Archives: representative office

Just updated our research regarding China Representative Office rules relating to employees and note the following.

Q.  How many foreigners can work for the Rep Office? What is the proper term for referring to these employees?

A.  A Rep Office may hire no more than four foreign persons, each of whom is called a representative. These people are hired directly by the Rep Office and are treated as normal employees under China’s employment law system. That is, they are to be hired pursuant to a written contract and their taxes and social benefits must be paid.

 

Q.  If four foreigners work for the rep office, can the rep office directly or indirectly hire any Chinese employees?  If yes, how many?

A.  A Rep Office cannot directly hire any Chinese nationals. It instead must hire Chinese nationals indirectly through a Chinese dispatch company such as FESCO. There is no limit to the number of Chinese nationals who can be hired indirectly.

 

Q.  Can the foreigners work directly for the American home office?

A.  All foreign employees of the Rep Office resident in China must be hired by the Rep Office. They cannot work directly for the American home office.

The Rep Office must appoint a Chief Representative. The Chief Representative is not required to be an employee of the Rep Office and is also not required to reside in China. However, if the Chief Representative is not an employee of the Rep Office it must be an employee of the parent company. It is therefor possible to have a situation where four foreigners work in the Rep Office in China as representatives while a fifth foreigner who works for the parent company is designated as the Chief Representative. That is, the Rep Office has four resident representatives and a fifth, non-resident Chief Representative.

 

Q.  Can the Chinese work directly for the American home office?  Or do they have to work for a third party agency, like FESCO?

A.  No Chinese individual can work directly for a foreign Representative Office. The Chinese nationals must work for a dispatch company under a contract between the dispatch company and the Rep Office.

 

Q.  If the Chinese are the Representatives (let’s say there are only 3 Chinese workers and no foreigners), can they work directly for the US home office? Or do they have to work for a third party agency, like FESCO.

A.  As noted above, all Chinese nationals must be indirectly employed under a dispatch agreement with a Chinese dispatch company such as FESCO. They cannot work directly for the foreign parent of the Rep Office. In addition, the dispatch agreement must be between the Rep Office and the dispatch company.

 

It is important to note that the Rep Office needs a good contract with Chinese dispatch company and also must make sure that the Chinese dispatch company has an agreement with the Chinese workers that protects the foreign company.  Just by way of example, if the foreign company wishes to protect its trade secrets, it should make sure that the employment agreement between the Chinese workers and the Chinese dispatch company mandates that the employees not reveal trade secrets of the foreign company.

A couple of years ago, we did a post on the difficulties in using “independent contractors” in China, entitled, Hiring A Chinese Employee Without A Chinese Entity. Good Luck With That. We wrote that post (and this post too) because forming a WFOE in China can be so difficult, expensive, and time-consuming, and because so many companies are looking for some way of hiring a Chinese employee without a China company.

This is our even grimmer follow-up.

In our first post, we listed out the following ways to “employ” someone in China without forming an entity there:

1.   A foreign company could have its proposed employee hired by a Chinese company and then pay the Chinese company the equivalent of the Chinese employee’s wages and taxes, plus an administrative fee. The problem with this is that if the “employee” is not going to be doing at least some work for its Chinese employer, it probably is not legal and if the foreign company gets caught, it may never be allowed to conduct real business in China again. If the “employee” does not actually do work for the Chinese company, it is nothing more than an attempt to get around the laws that require foreign companies with an employee in China to be a legitimate Chinese entity (be it a WFOE/WOFE, a Joint Venture/JV, or a Representative Office).

And if the foreign company’s goal is to have its “own person” on the ground in China, how much of “its own person” is someone employed by and paid by another? And how this foreign company protect its trade secrets from the Chinese company? There are definitely situations where this can work, but not every situation will.

Then there are all the issues for the Chinese company, which is likely going to have to lie to the Chinese government as to why it is receiving monthly foreign currency payments.

