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ROs are Chinese legal entities because they are registered under the Chinese laws. However, Chinese laws do not expressly provide that ROs should bear liabilities independently with their own assets (i.e. limited liability), ROs may be deemed to be part of the foreign enterprise. As a part of the foreign enterprise, the foreign enterprises should bear liabilities of the RO with all its assets. It the assets of the RO are not sufficient to satisfy its liabilities, the foreign parent enterprise should be responsible for the liabilities of the RO. However, it is not clear as to the extent of liabilities to be borne by the foreign enterprise if a RO exercises its authority which exceeds its business scope.
Moreover , a RO will subject the foreign enterprise to the jurisdiction of PRC courts. According to Chinese laws, if a foreign enterprise establishes a RO in China, the Chinese court in the location where the RO is located has jurisdiction over the foreign enterprise in respect of disputes arising from contracts or other property rights. This is a significant issue which a foreign enterprise should consider before it decides to set up a RO in China.
When a foreign company considers whether or not to establish a RO in China, it should research whether or not there are bilateral judicial assistance treaties between the home county and China. Bilateral judicial assistance treaties provide for a basis enforcement of civil judgments. If there is a bilateral judicial assistance treaty between a foreign country and China, a civil judgment rendered by a Chinese court usually can be enforced in that foreign country. Otherwise, such civil judgments are difficult to be enforced in other countries in the absence of a bilateral judicial assistance treaty on the-enforcement of civil judgments.
Currently, there is no bilateral judicial assistance treaty between China and the United States of America, it is very difficult for a PRC civil judgment to be enforced in the USA and vice versa. Therefore, jurisdiction is not an issue for American companies. However, enterprises located in countries that have bilateral judicial assistance treaties with China should consider the jurisdiction issue. In order to avoid this problem, the best way is to use a company located in a country that does not have a bilateral judicial assistance treaty with China.
Foreign companies may also want to set up a shell company in a country that has a bilateral judicial assistance treaty with China. However, local approval authorities have their specific requirements for the qualification of foreign enterprises that apply for establishment of ROs in respect of the amount of capital and how long the foreign enterprises have been in existence. The shelf company must meet these requirements before the application for registration will be approved.