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Business Scope of a Permanent Representative Office in China
General Information
The business scope of a Permanent Representative Office (RO, also known as Resident Representative Office)
should be clearly stated in the application document
prepared by the applying foreign enterprise. After approval
by the relevant authority and registration with the
AIC, the business scope will be stated in the Registration
Certificate for the Permanent Representative Office (RO). A Representative
Office (RO) can only engage in business activities which
are within the business scope as set forth in the Registration
Certificate (business registration certificate).
Normally, ROs can only engage in non-operational activities
in China, such as liaison, product promotion, market
research and technology exchange. However, if a bilateral
treaty between China and the home country of the foreign
enterprise provides that Permanent Representative Office (RO)
established by enterprises of both countries should
have the authority to engage in direct operational activities,
such provisions should prevail.
ROs will have the authority to engage in economic activities
and sign economic contracts which are necessary to maintain
the existence and function of the Permanent Representative Offices
(RO). For example, a Representative Office (RO) entered
into a purchase contract with a computer company, whereby
the Permanent Representative Office (RO) will purchase a computer
for office use. This contract for the purchase of computer
contract should be valid because the purpose of this
contract is to satisfy the basic needs of its operation.
The right to engage in activities to maintain its operations
is an intrinsic right of a Permanent Representative Office. Such activities are not
business activities. Examples include engaging the services
of Chinese personnel, renting permanent office space,
displaying the name of the office outside its premises,
using a company chop, importing personal and office
goods, obtaining telephone lines, opening a bank account
in the name of the office, obtaining resident visas
and other permits for expatriate employees and referring
to itself as having an "office" in China.
Allowable Activities for a Permanent Representatove Office
On approval, a RO will only be granted with a Permanent Representative Office Registration
Certificate (BRC) rather than a Busineexceptions (e.g. a RO registered by an overseas bank or law
firm), a RO is generss License because, with very
few ally not allowed to carry out any direct business
in China. The Implementation Rules for the Approval and Supervision
of Representative Offices of Foreign Enterprises in China, announced
by the Ministry of Foreign Trade and Economic Co-operation in February
1995, states that a Permanent Representative Office of a foreign enterprise (FE) (i.e. an entity
incorporated or established outside China) is only allowed to engage
in non-direct business activities for its head office and represent
the FE to undertake activities such as:
- product liaison and promotion
- market research and technology exchange.
A Permanent Representatove Office is prohibited from doing direct business with, or rendering
services to, any other persons. Any violation of this restriction
could result in a fine and even nullification of the Permanent Representatove Office’s
business registration in China. In addition, such direct business
activities may result in the head office being considered as carrying
on a taxable activity in China and hence may be subject to taxes
in China.
Although there is no official definition of ‘direct business’,
the following are the allowable activities for a Permanent Representatove Office in China:
- performing liaison, promotional and co-ordination functions
for its head office
- buying or leasing its own office premises
- importation of reasonable amounts of normal office equipment
(note: the imported commodities are subject to import customs duty
and import taxes)
- importation of personal effects in reasonable amounts
- helping to obtain working visa and related applications
in respect of expatriate employees
- contracting with an approved employment service organisation
in China for the provision of local staff to work for the Permanent Representatove Office
- opening necessary bank accounts in the name of the Permanent Representatove Office.
Restricted activities include:
- rendering services to any persons other than its head office
(e.g. suppliers or customers of the head office, fellow subsidiaries
or associated undertakings of the head office)
- soliciting, concluding or signing business contracts with
any customers in China
- determining prices of goods or offering any sales discounts
to customers
- issuing bills or invoices to customers
- collecting money from customers or issuing business receipts
to customers
- warehousing and managing inventory in China for trading
purposes
- hiring local staff directly without the use of an approved
employment service organisation in China
- any activities other than of a liaison nature (e.g. quality
control services and installation and testing services) not specified
in the BRC of the RO.
Complying with Limitations on Activities
The apparent intention of limiting representative offices
to "non-direct business activities" is to
ensure that representative offices act on behalf of
the foreign-based companies they represent and not on
their own behalf as separate business entities. Thus
contracts signed by the representative office (other
than those relating to its own administration, such
as its office lease) should be signed in the name of
its parent enterprise or one of its affiliates, not
in the name of the representative office itself. Such
contracts should also show an address outside of China
for the relevant foreign party. Any sale and subsequent
billing and collection of money for technical, consulting,
inspection, or other services should similarly be carried
out by the parent enterprise or one of its affiliates,
not the representative office. Based on the regulations,
representative offices should not perform the functions
of a "service centre".
Consequences of Exceeding the Limitation on Activities
If an established representative office is found to
be "directly engaging in business activities",
the Registration Procedures provide for penalties including
fines of up to RMB20,000 and suspension of business
activities. In practice, actual fines and sanctions
are somewhat discretionary and determined on a case-by-case
basis. It is possible that the representative office
may be allowed to remedy the situation without sanction
or that appropriate penalties will be determined on
the basis of the amount invested in such activities
and/or income generated through such business activities.
See also:
Introduction to China Permanent Representative Office
Permanent Representative Office Registration Procedures
Legal Status of Permanent Representative Office
Business Scope of Permanent Representative Office
Responsbilities of Chief
Representative
Taxation of Permanent Representative Offices
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