1. INTRODUCTION

1.1 Summary
This outline contains only a brief summary of certain aspects of Chinese law and practice that may be pertinent to establishing a representative office in the People's Republic of China ("PRC"). This outline is not intended to address all possible issues that may arise in connection with the establishment of a representative office.

1.2 Representative Office Vehicle
The representative office is one of the common business vehicles through which foreign investors can establish their first presence in China. The relative simplicity and comparatively short time frame required to establish such an office is the main reason for its popularity. Unlike other forms of foreign investment vehicles, there is also no capital requirement.

2. REGULATORY FRAMEWORK

2.1 Principal Regulations
The principal regulations governing the establishment and operation of representative offices in the PRC are the:
(a) Interim Regulations of the State Council of the People's Republic of China Concerning the Control of Resident Representative Offices of Foreign Enterprises, effective as of 30 October, 1980 ("Interim Regulations");
(b) Procedures of the State Administration for Industry and Commerce ("SAIC") of the People's Republic of China for the Registration and Administration of Resident Representative Offices of Foreign Enterprises, enacted by the State Council and effective as of 15 March, 1983 ("Registration Procedures"); and
(c) Detailed Rules of the Ministry of Foreign Trade and Economic Cooperation for the Implementation of the Provisional Regulations Governing the Examination, Approval and Administration of Resident Representative Offices of Foreign Enterprises, effective as of 13 February, 1995 ("Detailed Rules").

2.2 Local Regulations
Local regulations are also applicable. In Beijing, the following local regulations may apply:
· the Provisions of the Beijing Municipal People's Government for the Administration of the Hiring of Chinese Employees by Resident Representative Offices of Foreign Enterprises (1996); the Notice of the Beijing Municipal People's Government for the Further Improvement of the Labour Administration of the Secondment of Chinese Employees to Resident Representative Offices of Foreign Enterprises (1996); the Circular of the Beijing Municipality Regarding Payments Made by Permanent Representative Offices of Foreign Enterprises on Behalf of their Head Offices May Be Excluded from the Calculation of Taxable Income (1989); and the Circular Regarding Representative Offices in Beijing of Foreign Enterprises Shall Withhold and Pay Individual Income Regulatory Tax on the Remuneration Paid to their Chinese Employees (1991),
Note that in this memorandum, specifics relating to the establishment of a representative office in Beijing are provided for reference. Details may vary from city to city in China and thus should be separately confirmed.

3. NATURE AND FUNCTION OF A REPRESENTATIVE OFFICE

3.1 Liaison Office
A representative office is not an independent PRC legal entity, but rather a liaison office with a limited range of authorised activities. The parent enterprise will be legally responsible for the activities of its representative office.

3.2 Activities Scope
By law, the representative office's activities are quite restricted and must be specifically approved during the application process. A representative office may only engage in activities within its registered business scope. (Please see discussion below for approval and registration procedures.)

3.3 Permitted Activities
PRC law provides that representative offices are prohibited from engaging in direct business activities. The following types of activities within the business scope of the parent enterprise are permissible:
(a) conducting business liaison for the parent enterprise;
(b) introduction of products;
(c) market research; and
(d) technological exchanges in China.
In our experience, a representative office also coordinates visits and exchanges of personnel, and conducts negotiations on behalf of its affiliate companies/parent enterprise in the PRC. However, as it is not an independent legal entity, a representative office does not have the legal standing to enter into contracts with other entities on behalf of its parent enterprise. Special restrictions apply with respect to representative offices of financial institutions and other restricted categories of business.
A representative office is also permitted to carry out activities related to its own office administration. Examples include engaging the services of Chinese personnel, renting permanent office space, displaying the name of the office outside its premises, using a company chop, importing personal and office goods, obtaining telephone lines, opening a bank account in the name of the office, obtaining resident visas and other permits for expatriate employees and referring to itself as having an "office" in China.

3.4 Complying with Limitations on Activities
The apparent intention of limiting representative offices to "non-direct business activities" is to ensure that representative offices act on behalf of the foreign-based companies they represent and not on their own behalf as separate business entities. Thus contracts signed by the representative office (other than those relating to its own administration, such as its office lease) should be signed in the name of its parent enterprise or one of its affiliates, not in the name of the representative office itself. Such contracts should also show an address outside of China for the relevant foreign party. Any sale and subsequent billing and collection of money for technical, consulting, inspection, or other services should similarly be carried out by the parent enterprise or one of its affiliates, not the representative office. Based on the regulations, representative offices should not perform the functions of a "service centre".

