By Gregory Sy

While domestic companies have a wide range of alternatives in establishing business operations in China, foreign companies are more restricted, with the most common business vehicles for foreign investors being:

- Representative Offices
- Wholly Foreign Owned Enterprises 
- Joint Ventures (Cooperative and Contractual)

1. Representative Offices

General
The fastest and easiest method for a foreign company to establish a presence or ‘footprint’ in China is through registration of a Representative Office of a foreign company. While this is true, there are certain factors that must be considered when deciding whether an RO is the appropriate structure:

i) ROs cannot conduct direct profit-making activities (cannot earn income) and may only serve a liaison function between head office and suppliers/distributors/customers in China;
ii) ROs do not have separate legal personality and may only contract or conduct business on behalf of head office;
iii) practically, ROs are limited with regards to business relations with Chinese companies who may prefer to deal with Mainland registered company;
iv) taxes must still be paid (though there are no profits);
v) ROs, while simple to establish, are relatively more complex when closing.

An RO is permitted to:
- Conduct data collection and research on local market
- Liaise with local contacts on behalf of parent company
- Coordinate parent companies activities in China such as contract negotiations
- Coordination of warranty and after-sales service
- Conduct services for parent company such as coordination of import, export, and distribution of products

An RO is not permitted to:
- Directly engage in business for profit
- Sign contracts on its own behalf
- Represent entities other than the parent company
- Collect money or issue invoices for products or services

Representative offices are governed by the Procedures for the Registration and Administration of Resident Representative Offices of Foreign Enterprises in China and the Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation for the Implementation of the Provisional Regulations Governing the Examination, Approval and Administration of Representative Offices of Foreign Enterprises.

Registration
Unlike many other countries, Representative Offices in China are subject to registration requirements. A filing must be made with the local Administration for Industry and Commerce, which, if successful, will issue an Approval Certificate for the Representative Office. Thereafter, a number of filings with other authorities such as the Foreign Exchange Bureau, Public Security Bureau, Customs Bureau and Tax Bureau must be made. Registration is generally valid for only three years and application must be made prior to expiration for renewal of the term.

It is important to note that in order to establish an RO in China, it is necessary to establish a physical office space (in cities such as Shanghai, only certain commercial buildings may be used to register ROs).
 

This is the first part of the Grandall Legal Group article Business Vehicles, next week we will publish the second part.

Gregory M. Sy is a partner / foreign counsel with Grandall Legal Group. His practice includes general business advisory for SME’s in China, particularly in the areas of international corporate structuring and transactions. Representative clients include the Consulate of the United States of America in China (Shenyang), Embassy of Brazil, various publicly listed companies (NYSE, LSE, DAX, and BSE), along with numerous other SME’s operating in a wide range of industries. Mr. Sy obtained an LL.B. from the University of Victoria, and is admitted to the New York bar. Gregory publishes extensively on a variety of China legal issues for international and local publications, and has recently acted as chief editor for Martindale’s China Law Digest. You can contact Gregory at gregsy@grandall.com.cn or learn more about the firm at www.grandall-profile.com.