"Shanghai's new prosperity has would be the Shanghai Municipal Foreign Economic Relations and Trade Commission. Application must be made through a Chinese sponsor either an approved company with the right to engage in foreign trade or an accredited foreign trade and economic co-operation organisation or foreign enterprise service unit.
The second phase starts within 30 days by obtaining a registration certificate from the local branch of the State Administration for Industry and Commerce. If registration procedures are not completed within 30 days, the foreign enterprise's certificate of approval must be returned.
Once the registration certificate has been obtained, there are several other registration formalities that have to be completed, again within 30 days:
Bank account an account should be opened with the Bank of China or another bank approved by the State Administration of Foreign Exchange.
Tax registration both the foreign personnel and the office must register with the local tax bureau. Representative offices are also required to file regular reports.
Customs if the office is importing anything, it must register with the local customs bureau. Office equipment and supplies imported into China are subject to the payment of customs duties and value added tax.
Foreigner residence permit, work certificate and visa ?foreigners must apply for a foreigner residence permit and multiple-entry visa with the local public security bureau. The local labour bureau supplies work certificates.
The registration certificate for a foreign representative office is valid for one year. To renew a registration certificate, the office must apply for an extension of registration within 30 days prior to the expiry date. The approval certificate is valid for three years, after which the foreign enterprise must repeat the entire process for approval and registration.
Unlike foreign investment enterprises, there are no established limits on the numbre reign businesses wishing to establish a presence in Shanghai or other places n China, but do not want a full-blown wholly-foreign owned. enterprise or joint venture, have the option of opening a representative office. The role of representative offices is limited by Chinese laws to indirect business. They can represent a foreign enterprise in conducting business liaison, product introduction, market surveys and research, and technological exchange within the business scope of that enterprise.
The 1983 State Administration for Industry and Commerce PRC Measures Concerning the Registration and Control of Resident Representative Offices of Foreign Enterprises imposes penalties of up to Yn20,000 and suspension of business activities, on representative offices 'directly engaging in business activities'. The intention appears to be ensuring that foreign representative offices act on behalf of the foreign-based enterprises they represent and not on their own behalf as separate business entities.
So, for instance, contracting, selling, billing and collecting money should be done in the name of the entity the office represents or one of its affiliates, not in the name of the representative office.
As with many other business endeavours in China, setting up a representative office requires patient navigation through its legal system. Because the laws are unclear as to when foreign enterprises must register for representative offices, in practice only foreign enterprises which wish to maintain a long-term presence in China by renting permanent office space, obtaining a telex or fax line, or hiring local office help, have generally found it necessary to register.
When a foreign enterprise has deter-mined the need to file for a representative office, it must embark on. a two-phase process of (1) application for approval and (2) registration. The actual processing of registrations can be exasperating because of inconsistencies and constant change?at last count, the number of bureaux that must be visited to establish a representative office i.n Shanghai was eleven!
In the first phase, the foreign enterprise must_apply for and obtain an approval certificate from the'approval organ authorised by the Ministry of Foreign Trade and Economic Co-operation ?in Shanghai that
ber of representatives, deputy representatives and foreign staff members a representative office may employ. Though the government would prefer the hiring of Chinese personnel for clerical, secretarial and other related work, it has been possible to hire expatriates for these positions.
Chinese citizens must be hired through a 'foreign employee service company' or other units approved by the government to provide such employees to foreign representative offices. Local personnel can be selected by the foreign enterprise or the agency can recruit them. To hire local personnel, the foreign company need do little more than sign a contract for their services with the agency. The agency then enters into a contract of employment directly with the local staff.
Limiting tax exposure
Historically, there has been tension between foreign enterprises and Chinese authorities over whether representative offices are subject to business tax and enterprise income tax. In principle, so long as representative offices limit them-selves to providing business liaison services for a 'head office', they should not be subject to tax. In actuality, while Shanghai is relatively receptive to applications for tax exemption, other cities can be much more difficult.
The Provisional Regulations on the Levy of Consolidated Industrial and Commercial 7 . and Enterprise Income Tax on Resident Representative Offices of Foreign Enterprises states that so long as a representative office restricts itself to a narrowly-defined scope of liaison work and only acts on behalf of its 'head office', it is tax-exempted. The definition of 'head office' was a subject of debate, but in 1988 it was settled that 'head office' can include a number of companies within a group.
Representative offices are further protected from taxation through double tax treaties with China, which provide that only foreign enterprises with a 'permanent establishment' in the counterpart country are taxable. Since 'permanent establishment' as defined by the treaties excludes liaison-type activities, representative offices can be tax-free if it controls its activities accordingly.
