The State Council is revising regulations to standardize foreign representative offices in China and reign in those that have been overstepping their non-profit licenses for business gains and evading taxes.
Provisions under review included defining the scope of permissible activities, registration procedures, supervision mechanisms, and legal consequences for abusing the licenses, said legal expert Liu Junhai who participated in the regulations review meeting held on April 7.
Liu said the latest draft of "Foreign Enterprise's Representative Office Registration and Supervision Regulations" still banned such offices from conducting revenue-generating businesses. However, he revealed that the revised regulations would open the door wider for permissible activities.
He added that it clearly defined the previously fuzzy idea of "only permitted to engage in indirect business activities" to include market research, holding promotional exhibitions, and establishing business contacts, amongst others. Liu is a corporate law scholar from Remnin University.
The April 7 revision session was convened jointly by the State Council's legislative office and the State Administration for Industry and Commerce, with invited legal experts.
Targeting Violations of Licenses
According to Chinese law, foreign firms can be active in three forms. The first is to set up overseas branches; the second is to establish representative offices (by far the most popular); and the third is to directly do business in China in accordance with Chinese laws, with only around 4,000 foreign firms doing so.
At present, there are more than 100,000 foreign firms with representative offices in China.
Chinese regulations prohibit such offices from doing revenue-generating businesses, but it does not clearly spell out punishment for such violations. These offices are registered as non-profit institutions, and thus are exempt from corporate income taxes.
However, some foreign representative offices have engaged in hosting commercial exhibits, signing and fulfilling contracts, even installing equipment. They have effectively become branches of their mother companies, drawing in businesses but without paying taxes.
"The problem is a headache," Liu referred to license abuses, adding that the Chinese government was losing tax revenue as a result.
Taxation issue had been dealt with by other laws, thus it was missing in the Regulation, Liu pointed out. He added the latest draft would deal with the issue by establishing data-sharing mechanisms between different regulatory authorities to ensure more efficient joint-supervision.
In addition, Liu said the revision would include clauses to allow representative offices from countries or organizations that have signed bilateral, multilateral or international treaties with China to conduct activities as stipulated in the later agreements.
For example, as China had signed an agreement with the International Civil Aviation Organization (ICAO), airlines from the US, France and Germany would be allowed to set up representative offices in China and conduct sale activities as stipulated in the agreement.
On whether chief representatives could represent their mother firms to sign commercial contracts with Chinese counterparts, there still remained dispute in the experts' discussion, according to Liu.
As to the registration procedure, the revised regulations, if implemented, would require registration applications to be processed within 10 days, regardless of whehter they are approved or rejected.
Once approved, the authority should award registration and representative certificates to foreign representative offices within five days. If rejected, the authority should deliver a refusal notice and state the reasons.
In addition, the revision also called for representative offices to submit annual financial reports to the registration authority.
