Insights on Treatment of Representative Offices (ROs) – Pressure increases

By Richard Hoffmann, ECOVIS Beijing China

It is said that “guanxi”, meaning connections, is important in China. We have been in China for a long time and we have good contacts to many authorities in different areas. This helps us with a very important aspect: most recent updates. We use this inside knowledge to inform our client base and friends about upcoming changes for anyone running a business in China. Knowledge is power – especially in China.

A few days ago one of our employee met high officials from the tax authorities in Beijing and became aware of inside information about how Representative Offices (ROs) will be treated in future. The tax officials declared that they will increase pressure on ROs  – forcing them to pay their taxes from 2011 onwards.

Since 2011 regulations for ROs have changed. Previously many ROs have been exempted from tax payments. However, now they have the obligation to pay taxes. But most ROs are not in compliance with these regulations and continue as before. They do not pay taxes or far too less. That is why authorities will start chasing ROs to make sure that all outstanding and future tax liabilities are cleared.

Since most ROs have very high expenditures, the total taxes that have to be paid may accumulate to an immense amount. In addition to this, tax authorities often charge high fines for entities not paying in time. Thus, delayed tax payments for 2011 and 2012 can become very expensive. Moreover, the RO faces the risk to have its registration certificate revoked. In this situation the parent company will not be allowed to operate or establish any RO in China for the following five years anymore.

ROs are subject to Corporate Income Tax and Business Tax. Their total tax burden is either calculated using the deemed profit or actual income method and is generally about 11.69% in Beijing.

We want to draw your attention to the changed situation and want to inform you that from now on tax authorities will have an unwavering eye on ROs. All offices, which have not paid taxes in the two previous years, are strongly recommended to do so as soon as possible. It is important to build up a strategy, have someone who can assist you to clear tax obligations and lobby with tax authorities.

You have further questions or are interested in our services? Please don’t hesitate to contact us: