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The establishment of operations in Hong Kong and Shenzhen

The establishment of operations in Hong Kong and Shenzhen

Representative Offices and Branch Offices

20. Representative Offices

20.1 Introduction

Representative offices are a favoured option for Overseas Corporations with a genuine need for a permanent presence in the PRC. Such offices may engage in non-direct business activities within the PRC. Their function is limited to representing an Overseas Corporation in conducting business liaison with trade organisations or related industries, product introduction, market surveys and research, and technological exchange within the business scope of the Overseas Corporation.

A representative office is a good way for the Overseas Corporation to gain experience and acquire a better understanding of the size and potential of the PRC market. The representative office is a means for the Overseas Corporation to work out its long-term PRC objectives, oversee its business operations running in the PRC (for example a CJV), and forge stronger links with the domestic PRC market.

It is important for Overseas Corporations to establish representative offices to signal their intention in conducting businesses in the PRC and that they view China as a long term investment. The presence of a representative office is often a good bargaining tool in subsequent joint venture negotiations, showing that the Overseas Corporation intends to further invest in the PRC.

20.2 Specific Requirements

To set up its representative office, the Overseas Corporation must:

  1. be legally registered in its country of incorporation;
  2. have good commercial credibility;
  3. provide various “true and reliable” materials required by the implementation rules of the PRC; and
  4. complete the application procedures in accordance with the implementation rules.

There are a number of prohibitions in relation to representative offices: only certain specified activities may be undertaken in the representative office, and the representative office cannot generate income including any fees received for services rendered or sign contracts that generate income. However, a representative office is allowed to negotiate contracts which are later executed in the name of the Overseas Corporation.

Under rules of the State Administration of Industry and Commerce, a Overseas Corporation must register a representative office within six months of establishing a business presence in China. Failure to comply, will result in a fine (around US$1,150) and, in serious cases, the Overseas Corporation may be banned from engaging in further business activity in the PRC. The State Administration of Industry and Commerce enforces this requirement by carrying out random checks and using informants.

Unless a representative office is registered, the company will be unable to employ Chinese nationals, open a bank account, import duty-free personal effects, import office equipment without an import licence, obtain telephone lines, display company signs, or use business cards identifying the Overseas Corporation’s presence in China. Further, the Overseas Corporation’s representative will only be able to obtain a multiple entry visa for the PRC and legally rent accommodation once its representative office has been registered.

21. Branch Offices

A branch office does not have Chinese legal person status, but is permitted to carry out certain manufacturing and selling activities, as allowed by the Company Law of the PRC (enacted on 29 December 1993 and effective 1 July 1994). The Company Law was enacted for the purpose of allowing Overseas Corporations to conduct sales and manufacturing businesses in China without requiring them to make sizeable investments, as is required when setting up a WFOE.

Given that its lack of legal entity status, the branch office instead relies upon the separate legal entity status of the Overseas Corporation. Accordingly, the Overseas Corporation would be liable for all obligation, liabilities and wrongdoings of the branch office.

A representative office is unable to import products or sell samples, whereas under the Company Law, a branch office may do so and representatives of a branch office can engage in sales negotiations. However, a representative from the Overseas Corporation must execute and sign any sales agreements entered into in the PRC. All sales must be invoiced and imported from overseas.

Setting up operations in Hong Kong

Branch of the overseas corporation

Subsidiary of the overseas corporation

Foreign investment in China

Foreign Investment Enterprises in Shenzhen

Industrial Catalogue for Foreign Investment

Companies Ordinance of Hong Kong

Business Registration Ordinance

Companies Registry

The Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises

Representative offices
Foreign direct investments
Liability of the overseas corporation

Skills

Posted on

2003-04-21