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Representative Offices (ROs) are established by foreign companies to engage in business liaison, product promotion, market research, exchange of technology and other permitted activities in China.
ROs are not allowed to directly engage in operational activities. The AIC usually specifies in the Business Scope, as shown in the Business License of ROs, that a RO should not engage in direct operational activities. Therefore, ROs are not a form of foreign investment in China. However, some ROs are engaged in operations in a lawful or tacitly permitted way and constitute one of the direct foreign Investment forms in China.
The tacitly permitted way is applicable to those industries that do not require special material conditions or environment for their operations. For example, a consulting business does not need manufacturing equipment and raw materials. It only needs offices, employees and office articles. These physical conditions are necessary for other ROs as well. In practice, many ROs that are established by foreign consulting companies directly engage in consulting activities. Chinese government does not prohibit them in practice and this is reflected by the fact that the tax authorities collect business tax from these ROs.
The lawful operational activities engaged in by ROs refer to those business activities permitted pursuant to the bilateral treaties between China and other countries. In the event that a bilateral treaty provides that certain types of ROs are permitted to engage in operational activities, these bilateral treaties should prevail over Chinese domestic law. For example, according to the Sino-US Civil Aviation Transportation Agreement, ROs established by American civil airlines may sell civil air transportation services provided by American civil airlines, as well as engage in administration, inquiry and other business activities.
It should be noted that up to now, only ROs of foreign airlines are allowed to engage in direct operational activities in China under bilateral treaties. No other ROs of foreign companies are so permitted.
Representative Offices (ROs) are important means by which foreign companies conduct business liaisons or engage in business and operational activities in China. In this respect, foreign companies refers all companies incorporated outside China, and those incorporated in Hong Kong, Macau and Taiwan.
Set Up Procedures
The procedures for establishing a RO vary slightly in different areas of China and the procedures also vary in accordance with the places where the foreign companies are located. However, the basic procedures are much the same. The procedures for the establishment of a RO consist of three steps:
Step 1 : Examination and Approval Procedures
Foreign companies are not allowed to directly submit the application documents to the relevant authority. They must retain a PRC entity that is authorized or permitted by relevant authorities to act as a sponsor. The sponsor will submit all documents to the examination and approval authority on behalf of the foreign enterprise. This step is completed when the approval authority issues an Approval Certificate for Representative Offices of Foreign Enterprises.
Step 2 : Registration with the Relevant AIC
After the foreign enterprise obtains approval from the relevant authority, documents must be submitted to the relevant AIC for registration of the RO. This step is completed when the AIC issues a Registration Certificate for Representative Offices of Foreign Enterprises.
Step 3 : Post-establishment Registrations
After a RO is registered with the AIC, it must handle registration and other procedures with banks, customs office, tax authorities, public security bureau and other authorities.
Business Scope of ROs
ROs will have the authority to engage in economic activities and sign economic contracts which are necessary to maintain its existence and functions, and it should also carry out its activities within the business scope as set forth on Registration Certificate.
Legal Status of ROs
Chinese laws do not expressly provide that Rep Offices should bear liabilities independently with their own assets (i.e. limited liability), ROs may be deemed to be part of the foreign parent enterprise. As a part of the foreign enterprise, the foreign enterprises should bear liabilities of the RO with all its assets.
Authority of Chief Representative
Chinese laws do not clearly specify the limitation of the authorities of a chief representative or a representative . Therefore, foreign enterprises should clearly set forth the authorities of the chief representative and representatives of a RO in order to avoid, to the greatest extent possible, situations in which the acts of a chief representative or a representative have binding force upon the parent foreign enterprise.