company is required to hire its representative office's Chinese personnel through a foreign service company authorized to second employees to representative offices, but can appoint a foreign chief representative and other foreign representatives, who have to be registered with the SAIC. The Notice now restricts the number of representatives that a company is able to appoint to four individuals (including the office's chief representative). The Notice provides that existing representative offices that currently have more than four representatives are not permitted to have any additional representatives appointed. It is silent on whether they must reduce the number of their representatives to four to comply with the Notice, but an official at the Beijing local branch of the SAIC orally confirmed that they do not have to do so, unless they apply to the SAIC to make any changes to their registered representatives.
In conclusion, foreign companies should be aware that the operations of their Chinese representative offices may face heightened scrutiny and that registration certificate renewals and changes to their existing representatives will be affected by the Notice. It should be noted that the Notice's new restrictions do not apply to liaison or branch offices of foreign invested enterprises or to the representative offices of certain foreign professional-services firms (such as law firms). It is anticipated that the SAIC will amend the existing Administration Measures on the Registration of Foreign Companies' Resident Representative Offices (which were promulgated by the SAIC in 1983) later this year. The amended regulations will likely contain more specific details on the information contained in the Notice and foreign companies should watch for the announcement of their issuance.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
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