Establishing A Representative Office In China: Restrictions

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.

About The Author: David Carnes is licensed to practice law in California. He
speaks and reads Mandarin Chinese and has several years experience working
with Chinese law firms and Sino-American joint ventures. His website, China
Legal Bulletin, is at http://www.lunaticwisdom.com/blog1.