UPDATE ON THIS OPTION:  Since writing the post, we have received calls from a foreign company that was caught doing this and then effectively kicked out of China and from a couple other foreign companies that were doing this whose Chinese company stopped going along with this program out of fear of getting caught.  This has led us to conclude that this is, at best, a very temporary remedy, if even that.

2. A foreign company can hire the Chinese “employee” directly and just wire that “employee” his or her paycheck every month. Years ago, this sort of arrangement was pretty common, but it is becoming far less so as word is spreading that the Chinese government and tax authorities are very much on to this scheme and are quashing it. The problem with this set-up is that the foreign “employee” is at some point going to have to explain to the Chinese government why it is that he or she is monthly depositing foreign currency into his or her bank account and why no taxes are being paid on it.

In our last post, we noted the following big flaw with this sort of arrangement:  “We have received a number of calls in the last year from companies seeking our help in keeping their Chinese ’employee’ after they were told by their ’employee’ that the existing relationship must be discontinued. We told them that their best solution would be to form a China WFOE, but that we were very concerned about their WFOE application being rejected because of what they had already done.”

UPDATE ON THIS OPTION. Since we did our last post, we have heard from many more foreign companies that have gotten into trouble with the Chinese authorities for having employed this option.  Perhaps more importantly, we are finding that the trend is for Chinese prospective employees (particularly those with a high level of experience or skill-set) to flat out refuse this sort of arrangement.

3. The third and maybe best option (at least from a legal standpoint) is for the foreign company to have its Chinese “employee” form his or her own domestic Chinese company and then simply contract with that Chinese company for the services it is seeking from this Chinese person. This is going to require a fair amount of initiative by the Chinese employee and the downside of this is that when all is said and done, your client has an independent Chinese company out there with which it is conducting business, and not an employee.

UPDATE ON THIS OPTION.  We are unaware of anyone ever having tried this option as every foreign company has either deemed it too risky from the perspective of protecting its intellectual property or the prospective employee has simply been been unwilling to go through this convoluted process for the “job.”

4. Have your potential employee hired by a China-based staffing agency.  Under Chinese law, Representative Offices are not allowed to directly employ anyone; they must do so via a third party staffing agency.  Because of this, there are plenty of such staffing agencies in China and up to a few years ago, many of them were (for a somewhat reasonable fee) willing to hire someone for a company based overseas. Today, we know of only one such agency that will do that for  foreign companies without their own entity in China (be it a WFOE or a Rep Office) and that agency charges a 15% monthly commission on the salary to do so.  On top of that, come July 1, 2013, all of this will almost certainly be impossible as on that date, China’s labor law will be revised to make third party hiring for anything but “temporary, supplementary and backup jobs” illegal. For more on this, check out this article, entitled, “Newly amended PRC Labor Contract Law imposing stricter control over the use of seconded employees.”

At this point, I am not sure that the one remaining agency that will employ someone for a foreign company without an entity in China will remain willing to do so, but I doubt it.

For years, China has sought to force foreign companies seeking to hire in China to form a company in China. It appears that come July 1, it will have achieved this goal, which really is part of two much larger goals of increasing its tax revenues, particularly from foreign companies, and improving the lives of its working citizens. There is not going to be any going back on any of this. If you want someone working for you in China, you are going to need to form an entity — almost certainly a WFOE — to accomplish this.

What do you think?

One of the most common calls my law firm receives is the one from someone saying that they want to “start a business in China.” The first thing we do with that sort of caller is to seek to ascertain whether a China business is actually necessary.  Forming and then operating a business entity in China is not fast, is not easy, and is not cheap. I usually convey this by asking the caller if they find it easy running a business in the United States (or Europe), what with having to figure out and pay taxes, rent, wages, vendors, etc.  I then point out that having a business in China means they will have to do the same thing over there. So whenever possible, we seek to determine whether there is some way the caller can conduct business with China, achieve its goals with respect to what it is seeking to do with China, while not having a business in China at all.  For potential alternatives to forming a China business, check out the following:

But if forming a China business does make sense, the next issue is what kind of business makes sense. On this, you typically have three choices: a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV), or a Representative Office.  These days, the overwhelming majority of foreign companies seeking to do business in China go in as a WFOE, but there are definitely still instances when a Joint Venture or a Representative Office makes sense.  For more on the differences between these three sorts of entities and on what it takes to form each of them, check out the following:

If you are going to have a China business entity, you are going to have employees (indirectly in the case of a Rep Office). That means you are going to need written employee contracts (it virtually always makes sense to have these in both Chinese and in English) and a written employee manual/employee handbook (again, in English and in Chinese).  You probably will want your employee agreements to speak to issues like trade secrets and non-competes (which are limited in China) and overtime.  For more on employee contracts and employee handbooks, check out the following:

The last thing you need to focus on if you are going to be doing business with China, particularly if you are going to be doing business in China, is protecting your intellectual property. In nine out of ten cases, this means registering your trade name and your other important trademarks in China. On some occasions, this also means registering your patents or copyrights in China as well. For more on registering your trademarks in China and protecting your IP there, check out the following:

The above are the four main issues confronting foreign companies seeking to do business in China. 1) Determine if a China company is necessary.  2) If a China entity is necessary, form the right one. 3) If you are going to have a Chinese company, you should have the proper employment contracts and employee manual.  4) If you are going to be doing business in China, you are going to need to take certain steps to protect your IP.

That was easy, wasn’t it?

I know I keep reading how China’s economy is just fine, but my firm just keeps getting more inquiries and more work relating to shutting down offices and companies in China. 

Of those, the most heartbreaking are coming from Chief Representatives of China Representative Offices who are concerned about their own liabilities when their China Rep Office closes.

Typically, the Chief Representative tells the Rep Office employees that the Rep Office is going to be shutting down. Naturally enough, the employees ask about their getting paid. The Chief Representative usually tells them not to worry, which causes them to worry more and go to their local government. A local government official then comes by and informs the Chief Representative that he or she is PERSONALLY responsible for paying the Rep Office’s employee salaries AND all outstanding taxes. 

The Chief Representative then contacts my firm and we tell him or her that he or she does indeed run a very real risk of being on the hook for any and all Representative Office debts and so they had better make sure their home office pays. What can happen to a Chief Representative if the home office refuses to pay? We’ve heard of all sorts of things, ranging from the Chief Representative being held at a hotel for weeks until all debts are paid, to Chief Representatives sneaking out of town and then out of China, under fear of being put on a list that will prevent them from ever returning.

But what happens when the head office/owner of the China Representative Office files for bankruptcy in the United States?

In those situations, we recommend that the Chief Representative hire a US-based bankruptcy lawyer to file a claim against the bankruptcy estate on his or her own behalf.  The Chief Representative could claim that the US company owes him or her the amount owed to the Chinese employees and the Chinese tax authorities because the Chief Representative assumed that debt on the home office’s behalf.  Will this work?  We don’t know. Yet. 

Will the bankruptcy court hold that the Chief Representative is owed anything by the home office in bankruptcy? And even if the bankruptcy court does hold that the bankruptcy estate owes the Chief Representatve the amount the Chief Representative (and the estate) owes in China, is there any basis for the Chief Representative to claim entitlement to any higher percentage on his debt than any of the other unsecured creditors? In other words, will the Chief Representative get anything more than the usual pennies on the dollar creditors usually get? I rather doubt either the employees or the tax authorities in China will cut the Chief Representative much slack simply because his or her home office has filed for bankruptcy in the United States.

Quite the ugly situation. Bankruptcy lawyers (and others), what do you know?

