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Disadvantage For Registration of Representative Office in China

Chinese foreign investment law does not permit a Representative
Office to carry out direct business activities. It is limited to
activities such as market research, product promotion, and
liaison. It may not charge fees for its services or engage in
profit-making activities such as direct sales or marketing.

A Representative Office should take special care when
performing the following activities:

Billing Procedures: A Representative Office may neither collect
money for its parent company nor invoice clients directly - this
must be handled by the parent company. This is a tricky and
ambiguous area, and it would be wise to subject your
Representative Office's billing procedures to the scrutiny of a
competent professional in China to ensure that it is not
operating outside of its scope of business.

Signing Contracts: All contracts must be signed by the parent
company, although a Representative Office can negotiate
contracts that are later signed by its parent company.

Employing Staff: Unlike Joint Ventures and Wholly Foreign Owned
Enterprises, a Representative Office cannot directly hire
employees - it must use an authorized human resources agency.
Although most of these agencies are affiliated with local
governments, a few are private. Many Representative Offices get
around some of the inevitable inconveniences by independently
seeking employment candidates, having the HR agency 'refer'
these candidates to them, negotiating salary, etc. directly
with these candidates and then having the HR agency make the
official hiring referral to the Representative Office. The HR
agency would then take a percentage of the employee's salary
each month. Although the above-described flexibility with the
rules is common, it is best not to go any further in treating
the HR agency as a formality because a number of Representative
Offices that have tried to skirt these requirements have been
closed.

A draft Labor Contract Law is widely expected to be enacted
soon. Assuming that the enacted law is identical to the draft
that is currently in circulation, Representative Offices will
be allowed to contract directly with employees during the
employees' first year of service.

Activities Outside the Normal Scope of the Parent Company: Even
though corporations in Western countries are generally allowed
to participate in 'any lawful activity', in China a
Representative Office is conceived of as part of the overseas
parent company and must act within the parent company's usual
scope of business rather than opening up an entirely new
business for its parent company