New Regulation Says: No Need to Register

  With the advent of the amended editions of the Company Law of PRC and the Regulation of PRC on the Administration of Company Registration coming into force as of January 1st of 2006, a new regulation has been promulgated for the purposes of carrying out the administration of regulating the examination, approval and registration of foreign investments and promoting the sound development of foreign-funded companies. “The Executive Opinions on Some Issues Concerning the Application of Law Governing the Examination, Approval and Registration of Foreign-funded Companies” Printed and Distributed by the State Administration for Industry and Commerce, Ministry of Commerce, General Administration of Customs and the State Administration of Foreign Exchange has thereby been implemented and became effective as of April 24th of 2006.

  The new regulation has attracted lots of attentions from foreign investors and one of the key focuses is about the registration of representative office of foreign-funded companies. It says that “the company registration organs shall no longer engage in the registration of the representative offices of foreign-funded companies”―in other words, there is no need for foreign investors to register a representative office from then on. But, does that mean representative office is no longer a legal form in business aspect? Absolutely not. No effective laws or regulations prohibit the existence of representative office. Without registration, any foreign-funded company can set up a representative office with its own discretion and according to business needs in order to carry out liaison activities in China. The new regulation is quite convenient for foreign investors in this regard.

  However, “Anyone engaging in business operations in the name of a representative office shall be punished by the company registration organ”, which means the business scope for representative office only includes liaison activities and no representative office is allowed to perform any business operation activities. In addition, according to the regulation, a representative office that has already been registered is no longer required to go through the modification or extension formalities, and after the expiration of its term, it shall go through the deregistration formalities or it may establish a branch where necessary, while a branch of a foreign-funded company may engage in the liaison, consultation and other businesses within the business scope of the company.

  Then, the new regulation raises a question―which on earth is preferable for foreign investors, to set up a representative office or to establish a branch? The answer is always “it depends”. It depends on the actual situation of the foreign-funded company. In the event that the foreign-funded company needs to carry out other business activities besides liaison, for the sake of business security and avoidance of legal risks, it is better to establish a branch.

  Moreover, what foreign investors need to notice is that the new regulation will in fact have some negative influence on foreign-funded companies. For example, if a foreign-funded company intends to keep a representative office after the expiration of its term, without registration in company registration organ, the representative office can not get involved in such activities as opening a bank account and renting a house ever since. Furthermore, the new regulation may affect the security of business transaction in the market, say, if a foreign-funded company sets up a representative office without registration in another city outside its place of business and does business with another entity, for the opposite party or ordinary citizens, it is hard to tell whether it is the company or the representative office that the said entity makes a deal with.