3.5 Consequences of Exceeding the Limitation on Activities
If an established representative office is found to be "directly engaging in business activities", the Registration Procedures provide for penalties including fines of up to RMB 20,000 and suspension of business activities. In practice, actual fines and sanctions are somewhat discretionary and determined on a case-by-case basis. It is possible that the representative office may be allowed to remedy the situation without sanction or that appropriate penalties will be determined on the basis of the amount invested in such activities and/or income generated through such business activities.

3.6 Basic Requirements to Establish a Representative Office
A foreign enterprise seeking to establish a representative office in the PRC must satisfy the following basic requirements:
(a) it must be legally registered in its home country;
(b) it must enjoy a sound commercial reputation;
(c) it must provide authentic and reliable documents as required by the relevant laws and regulations; and
(d) it must complete the application procedures as required by the relevant laws and regulations.
These are flexible principles which can be managed easily with careful preparation of the application documentation.

3.7 Eligible Foreign Enterprises
In Beijing, the applicant foreign enterprise must have been incorporated for more than one (1) year prior to the application. Where the applicant is a newly incorporated subsidiary of the parent, the application will be considered on a case-by-case basis and may be allowed if the parent of the applicant has a good track record. An application by a foreign enterprise in business deficit shall not be approved.

4. TWO-STEP APPLICATION PROCESS

4.1 Two-Step Process
There is a two-step application process to establish a foreign enterprise representative office in the PRC. The first step involves preparing and filing the application materials and completing the approval process. Once approval has been obtained, the second step involves undertaking registration procedures with the Chinese registration authority. Without such approval and registration, a foreign enterprise is not permitted to establish a representative office, or engage in the related activities, within the PRC, and the foreign enterprise may be fined and/or ordered to terminate its business activities.

4.2 Prohibitions Prior to Establishing a Representative Office
In addition, until a foreign party has successfully applied and registered its representative office, it will be prohibited from:
(a) putting up any signs or nameplates in front of any offices, including hotel rooms or private residences which may serve as offices;
(b) holding out to the public (whether through brochures or other forms of advertisement) that it has an "office" in the PRC;
(c) using a seal identifying its "office" in the PRC; and
(d) opening a bank account. If the SAIC determines that any foreign party has engaged in such activities reserved for representative offices without having yet established the entity, that foreign party may be ordered to pay a fine and/or terminate its business activities in the PRC. Although such fines and sanctions may be levied on a discretionary basis, it is advisable that prior to registration, the office generally not enter into any employment agreements for local staff or other office-related contracts in its own name.

4.3 Main Approval Authorities
The application should be submitted for approval to the government authority which administers the particular industry sector of which the foreign enterprise falls under. The Detailed Rules stipulate that the Ministry of Commerce (the successor of the former Ministry of Foreign Trade and Economic Cooperation) ("MOFCOM") or its local branch, either a Commission of Foreign Trade and Economic Cooperation ("COFTEC") or a Bureau of Commerce ("BOFCOM") is the approval authority for establishing representative offices of foreign enterprises which engage in trading, manufacturing, cargo transport, consulting, advertising, investing, leasing and other economic and trade activities. The applications by the following foreign enterprises, economic entities or organizations shall be filed with MOFCOM directly:
(1) Chamber of commerce of a foreign country;
(2) Official or quasi-official organization of a foreign country;
(3) Enterprises or economic entities from a country with which China has not established formal diplomatic relationship; and
(4) Enterprises or economic entities from Taiwan.

4.4 Other Approval Authorities
In addition, foreign parent enterprises, other than those designated by the Detailed Rules, shall apply to the following governmental agencies according to their business:
(a) a financial or insurance institution shall apply to the People's Bank of China;
(b) a maritime shipping agency shall apply to the Ministry of Communications of the PRC;
(c) an air transport enterprise shall apply to The General Administration of Civil Aviation of the PRC;
(d) a law office shall apply to the Ministry of Justice of the PRC;
(e) an accounting firm shall apply to the Ministry of Finance of the PRC; and
(f) any other enterprises shall, according to the nature of their business, apply to the competent commissions, ministries or bureaus of the Central Government of China.

