Representative Office Regulations Limit Foreign Employees

June 9, 2010 Posted by China Briefing Reading Time: 3 minutes

Jun. 9 – China has made some fundamental changes to one of the oldest legal entities available to foreign investors on the mainland, the representative office. In addition to the new tax regulations concerning the operations of representative offices in China issued by the State Administration of Taxation on February 20, the State Administration of Industry and Commerce released new incorporation regulations on Jan. 4, which are effective retroactively from Jan. 1, 2010.

As we previously described in March, the tax structuring of ROs has changed, with the deemed profit rates for ROs now being 15 percent. The SAIC’s new regulations will affect foreign investors setting up representative offices in China, as well as ROs already established on the mainland as they touch on the establishment, management and staffing of ROs.

The four main changes are as follows:

Establishment procedures
Foreign parent companies applying for representative office licenses must have been established for two years prior to the RO application. In addition, foreign corporations must provide notarized copies of their incorporation certificates as well as bank reference letters.

Authorization
The local branch of the AIC will verify all the information of the RO including its registered address within three months after the RO obtains its registration certificate.

Management
Representative offices must employ no more than four foreign employees, including the chief representative.

Maintenance
All ROs must renew their licenses annually.

In terms of setting up an RO and the two year parent company requirement, if a new business is to be established, it may be done so through usage of aged shelf offshore companies, for example in jurisdictions such as Hong Kong. Hong Kong company law provides for the formation of a company without the need for it to trade.

Consequently, larger incorporation specialists (such as the Dezan Shira & Associates office in Hong Kong) carry stocks of aged, unused two and three year old companies for this purpose.

Concerning management and staffing, we note that ROs that currently employ more than four foreign staff may maintain their existing levels of foreign employees, though are not allowed to increase them. Interestingly, there is no limit to the numbers of staff that may be on secondment to a China RO, provided they possess the relevant work permits.

These regulations may take some time to filter through to all regions of China, accordingly some ambiguity may remain. Foreign businesses interested in establishing a presence in China are advised also to consider a foreign-invested commercial enterprise (FICE) as an alternative to the Representative Office given most of the previous tax, management and reporting benefits of an RO have mostly disappeared from the commercial perspective.

Richard Hoffmann is a senior legal associate with Dezan Shira & Associates; Sabrina Zhang is the national tax partner. For advice on establishing representative offices or other legal entities in China please contact legal@dezshira.com.