Next March, new rules will come into effect, requiring even higher standards for foreign enterprise representative offices in China. These rules may have far-reaching implications for both new foreign investors and foreign investors who already have representative offices, writes Mallesons Stephen Jaques Partner, Nicolas Groffman.

Two government departments have long been seeking to restrict the use of representative offices, namely:

• the Administration of Industry and Commerce (the AIC), which suspects that representative offices are used to hide profit-making businesses; and

• the police, who want to close what they view as a visa loophole for foreign workers entering China.

The build up to these regulations goes back to January 2010. Mallesons Stephen Jaques issued an alert at the time to highlight the way China is cracking down on representative offices of foreign companies with unprecedented changes.

The changes we emphasised back in the alert included the stricter compliance regime and the new requirement that a representative office can only have four representatives. There was no existing legal basis for this, and since the early 1980s there has been no limit on the number of representatives allowed.

Ten months later, on 19 November 2010, the PRC State Council issued the Administrative Regulations on Registration of Foreign Representative Offices of Foreign Enterprises (the “RO Regulations”), which will take effect on 1 March 2011.

The legal basis for the existing regime, the Administrative Measures on Registration Representative Offices by Foreign Enterprises, issued by the State Administration Industry and Commerce (“SAIC”) on 5 March 1983, will then be repealed.

The RO Regulations heighten scrutiny in the establishment and operation of representative offices by foreign companies (“ROs”) by introducing more stringent compliance requirements and tougher penalties. ■

To read Nicolas’s article in full, click here.