5. STEP 1 - APPROVAL REQUIREMENTS

5.1 Filing Applications and Sponsors
The first step of the application process involves filing the application materials with the relevant Chinese approval authority to obtain a certificate of approval ("Approval Certificate") to register the representative office. The application must be made through a local Chinese sponsor, which is usually a foreign service unit accredited by MOFCOM to submit documents on behalf of the applicant for a fee ("Sponsor"). In order for the Sponsor to file the application materials and documents with the approval authority, the foreign enterprise shall issue a power of attorney addressed to the approval authority certifying the Sponsor's authority to file the application on its behalf.
The Sponsor submits the various documents to the relevant Chinese approval authority and carries out the application procedures on behalf of the foreign enterprise. The Sponsor does not play a significant role in the operation of the representative office.
For example, in Beijing, the Foreign Enterprise Services Corporation ("FESCO"), and in Shanghai, the Shanghai Foreign Investment Service Centre is a designated foreign-service unit which can submit the application, and handle the application formalities, for the foreign parent enterprise. Other sponsors may also be authorized to provide such services.
In Beijing, the basic handling fee for FESCO will be around US$800 for the application and registration of a representative office.
FESCO also offers a full service package including additional items such as the opening of bank accounts, tax registration, bar code registration etc. for around US$1,300.
A relevant factor to consider in determining whether to select the full package or basic package may be the foreign parent enterprise's ability and willingness to liaise with FESCO and to process the more mechanical aspects of preparation and submission of documentation. Such work is commonly handled by local staff on the ground.
These fees are subject to change. Other service entities in other jurisdictions may charge different rates.

5.2 Documents for Submission
The following documents are required to be submitted in connection with the application for the establishment of a foreign party's representative office:
(a) an application letter signed by the chairman of the board of directors, or the general manager, of that foreign party, and the completed prescribed application forms;
(b) the constitutional documents of that foreign party and supportive documents sanctioning the legal incorporation and operation (e.g. incorporation certificate, annual report, and tax statements) of that foreign party issued, as appropriate, by the authorities of the relevant jurisdiction where that foreign party was established (notarised copies);
(c) a credit reference letter from a bank with which the foreign party has regular business contact, advising on the credit-worthiness of that foreign party;
(d) letters of appointment of the chief representative (i.e. the person held in charge of a representative office at law) and other representatives signed by the chairman of the board of directors, or general manager, of that foreign party together with their respective CV's and identification papers. If the chief representative is the chairman of the board of that foreign party, the letter of appointment must be signed by at least two (2) directors of that foreign party. If the chief representative is a PRC national a special approval letter by the designated foreign service unit (FESCO etc.) in favour of such chief representative has to be submitted with the application (which will often require the foreign Sponsor to enter into a service agreement with FESCO etc. as described in section 8 below); and
(e) a lease contract showing the address of the representative office and the relevant title documents. In this regard, it should be noted that:
(i) as there are some restrictions on where foreign companies may be located, it is important to confirm that the building under consideration is legally permitted to lease space to foreign companies; and
(ii) because the representative office is still in the process of being established, there is often a "chicken and egg" question about having the not yet established representative office signing the lease. In such cases, it may be possible to either (a) sign a letter of intent for presentation along with the application materials; or (b) have the representative office go ahead and sign the lease, which is subject to ratification upon formal establishment of the representative office.
Please note that the relevant local Chinese approval authority may require additional documents. However, in our experience, the above documents are the usual documents requested.
Drafting notes for the foregoing documents are set out in section 5.3 below. It should also be noted that where any of the above documents is not in Chinese, a Chinese translation of that document is necessary.
Further, the application documents will be subject to notarisation by a notary public in the home country of the foreign enterprise, and legalisation or authentication by the Chinese Embassy or Chinese Consulate-General in the home country of the foreign parent enterprise. The documents required to be notarised, and the notarisation requirements, will vary depending on the particular Chinese approval authority. That is, the requirements of the Beijing approval authority for a representative office to be set up in Beijing may differ from the requirements of say, the Shenzhen approval authority for a representative office to be set up in Shenzhen. In addition, the notarisation and authentication steps may also differ between different states in the home country of the foreign enterprise, and the place of incorporation of the foreign enterprise will be a relevant factor. Accordingly, the notarisation and authentication process may involve a number of steps.