However, in practice, representatives frequently extend beyond liaison work and participate in negotiations and conclude and even sign contracts. According to Ministry of Finance officials, the most important factor in determining whether such activities are taxable is whether the representative has or habitually exercises the power to negotiate and conclude con-tracts. If the representative acts only on instructions from head office when negotiating a contract, and does not exercise a general power of attorney to sign contracts, the representative should not be held to be conducting taxable business.
In general, the following precautions should be taken by a company to limit tax exposure:
activities should be limited to representing companies that file a consolidated tax return with the entity which established the representative office.
accurate records should be kept to demonstrate that the representative acts on instructions from, and that decisions are made at, the head office or outside China.
if possible, contracts should be signed outside China or by personnel sent in from outside China for the signing. If this is not possible, the representative should be given a specific power of attorney.
if the representative office earns or is allocated income for its activities in China, it should report and pay taxes on that income. These Chinese taxes should normally be able to be credited against the home income tax of the company it represents.
Freslzfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, telephone Matthew Cosans in Hong Kong (852 2846 3400) or Beijing (86 10 6410 6338) or by e-mail: mcosans'irfreshfields.coin
40 Years of Austrian Airlines
"I do not believe at all in this aviation stuff. It costs much more.than we can afford. It would be smarter to build airports and let others fly here to lose their money," said the Prime Minister of Austria, Julius Raab shortly before Austrian Airlines was founded on September 30, 1957. The maiden flight took place on March 31, 1958 from Vienna to London by Vickers Viscount propelled by Turboprop engines. In the first year of operations, new destinations including Frankfurt, Zurich, Paris, Stuttgart, Rome and Warsaw were added.
On March 28, 1995 Austrian Airlines Airbus A-340 landed in Beijing with scheduled flights twice weekly. Just three years after its inaugural flight to China, Austrian Airlines has increased its flights to three per week with an additional destination: Shanghai, now being served every Monday, Wednesday and Friday.
It is now the third European carrier to serve Shanghai and its success is partly due to its close co-operation with Air China on all Austrian Airlines flights to and from China. In order to provide even more personalised service for Chinese passengers, two Air China hostesses are on board of each flight. "The out-bound Chinese market is essential to the success of Austrian Airlines," said Alfred Brader, the first General Manager of Austrian Airlines for Greater China.
Another reason for its growing success is Vienna's strategic location in Europe. The city is located in the heart.of Europe and is the traditional gateway to both Western and Eastern Europe for inbound traffic from Asian destinations. In a similar way, long term established trade connections, similarities in languages and culture lead many Eastern European countries to look to Austria as the gateway to the rest of the world. "Today, more than 30% of the airline's China business comes from third countries. Austria and her neighbours technical co-operation and Vienna is becoming an important source of traffic from the emerging markets that stretch from Bratislava to Tbilisi in the east and Budapest to Belarus in the north." said Mr Brader.
As the flag carrier of Austria, Austrian Airlines has a long-standing reputation of promoting art and sponsoring Austrian culture at home and overseas. Since flying to China, Austrian Airlines sponsored many cultural exchanges between the two countries. In 1996 the Vienna Philharmonic Orchestra flew to Beijing on Austrian Airlines. The same year, a selection of priceless treasures from the world-renowned Museum of Fine Arts in Vienna was exhibited at the National Art Gallery In Beijing. In 1997 the Vienna State Opera was in Beijing staging three performances of Mozart's "Marriage of Figaro", while in 1998 the China National Symphony Orchestra performed a Chinese New Year's Concert in the prestigious Vienna Musikverein "Golden Hall". The programme was broadcasted to China, to an audience of several hundred million spectators by CCTV national network. The recent exhibition of Austria's most famous contemporary painter, Max Weiler, in the China National Art Gallery Beijing and the forthcoming "Treasures from the Han Dynasty" in Leoben/Austria including 17 original Terracotta Warriors from Xian presented for the first time in Europe, underlines the commitment of Austrian Airlines to furthering friendship and better understanding of different peoples.
Austrian Airlines, in striving to provide superior service, has purchased the new Airbus
A-340, the most up-to-date long-haul aircraft in the world. Used on the Shanghai-Beijing-Vienna flights, the A-340 is geared towards the highest level of comfort with 263 seats, on board satellite telephones, 16 multi-channel stereo system and exquisite meals accompanied with the finest Austrian and international wines and liqueurs.
"With regards to Shanghai, we see the latest flight addition as a sound investment for the future and are certain that it is a further step in the right direction," said Mr Brader.