I received the following email today (modified slightly to take out any possible identifiers):

My name’s William and I am a Chinese. I am also an avid reader of China Law Blog. So when Frank, my American friend who owns a translation services company in America, asked me about how to set up a limited partnership in China, I turned to your blog for info. I made a search using the keyword “partnership” and found a number of great articles on how to establish a business in China. And it appears that three ways repeat constantly: a WFOE, a JV and a representative office, with the WFOE seemingly highly recommended. I also noted that as early as back 2009, a new partnership law had begun to be talked about. I did a little homework and found that partnership law had been passed and come into force since Dec 2009 and Mar 2010 respectively. However, I didn’t find any articles talking about it (good chances are that I missed them). So I was wondering if you could kindly recommend articles comparing pros and cons of a WFOE and a partnership. I’d really appreciate it.

I responded as follows:

I am not aware of any such articles nor am I aware of anyone who has set up such a partnership or been in one. The problem is that these partnerships seem only to exist in theory. There are not nearly enough laws/regulations/statutes on the books to tell us how they should work or how the governement will treat them.  Because of this, they probably don’t make sense for anyone. And if they do, I do not know anyone with any experience with them. That is why you will see so much on WFOEs, Joint Ventures and even Representative Offices, yet virtually nothing on Partnerships.

Hope this helps.

What do you know?

This post is essentially a re-running of a post we did at the end of last year. We are re-running it because as China’s economy starts to waver, the Chinese government seems to have stepped up both its tax collection and its closing of illegal foreign businesses another notch. I received two calls just last week from companies who were told that their “Rep Offices” were illegal and that they needed to form a WFOE right away or simply leave China.

Now is really not the time to be operating in quasi-legal mode in China. It just isn’t. 

Every couple of weeks my firm gets an email or a phone call from a small business that is seeking to justify forming a Rep Office in China instead of a Wholly Foreign Owned Enterprise (WFOE). These small businesses typically go into advocacy mode explaining why their business can and should be a Rep Office in China. They then go on to explain that they simply cannot afford to form a WFOE in China due to the minimum capital requirements, the legal fees, and the taxes. 

They then want me to condone their Rep Office plans but I never do.

In fact, the increasing number of these requests has caused me to get even blunter than usual, and my most recent response exemplifies this: 

What you are describing doing as part of an RO [Rep Office] is definitely not proper for an RO. Not even close. 

In terms of minimum capital required, because it is Dongguan, it is likely to be pretty high. Sorry. 

You pretty much have two choices. You can operate completely off the grid and risk getting shut down, or you form a WFOE. Probably the worst thing you could do would be to form an RO that operates illegally because they you are just drawing attention to yourself.  

I get the sense that the people contacting us on these things are hoping that they somehow have found THE loophole that nobody else has found and that if only they can get the blessings of an attorney for what they are doing, that their operating illegally will somehow not be illegal. I wish I had some magic oil I could sell (for a helluva lot of money) that I could sprinkle on illegal China businesses to make them legal, but I have no such thing.

Those who think they are going “sorta” legal by forming what is clearly an illegal Rep Office in China are very similar to those who think they are “sorta” protecting themselves legally by doing a “sorta” joint venture with their girlfriend. I wrote about those people in a post, entitled, “Operating Illegally In China. Half-Assing It Does Not Help.” In that post, I described the following email I had recently received from my co-blogger, Steve Dickinson:

We had one of these the other day and it precipitated an email from my co-blogger, Steve Dickinson, to me, which went as follows:

If these people are going to go illegal in China, they should go 100% illegal. That is, enforcement either through really strong family connections (your father knows her father) or enforcement through gangsters and the like. I know people who have succeeded this way but I don’t know anyone who has succeeded with an illegal contract. This is not because contracts don’t work in China, because you and I have won enough China contract cases to know that they do.

It is because the Chinese judges are totally on to these sorts of arrangements and they know they violate or seek to evade Chinese law. They therefore have and will continue to deem such contracts void. Why do people live in this fantasy world thinking that somehow they are so different or that they have discovered the solution? Why do they think a Chinese court would enforce a contract designed to evade the law?

