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China has tightened the procedures for setting up and renewal of foreign company Representative Office (RO) and stipulates stricter supervision of rep office operations. For multinationals, this means increased compliance efforts and costs for setting up and renewal of their RO or rep office in China. Representative Offices also need to be more vigilant in ensuring they operate within the limits of permissible activities and comply with all registration terms as the new provisions enhance the powers of the authorities when dealing with illegal cases.

In a company international expansion, most companies face increased paperwork as a series of documents need to be notarized and authenticated when the rep office applies for renewal, especially in pilot cities like Shanghai. Further, the notice permits setting up of rep office only for companies existing for more than two years. The representative office term of duration has decreased and will need to renew their registration certificate every year as against the earlier permissible term of three years. For existing rep offices, the one year limit begins when they apply for renewal upon expiry of their existing term.

The cap on Number of Representatives is restricted to four. Existing ROs that already have more than four representatives may not need to prune their staff but cannot add to that number. The local officials require authorities are required to conduct on-site verification of legal address and other Representative Office registration items. This has to be done within three months of the Representative Office obtaining its registration certificate. Any unreported change of address is subject to penalty and the rep office may even be blacklisted in non-compliance records. Additionally, in certain pilot cities, e.g. a Representative Office in Shanghai, office space must be rented in a Grade-A building, which essentially refers to a high-standard building.

In any international business expansion, establishing a representative office has conventionally been a reasonably quick and inexpensive way for foreign companies to gain a presence in China, promote themselves and explore additional investment opportunities. There is no capital requirement and, aside from registration with the local branch, no separate approval process, as is the case with legal entities. The new rules indicate an intention to tighten the existing regulatory regime, with increased scrutiny on compliance. In an international expansion, foreign companies will need to consider the implications of this for the structuring and establishment of new representative offices, as well as the ongoing operations of any existing representative offices they have.

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