On 4 January 2010, the State Administration of Industry and Commerce ("SAIC") and the Ministry of Public Security jointly promulgated a notice that places additional restrictions and requirements on new and existing foreign representative offices ("RO"). The local AIC in Beijing implemented the notice on 15 January 2010; other cities and provinces swiftly followed or are expected to do so soon. The more stringent criteria on RO registration are summarised below.
First, the notice shortens the operational term for most ROs from three years to one year. This applies to newly established ROs as well as existing ROs that seek to renew their registration. This represents a significant increase in the cost and effort involved in maintaining an RO. In addition to the increased burden of an annual registration on the RO itself, because the employment-related documentation of foreign staff is related to the operation term of their employer, they will likely be required to renew work permits, residence certificates, and related docu¬ments once a year.
Second, an RO's parent company must be at least two years old. Previously, any foreign company - regardless of its establishment duration - could register an RO.
Third, an updated legalised and notarised incorporation certificate of the parent company must be provided each time the operation term of the RO is extended. Such a certificate was previously only required when the RO first registered.
Fourth, in addition to this certificate, the parent company must provide a notarised and legalised bank reference letter. Notarisa-tion and legalisation of a bank reference letter was previously not required, and is still not required for parent companies registered in Hong Kong, Macao or Taiwan.
Fifth, an RO can no longer register as many representatives as it wishes; it generally cannot register more than four representatives (including chief representative). Also, local AICs will conduct an on-site inspection of an RO within three months after it issues a registration certificate.
The notice is yet another indication of more severe scrutiny of ROs by Chinese authorities. ROs must be ever more prudent in conducting themselves properly and pay particular attention to the following restrictions:
ROs may not engage in direct business activities and are limited to conducting activities on behalf of their parent companies such as business liaison work, market surveys and research and prod¬uct introductions. (Some exceptions apply, such as for legal and tax advisors.) In other words, ROs may only engage in non-profit-making activities for assisting their parent company in estab¬lishing and arranging contracts, rendering advice (the extent of which depends on the business of the represented enterprise), preparing market studies and collecting general information. Activities outside such scope are prohibited by law.
The State Council made tentative moves to revise legislation applicable to ROs when it circulated draft regulations for comment on 29 August 2008 ("RO Draft Regulations"). The RO Draft Regulations, which have not yet become law, define an RO as a "non-profit-making administrative body" of a foreign enterprise in China which is only permitted to carry out activities related to market research, presentation, promotional activities and liaison activities in relation to product sales, service provision, domestic procurement and investment.
The penalties for conducting activities outside the permitted business scope can be severe. Such activities can expose an RO to an RMB 20,000 fine and revocation of its license; the RO Draft Regulations even foresee a penalty for undertaking profit-making activities of up to RMB 500,000.
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