Take an alternative example. Remember John Smith’s [yes, it is an alias] company we formed in Beijing a few years ago? Not sure if you remember this, but that investment was with his Chinese wife. However, we did that as a very formally organized WFOE and left the wife and her family with the irregular side of the deal. His US company is the only shareholder and he runs the board. His company has had no trouble and he has had no trouble because he is legal and secure. His US LLC [and with it, the China WFOE] were just purchased by _______ [a pretty big name U.S. company]. The reason the purchase was successful is that the whole company was “clean” and therefore it could be purchased by a foreign public company.

I then concluded that post with the following:

As lawyers we are never going to tell our client to go full illegal, but in my role as a blogger, I have to think going full illegal would probably make better sense than paying a lawyer to draft a void contract. I think people know this, but their rightful discomfort at operating illegally makes them want to clutch on to something that will allow them to justify (however falsely) their actions.

The same holds true with respect to forming a Rep Office when a WFOE is required. Forming the Rep Office in that situation will just serve to let the Chinese government know where you are and what you are doing and will make it easy for them to realize that what you are doing requires a WFOE. On top of that, as I am always saying, you should not form a Rep Office with plans to form a WFOE in a year or so “if everything works out.” You should not do this because you will end up paying THREE times as you will pay for forming the Rep Office, pay for shutting down the Rep Office (and this is not cheap), and then pay for forming the WFOE.

What really drives me crazy about all this though is that on at least three occasions, companies for whom we have refused to form Rep Offices have written me to tell me that “so and so” company formation company is willing to form the Rep Office for them, as though this mere fact means that my firm was wrong in declining to take money to do something we know will eventually not work.

And though I take no happiness from this, I will note that one of the three companies that went ahead and formed a Rep Office against our advice did contact us about a year later to tell us that the Chinese government was now making them form a WFOE.

For more on what is involved in forming a company in China, check out the following:

Doing business in China? Don’t do it half right because you are only increasing your risk. 

Get legal now.

Pretty much every week my law firm gets contacted by an American or European company with big plans for China. Almost invariably (and this is a good thing), this company has spent tens of thousands of dollars in researching China for their business and in travelling back and forth to China to scope things out. Their calls to me usually begin with them telling me that they have done their research and they want to form their own China company to conduct business in China.

I then explain the various options foreign companies have for going into China — still essentially confined to going it alone as a Wholly Foreign Owned Entity (WFOE, a/k/a Wholly Owned Foreign Entity or Enterprise or WOFE), Representative Office (Rep Office) or partnering with a Chinese company in the form of a Joint Venture (JV).  

Then we start talking about what sort of entity makes sense for this particular company. Nine out of ten times, the company wants to go into China on its own as a WFOE and that is where the problem sometimes starts. The company has heard that China is very capitalistic and “wide open” and did not know that is not really the case, particularly as it relates to foreign companies. 

China has what it calls its “Catalog for the Guidance of Foreign Invested Enterprises.” This catalog divides foreign investment into “encouraged,” “restricted” and “prohibited” investments. Foreign companies cannot invest in prohibited industries and foreign investment in restricted industries typically requires the foreign company joint venture with a Chinese company. Industries that are not classified into any of the three categories are generally assumed to be permitted.

So every once in a while, I have to inform the American or European company that it simply cannot go into China at all or that it can only do so if and when it has found a Chinese company with which it can joint venture. The moral of the story is that it makes sense to find out whether your proposed company can work in China at all, and to do so before funding market and operations research or China trips.

But this research is oftentimes not so simple and that is because a lot depends on how the business is defined when the application is made. The business scope is relevant to the catalog on foreign investment because a business sometimes can fit within one or more categories of the catalog and how you describe your business scope on your WFOE application can make the difference between approval and rejection. You sometimes can massage the description of your business scope to obtain more favorable classification.

BUT — and this is why I am writing this post now — if you under or overreach on the description of your business scope, you might find yourselves in big trouble.  We are getting an increasing number of calls from American companies in trouble with the Chinese government for doing things in their business that were not mentioned in the business scope section of their initial WFOE.

