I have written a number of times recently of how China is cracking down on Representative Offices and of how they seldom make sense anymore. This past week, I encountered yet another potential pitfall. First though, a bit of general background on China Representative Offices.

China 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.

There are three basic requirements for forming a Rep Office:

  1. The most important requirement is that there must be a lease on an approved space for a period of at least one year beyond the approval date of the Rep Office. Care should be taken with this requirement, since many jurisdictions accept leases only from a small group of approved office buildings. Shanghai, for example, is one such jurisdiction. The lease must be registered, which can also cause problems in some jurisdictions.
  2. There must be a designated Chief Representative who will manage the affairs of the Rep Office.
  3. There must a foreign entity (typically a limited liability or a corporation) that the local office represents; private individuals and partnerships cannot establish a Rep Office in China.

There are two major issues that make operating a Rep Office in China unattractive:

  1. Even though Rep Offices are not permitted to earn income in China, they are nevertheless subject to taxation.
  2. A Rep Office is not permitted to directly hire Chinese nationals. All hiring of Chinese nationals must be done indirectly through contracting with a Chinese employment agency such as FESCO. Recent changes in the Chinese labor contract law have made such contracts extremely unattractive. Rep Offices can directly hire foreign nationals.

So this past week, I was talking with a new client interested in getting into China. The company is a service business that spun off from a much larger company about a year ago. I cannot reveal its business, but I can say that it is already representing a number of Chinese companies going overseas and its plan was to open a Rep Office in China to push more China business to its US offices. After my initially telling them that Rep Offices seldom make sense in China any more, I was starting to see reasons why it might make sense for this company. As we were talking though, I started reviewing my cheat sheet on China Rep Offices and quickly realized a flaw in my analysis: China now pretty much requires the Rep Office’s parent company to have been in existence for at least two years.

I alerted my client to this and we then talked a bit about possibly buying an older US shell company to own the China Rep office. Eventually (and fortunately), we all decided a WFOE made better sense in any event.

Whew.

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

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.