| NACS Country Operations
CHINA |
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Representative Office:
“Rep Office”
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| Introduction: How to establish an active and useful presence in China, with a fast start, minimum red tape, minimum investment, total control, no unnecessary ties to local Chinese, etc? These are the types of questions many small to medium sized entrepreneurs and businesses are asking themselves. China has established and got into a good working state over the past decade or so, a range of avenues for setting up business operations in China. Some are more complex than others; some are early efforts at bringing expertise into China with local involvement, e.g. the Joint Venture. The three most common forms are: the Rep Office, the wholly foreign owned enterprise (“WFOE”), and the joint venture. In 1993 the concept of “branches of foreign companies” being established in China was legally introduced. This is a lengthy procedure requiring full company registration and obtaining a business license. It is not recommended for the foreign company seeking a fast and easy first entry into the Chinese market: the Rep Office is clearly intended to fill this role. By far, the simplest and fastest method of establishing a useful business presence in China is the Representative Office (“Rep Office”). This form can later be developed into a normal more corporate form. Very importantly, foreign investors and companies can very rapidly and simply establish and operate “Representative Offices” (“Rep Office”) directly in China to handle a limited range of business communications, liaison, and certain other matters. Although Rep offices are legally prohibited from directly engaging in business and related operations activities in China, in practice they are undoubtedly an important means for foreign investors to develop effective business and operations in China. Establishing a Rep Office: Until the 1993 “branches of foreign companies” legal development in China, with its time consuming and difficult procedural requirements, it has not been possible for a foreign entity or company to set up a wholly owned subsidiary in China for the purposes of corporate representation or the provision of services. However, in 1983 the PRC Government had put in place a very useful alternative for companies wishing to enter China fast and simply, via the establishment of a representative office by such foreign entities requiring a fixed legal presence in China. Important Legal Note: It should be noted that the establishment of a
Rep Office in China exposes the involved foreign company to the jurisdiction
of PRC courts. The Chinese courts in the location where the Rep office
is located have jurisdiction over disputes involving the Rep Office in
matters concerned with contracts and property rights. Structures can be
developed with NACS to largely resolve potential exposures arising from
this issue. On paper the activities of the foreign Rep office are highly restricted; they are generally permitted to carry out promotional activities, but are strictly not permitted to carry out “direct business operations”, a term which is not clearly defined in the regulations. Rep offices are prohibited from signing contracts on behalf of their corporate offices. In practice, the distinction between prohibited and acceptable practices becomes blurred, and it is questionable as to what level of compliance there is with the restrictions. Affixing the official chop of the Rep Office to contracts is definitely not acceptable. Prosecuted contravention can lead to fines up to 20,000 RMB. A fuller list of accepted activities for Rep Offices from the PRC’s Detailed Implementing Rules for such organizations includes: · Introduction of products
The choice for an initial Rep office will normally be determined by basic market and product research in China. The high profile large cities of Shanghai, Beijing, Guangzhou, and Tianjin are the most likely choices for the Rep office. It should be noted that more than one Rep office can be established in China by a foreign entity. The actual government agency with the authority to approve Rep Offices will vary with location. Also, while the actual procedures for establishing a Rep Office may vary somewhat in different parts of China, the basic requirements as required by Chinese law are the same. The Ministry of Trade and Economic Cooperation (“MOFTEC”), and its local counterparts provide the approval processes for most Rep Offices. MOFTEC is the highest authority in China regarding foreign trade and foreign investment. The approval of Rep Offices for foreign businesses engaged is certain nominated business areas must also be sought from the government agencies responsible for such specific business areas, according to specific laws and regulations. A Chinese sponsor is required for the formation of a Rep Office. This sponsor will normally be a major Chinese foreign trade organization, a Chinese foreign affairs service unit, or some other state agency or enterprise with which the applicant has had prior dealings. The establishment of a Rep Office calls for 3 basic processes steps to be completed, with a 4th significant post approval effort to register with the various involved authorities: 1. Locate and secure a PRC Chinese sponsor that is authorized and permitted to act as a sponsor for Rep Offices by the authorities. No foreign company is permitted to submit Rep Office applications directly to the Rep Office approval authorities. The sponsor will be responsible for all submission and interfacing requirements. 2. Submit formal application for the approval of the Rep Office to authorities: Actual documentation required for Rep Office approval may vary by local approval authority, but the applicable Chinese law requires the following documents: · An application letter for the establishment of the Rep Office
Within 30 days of the issuance of the Rep Office Approval Certificate, the foreign applicant must submit through its sponsor an application for Registration of the Rep Office to the relevant AIC (the local Administration for Industry and Commerce). The required documents to be submitted to the AIC are essentially the same as those submitted to the approval authority. Upon the AIC’s decision to register the Rep Office it will issue the following documents: · A registration Certificate for the Rep Office, and
After the establishment process has been completed and accepted, there are a number of Post-Establishment Registration procedures to be completed, involving principally: · applying for an Enterprise Code Certificate;
A Rep Office is liable for taxes and must pay the following: · A 33% national income tax, and a 3% local income tax (with lower
rates in the SEZ’s). Tax determination is based on one of 3 methods: Taxable revenues may include commission fees, services fees, and consultancy fees that are deemed to have been sourced in China, without consideration of where the income is actually paid or received.
Since 1997, NACS has been carefully and diligently investigating and analyzing the Chinese business environment and developing its own capabilities to provide a growing range of business start-up and development services in China - particularly to small to medium sized international business operations and operators. Generally its services are required in setting up Rep Offices, but there is also an increasing level of international interest by medium sized companies, as well as larger operations, seeking assistance in setting up a wholly foreign owned enterprise there. One of NACS’s early PRC tasks was to assist with the formative stages of a high technology Joint Venture between US interests and one of the 4 huge PRC cabinet level monopolies. Dependable professional expertise and experience are the two major elements the foreign client is seeking when he contracts for assistance from NACS in analyzing, determining, and setting up the right type and level of operations in China, and in the right location. Once the prospective client has familiarized himself with the summary information presented in this brochure, he should be ready to commence discussions and negotiations with NACS leading rapidly to the detailed step by step implementation of NACS’s carefully considered work plan for the client. NACS can also provide its clients with significant assistance in determining the level and nature of PRC operations a client should aim at. NACS can provide its clients with analysis, PRC business plan development, and certain implementation support efforts through a combination of its own experienced professional internal staff in its offices in China and Hong Kong, its network of highly PRC experienced professionals, generally located in major Chinese cities, and its own international network of professionals and business advisers to cover the following critically important areas: · Chinese government regulatory procedures and NACS is very pleased at the high level of experience, professionalism,
and connections that its expert PRC advisors have achieved and maintain
in their various professional functional fields and in the cities where
they are located in China. A summary of the services NACS can provide
to clients seeking to set up a Rep Office follows.
Representative Office
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