In some cases, the companies have admitted to us that they were never “really comfortable” with the business scope mentioned in their applications, but that the company they had used to form their WFOE had “pushed” them into it as it would “make things much easier.” In some cases, the scope of the business changed after the application was submitted and the company had failed to secure approval in advance for the change. And in some cases, the company probably would never have been approved at all had it been upfront and honest in its application. In nearly all instances, the companies had managed to secure local approval but were now in trouble with Beijing, which constantly is auditing these applications. In one instance, the local government went back and changed its mind, probably after conducting an audit of its own.

I cannot go into any more detail on these matters, but I can give this advice: applying for a WFOE in China involves a heck of a lot more than just filling out a form and getting approval. It does matter for what you get approved and you (or whomever you are using for your WFOE application) need to know China’s foreign investment catalog inside and out before applying. You then must tailor your application to meet both the requirements of the foreign investment catalog AND the reality of what you will be doing in China. A failure to comply on both fronts will lead to, at best, a rejection of your application and, at worst, being shut down months or years later.

If you take away nothing from this post, please at least understand that your getting local government approval for your WFOE does not mean you are out of the woods. There is little to no benefit in getting approval for a non-conforming WFOE.  

I am always saying that for every 100 China WFOEs and Joint Ventures my law firm helps set up in China, it does one representative office. Why so few, when it is generally agreed that representative offices are the easiest type of offices for foreign firms to set up in China? Because the inherent limitations on China Rep Offices mean they seldom make sense.

Rep Offices “represent” in China the foreign company back home. Rep Offices are not a separate legal entity; they are the China representative of the foreign company. Most importantly, they are not allowed to engage in profit making activities. Chinese law limits them to performing “liaison” activities. They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. NOTE: This post does not discuss branch offices for banks, insurance companies, accounting and law firms, that are permitted to engage in profit-making activities.

Rep Offices are pretty much limited to engaging in the following:

  • Conducting research.
  • Promoting their foreign company.
  • Coordinating their foreign company’s activities in China.
  • Other activities that do not and are not intended to generate a profit.

Because forming a Rep Office in China is faster, cheaper and easier than forming a Wholly Foreign Owned Entity (WFOE), companies oftentimes consider forming a China Rep Office as a way of “putting their toe into the water” there. These companies typically intend to switch over to a WFOE once it becomes clear China will be viable for them.
My firm generally discourage this “Rep Office and then a WFOE plan” because “switching” from a Rep Office to a WFOE is not really a switch at all. Making that switch in China will involve both shutting down the Rep Office and then forming a WFOE pretty much from scratch. Because the cost of forming a Rep Office, shutting down the Rep Office, and forming a WFOE, will be considerably more than just forming a WFOE, forming a Rep Office with the later intention of forming a WFOE does not usually make sense and most companies will be better off just biting the bullet and forming the WFOE straight away.

Other times, companies have come to my law firm believing they need a China Rep office because they need a Chinese entity to sell their product into China. Oftentimes these companies can sell their product into China without having to create any in-china footprint at all. So long as they are not going to have much need for people in China, they oftentimes can get away without forming a company in China at all.

But there are definitely times where a Rep Office makes sense. By way of one example, my firm set up a Rep Office for a US company that sells US made equipment for around $2 million each. This company has no plans to start manufacturing its equipment in China so there would be no need to form a WFOE for that. It already had an arrangement with a Chinese company to repair its equipment sold into China, so no need to establish a WFOE for that purpose either. This company merely wanted an on the ground China presence to improve its sales and to let its customers and potential customers know it is serious about China.

China Rep Office applications typically go through the Administration of Industry and Commerce (“AIC”), though some industries (banking, insurance, legal, accounting, airline, media, and some others) also require an additional approval from the Chinese government agency with jurisdiction over that particular industry. All applications must be submitted by a designated/authorized Chinese agent (often known as a Foreign Enterprise Services Company or “FESCO”) in the locality where the proposed representative office is to be established.The application involves submitting fairly standard corporate documents from the foreign company, along with a copy of the lease agreement showing the Rep Office is leasing legitimate business space in China.

