Op-Ed Commentary: Chris Devonshire-Ellis
Aug. 16 – An interesting legal point cropped up as a result of our recent commentary concerning chief representatives in China. The chief rep is of course the person who is legally responsible for the activities of a China representative office (RO), and the piece outlined the various roles and responsibilities the chief rep has to undertake, as well as the qualifications for doing so. It’s a position I am very familiar with, having been chief rep of our firm (and subsequently the legally responsible person – not to be confused with actually being a lawyer as some assume) when we converted our own business from an RO to a WFOE structure several years ago.
Buried in the regulatory legalese concerning the appointment of a chief rep, however, is this little item:
“The chief representative cannot concurrently hold such positions as the chairman of the board of directors, general manager, or manager of other domestic foreign invested enterprises.”
It seems innocuous enough, but it did have the effect of raising questions from a number of clients whose chief rep is also about to take on additional roles as general manager for a WFOE.
There can in fact be many good reasons for retaining both an RO and a WFOE/JV structure in China, not least the RO’s ability to conduct research in a central strategic city such as Beijing, while the main manufacturing unit is based out in the sticks somewhere. The key word being made in the regulatory guidelines above being “other.” What the Chinese actually mean by this is that, to avoid any claims against him/her, the chief rep shall not hold a legally responsible managerial position – such as general manager or director – of a Chinese company non-related to the main investor, but in the same business line, without the prior approval of both the foreign company who appointed him/her as the chief rep and the shareholders meeting or general meeting of shareholders of the Chinese company. It’s to protect the business from having managers compromised by taking roles in competing businesses. There do not appear to be any restrictions on chief reps taking additional roles within companies established by the same investor. However, it may be a point worth remembering when different subsidiary group companies are investing in China – a sharp eyed official could require some explanations as to why a chief rep is also a member of what may appear a separate business.
On that note, there are however additional regulations concerning the barring of chief reps from office. They are quite straightforward, but make interesting reading. According to the regulations from the State Council’s “New RO Administrative Measures” effective March 1, 2011, candidates who meet the following criteria will not be allowed to hold the role of chief representative:
- Any individual who has been sentenced in relation to harming national security or the social public interest of China;
- Any individual who was the chief rep or representative of an RO that, during the past five years, had its establishment registration cancelled, registration certificate revoked, or was ordered to close by authorities for engaging in illegal activities that were damaging to national security or public interest, resulting in them being blacklisted in the AIC warning system (some local AIC branches may invoke a slightly different time-frame regarding blacklist duration);
- Any other conditions specified by the AIC.
While on the AIC blacklist, the chief rep cannot fulfill senior management or legal person roles in other entities. However, if the RO is legally de-registered by submitting the application correctly, it will not affect the chief rep’s ability to hold such a position in other entities in the future.
In essence, most chief reps that are in breach of these regulations will have either been running an RO that performs activities well outside its scope of permitted business, evaded tax by using the RO as a business but diverted income to other accounts, or who just walked away from an RO that was going bust. Be aware then, that walking away from an insolvent RO without going through the proper audit and closure procedures can land the chief rep in a position of being blacklisted in China. Being blacklisted has other implications as well. In the worst case scenario, the chief rep may be considered personally liable for any debts, and if found residing elsewhere in China could face legal action for recovery of monies left outstanding by an insolvent RO. Better than to either get that failing RO into compliance with China’s regulations concerning closure – and take the financial hit – or resign yourself to leaving the country, giving up your China career, and not working in China for the next five years.
Dezan Shira & Associates can provide assistance with establishing representative offices in China, as well as de-registering them and upgrading to trading companies or WFOEs. The firm maintains 12 offices throughout China. Please contact email@example.com for assistance or visit the firm’s web site here.
Setting Up Representative Offices in China (Fourth Edition)
This is an essential, practical guide for any foreign enterprise or business-minded individual to understand the rules, regulations and management issues regarding establishing representative offices in China. This updated edition also includes detailed descriptions of the 2010 regulatory updates which have impacted on ROs.
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In this issue of China Briefing we take a look at the difference between the representative office and the foreign-invested commercial enterprise.
Closing Representative Offices and Liquidating a Business in China
In this issue of China Briefing, we examine the procedures for closing down representative offices and liquidating businesses in China.
Legal Risks in ‘Walking Away’ From China
China RO Changes in March – The Full Implications