Establishing A Representative Office In China: Restrictions By Fred Jones At Isnare.com Ezine Articles

Chinese foreign investment law does not permit a Representative Office to carry out direct business activities. It is limited to activities such as market research, product promotion, and liaison. It may not charge fees for its services or engage in profit-making activities such as direct sales or marketing.

A Representative Office should take special care when performing the following activities:

Billing Procedures: A Representative Office may neither collect money for its parent company nor invoice clients directly - this must be handled by the parent company. This is a tricky and ambiguous area, and it would be wise to subject your Representative Office’s billing procedures to the scrutiny of a competent professional in China to ensure that it is not operating outside of its scope of business.

Signing Contracts: All contracts must be signed by the parent company, although a Representative Office can negotiate contracts that are later signed by its parent company.

Employing Staff: Unlike Joint Ventures and Wholly Foreign Owned Enterprises, a Representative Office cannot directly hire employees - it must use an authorized human resources agency. Although most of these agencies are affiliated with local governments, a few are private. Many Representative Offices get around some of the inevitable inconveniences by independently seeking employment candidates, having the HR agency ‘refer’ these candidates to them, negotiating salary, etc. directly with these candidates and then having the HR agency make the official hiring referral to the Representative Office. The HR agency would then take a percentage of the employee’s salary each month. Although the above-described flexibility with the rules is common, it is best not to go any further in treating the HR agency as a formality because a number of Representative Offices that have tried to skirt these requirements have been closed.

A draft Labor Contract Law is widely expected to be enacted soon. Assuming that the enacted law is identical to the draft that is currently in circulation, Representative Offices will be allowed to contract directly with employees during the employees’ first year of service.

Activities Outside the Normal Scope of the Parent Company: Even though corporations in Western countries are generally allowed to participate in “any lawful activity”, in China a Representative Office is conceived of as part of the overseas parent company and must act within the parent company’s usual scope of business rather than opening up an entirely new business for its parent company (see this site’s section on “Scope of Business” in the “Glossary” section for further details on the “scope of business” concept in China.

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