MOFCOM usually takes around thirty days to approve a Rep Office. One interesting feature of China Rep Offices is that they are not permitted to hire employees directly; they must be staffed indirectly through a FESCO. Nonetheless, it remains the responsibility of the Rep Office to make sure its FESCO employees have signed off on Rep Office company policies, including on such things as confidentiality. In all instances where we have formed a China Rep Office for our clients, we also have drafted the employment agreements the FESCO must use with the employees. That way we can be certain the agreements best protect our client.

For more on Rep Offices in China, check out the following:

Spoke with a China lawyer friend of mine today who told me his firm had not “done” a single China Rep Office for the last six months. Every time someone had contacted them with plans for a China Rep Office, it ended up as a WFOE. I told him the same thing had been happening at my firm as well, and that the only time I could remember not trying to talk a client out of forming a Rep Office was for a company that would have one foreigner in China doing nothing but shilling for an offshore service whose cachet was based in large measure on the fact that it is foreign. In other words, a classic Rep Office situation but with the additional twist of the company wanted to trade off and even enhance its foreignness.

China is killing Rep Offices and the reason it is doing so is to increase its tax collections. In the past, Rep Offices virtually always provided substantial tax savings. In the past, forming a Rep Office was nearly always faster, cheaper and easier than forming a WFOE. Now, it is usually a push on money, and because WFOEs are so much more flexible in terms of what they can do in China, it has truly become the rare instance where a Rep Office makes sense. Rep Offices, unlike WFOEs, are not allowed to engage in profit making activities. Chinese law limits them to performing “liaison” activities.They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. They simply cannot earn any money in China or take any payments from a Chinese person or business for any reason.

In the last year or so, China has increased the tax rate on Rep Offices, greatly stepped up its enforcement of Rep Offices in terms of making sure they are not engaging in anything more than “liaison” activities, and instituted various other provisions to make them less favorable/more expensive. Just by way of example, Rep Offices have always been required to “hire” their employees through an outside third party agency such as FESCO, but what makes that so onerous now is that all of these agencies (at least as far as we know) require a minimum two year employment contract.

And now there’s more. The Seyfarth law firm’s visa group just came out with an article, entitled, “China Changes Rules Governing Representative Offices,” [link no longer exists] talking about some more rules for Rep Offices:

China’s State Administration for Industry and Commerce (SAIC) recently instituted new regulations for representative offices of foreign companies (ROs) in Shanghai , limiting head count as well as the validity period of the RO’s registration. ROs are now only able to sponsor a maximum of four foreign representatives. In addition, the registration certificates for ROs must be renewed annually. Though these restrictions are only being implemented in Shanghai currently, they will be implemented throughout China in 2010. These new restrictions do not apply to representative offices of foreign law firms.

The article goes on to note that these new regulations mean that work permits will be for one year not three as was formerly the case for Rep Office employees and is typically the case for WFOE employees. The article concludes by noting that the SAIC will perform on-site inspections within three months of the issuance of their registration certificates and Rep Offices that have performed any illegal activities could face fines and a delay in their renewals.

China does not like Rep Offices and the situations in which they still make sense are becoming even rarer.

For more on Representative Offices in China, check out the following:

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Just got this comment (comment # 63 on our post, “China: First Let’s Clear Out The Long Time Foreigners,” posing some pretty important questions and also leaving hanging some very common misconceptions about doing business in China:

So here’s my question albeit already bounced around but no solid answer given….
JV or WFOE for a new foreign company launching in China?

I am about to launch my company that I have been planning for 8 years and will do things by the book, no qualms about that, but I don’t want to start the thing in a realm of probable employee threats, and local competitor company lordship privileges.

Especially if it’s capable of being taken away from me over 5 mao (50 cents) missing in a tax audit because someone has decided that my company will look better in the hands of my local competition.

I have seen many situations of law bending to suit local businesspeople to their advantage, and in those situations the victims of such law bending have almost always had little power to protect themselves.

Would not JV be the better option over WFOE?

