|China’s State Council recently issued new rules concerning the representative offices of foreign companies. The new rules, which come into effect on 1 March 2011, change some existing requirements and also increase penalties for non-compliance, according to Herbert Smith law firm. The existing 1983 rules are repealed. The main changes introduced by the new rules include:
• Authority of proposed chief representative. The new rules explicitly recognise that a proposed chief representative may sign application materials on behalf of the foreign company, provided that the proposed chief representative is duly authorised by the foreign company to do so.
• Lengthened operational term. Foreign representative offices will be permitted to have the same term as the head foreign company. Continued validity of the term will however be subject to the passing of annual reviews. At present, representative offices have terms of between one and three years.
• Annual reviews. Each foreign representative office will need to submit an annual report to its registration authority from March 1 to June 30 each year. The annual report must cover the operational status of its foreign head company, business activities carried out by the representative office, an audited statement of income and expenses, and other relevant information. Some local authorities already require annual reports.
• Increased penalties. The penalties for non-compliance will increase under the new rules. For example, fines under the old rules for conducting activities in China without registering a representative office were capped at RMB10,000; the new rules allow fines between RMB50,000 and RMB200,000. Representative offices conducting direct business activities may be subject to fines of up to RMB500,000 and confiscation of all illegal profits.
In confirmation of rules issued in January 2010, the new rules also state that:
• A foreign company must have been established for at least two years before setting up a representative office in China.
• A representative office may have no more than four foreign-national representatives.
Certain representative offices (such as those of foreign banks, insurance companies and securities firms) are established under industry-specific rules and not directly under the general rules. However, if such representative offices are required to register with the State Administration for Industry and Commerce, then they will also be subject to the new rules. This means, among other things, that representative offices of foreign banks, insurance companies and securities firms will clearly be limited to four foreign-national representatives.
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