5.3 Drafting Notes for Application Documents
Care should be taken when drafting the application documentation to ensure that approval can be obtained. The following sections highlight certain aspects relevant to the preparation of the foregoing application documents.
(a) Application Letter. The application cover letter, referred to in section 5.2(a) above, should list the documents that will be included with the application, and must set out the following essential information:
(i) a brief introduction to the foreign enterprise;
(ii) the purpose of establishing the representative office;
(iii) the name of the representative office to be set up (see below);
(iv) the name(s) of the responsible member(s) (i.e. the chief representative and other representatives, if any);
(v) the scope of business activities;
(vi) the duration of the representative office (see below); and
(vi) the location of the representative office.
A sample application letter is attached as Appendix 2.
The name of the representative office should be in the form of "country of origin + name of enterprise + name of city in the PRC + representative office".
An original standard form application form for the "Establishment (Extension) of Representative Office of Foreign Enterprises" should also be completed and submitted in Chinese. The maximum term for the duration of a representative office is three (3) years, calculated from the date the approval certificate is issued. Within sixty (60) days of expiry of the term, the foreign enterprise through its Sponsor may apply to the relevant approval authority for an extension of the term.
A summary of the corporate information and business activities illustrating the strength of the foreign party will also be of assistance, particularly where the local Chinese approval authority is not familiar with the parent enterprise. If an annual report or firm brochures are available, this is often helpful. A projection of how the local municipality may benefit from the establishment of the foreign party's representative office may assist to expedite the process.
(b) Credit Reference Letter. There is no required format for the credit reference letter referred to in section 5.2(c) above. It may be a letter from a reputable bank with which the foreign party has its account or has business dealings, testifying to the credit-worthiness of that foreign party.
(c) Letter of Appointment. The letters of appointment, referred to in section 5.2(d) above, should include credentials and brief biographies, and should enclose identification documents, of the chief representative and any other representatives who will be staffing the representative office. A sample appointment letter for the chief representative is attached as Appendix 3 herein.

5.4 Chief Representative Qualifications
The chief representative of the representative office must meet one of the following qualifications:
(a) he/she is a foreign citizen holding a valid ordinary passport (excluding foreign students studying in the PRC);
(b) he/she is a Chinese citizen who has obtained permanent residence status in a foreign country;
(c) he/she is a compatriot from Hong Kong, Macau or Taiwan who holds valid documentation; or
(d) he/she is a Chinese citizen (not including Chinese citizens referred to in paragraph (b) above), in which case the representative office must entrust an authorised local service unit to undertake the relevant employment formalities (see section 8 below).
We are not aware of any current requirement for the duration of stay in China by the chief representative of a representative office of a foreign enterprise. It should be noted that the chief representative and representative(s) cannot concurrently hold such positions as the chairman of the board of directors, general manager or manager of other domestic foreign invested enterprises.

5.5 Approval Certificates
If the application materials are in good order, and taking into account certain somewhat intangible factors such as whether the parent enterprise is an internationally recognized firm and whether the Sponsor has clout and experience, the Approval Certificate can generally be obtained within about ten (10) business days in Beijing (timing for other cities may vary). The Approval Certificate will usually be issued to the applicant without charging any application fee, except under certain circumstances. Once the Sponsor is notified that the Approval Certificate is ready, it should be picked up personally by the designated chief representative of the representative office (and not the Sponsor).

6. STEP 2 - REGISTRATION REQUIREMENTS

6.1 Registration Certificates
Once the Approval Certificate has been obtained, the second step of the application process involves undertaking the registration procedures with the Chinese registration authority to obtain a registration certificate for the representative office (the "Registration Certificate"), and certificates for the representatives ("Identification Certificates"). Within thirty (30) days of the date of issuance of the Approval Certificate, the foreign party must register at the local branch of the SAIC to obtain a Registration Certificate. The Approval Certificate will be automatically invalid if there is a failure to register within t