At least with a local person in a directors chair it would be harder for sharks to pull the company down.
The whole idea of building a company here in China is fearful and daunting but it’s what I want to do.

Re: Operating illegal biz in China;
I care not that the govt. closes them down. It would be exactly the same in my homeland.
Should that happen, they only have themselves to blame.
Lawbreaking is lawbreaking in any language.
Yet I do agree, Chinese law is ambiguous by nature and isn’t self explanatory where it should be.

I swear, I was asked nearly the exact same question not all that long ago when I was lecturing on the legal basics of foreign investment into China. And just as I did then, I am going to break down this series of questions and statements and answer it. Here goes.

1. “JV or WFOE for a new foreign company launching in China?” Sorry. Impossible to answer. There are just too many variables that go into this determination and you have really only discussed one, and it is one I do not even see as being terribly relevant. In making this decision, the first question that must be asked is whether the business you are planning is legal as either a WFOE (Wholly Foreign Owned Entity) or a JV (Joint Venture). Most types of businesses these days can be operated by foreign businesses in China as either a WFOE or a JV, but there are still some businesses that are completely off limits to foreigners and there are still some businesses that must be operated as a joint venture and not as a WFOE. There is also sometimes the possibility of operating your business as a Representative Office, but those are fairly rare and the scope of those businesses will always be very limited. I also should note that China will soon also be allowing foreign companies to enter China as part of a partnership.
Assuming you can enter China as either a WFOE or a JV, the hard analysis must now begin. Speaking very generally, WFOEs give you greater control than a Joint Venture. Joint Ventures give you the advantage of having a local partner to help you negotiate new territory and also someone with whom you can share the work and the expenses.

2. “At least with a local person in a director’s chair it would be harder for sharks to pull the company down.” You can put a local person in your WFOE director’s chair if you wish. You seem to believe that a WFOE is more likely to be pulled down by sharks than a Joint Venture, but my experience is that the shark most likely to pull down your business is the one you have invited into your swimming pool. All I can tell you is that my firm has never worked on a matter involving a WFOE that got “pulled down” when it was operating legally. I am not saying this cannot happen, but I have never heard of anything like the example you give of a WFOE being shut down for failing to pay 5 mao in taxes. My law firm has handled a number of matters for WFOEs that have gotten in trouble with the Chinese government for things like pollution, zoning issues, tax issues, employment issues, etc., and there have definitely been times where our clients have had to pay fines and there were times we did not think those fines were particularly fair. But I am not aware of any client of my firm or any legitimate WFOE operating anywhere in China being shut down for a minor infraction. I am aware of China changing  its rules and making what was once legal for foreigners no longer legal for foreigners with terrible business ramifications, but that is a different issue.

On the flip side, I estimate maybe around ten percent (or maybe even more) of my firm’s revenues from its China practice each year comes from our representing foreign companies in a joint venture gone bad. We are typically working on anywhere from one to three of these failed joint venture deals at any given time and they are seldom pretty. If you are a foreign company and you have entered into a joint venture in a third tier Chinese city and your joint venture agreement was badly written in terms of protecting you, you will be lucky to get past the shark in your tank without losing at least half your fingers and toes.

My experience (and I think virtually every China lawyer will agree with me on this) is that you are at much greater risk of being eaten in a joint venture than if you do a WFOE.

3. “Yet I do agree, Chinese law is ambiguous by nature and isn’t self explanatory where it should be.” This is an exaggeration when it comes to China business law. I have said this countless times and I will say it again. Much of the belief that China’s business laws are ambiguous stems not from the laws themselves, but from their varying (and almost universally poor) translations and from people who claim they know what the laws say without ever having read them. China’s business laws with respect to foreign investment are, for the most part, very well written and very clear. A couple years ago, we did a post entitled, “China Company Formation Law Is Clear — WFOEs Are Easy,” where we argued that the laws on how to form a WFOE in China have stayed the same for quite some time and really are very clear.

My best advice to you is that you figure out what will be best for your situation, taking into account China’s laws and its realities on the ground.

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