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How to change a RO into a WFOE

(June 10th, 2015)

By Richard Hoffmann

Establishing a Representative Office (RO) is one of the easiest, fastest and cheapest ways of entering the Chinese Market. For certain activities a RO might be the right choice, for others however, it is a waste of time and money, as the purpose of a RO is very limited and after a while it might not satisfy their expansion plans. Basically, a RO can only perform activities that do not generate revenue within China, such as market research, networking and marketing.

Opportunities and Limitations of a Representative Office

 

Easier and faster to set up, a RO is a good choice to evaluate the market first and establish contacts with potential business partners and clients. Many companies start out as a Representative Office, with the thought of changing it into a WFOE in the long run. However, engaging in the market actively, you are required to set up a WFOE in order to enjoy a wider range of possibilities.

Advantages of a WFOE in China

We receive many inquiries of foreign companies every month, planning to change a RO into a WFOE. Such a conversion, however, is not possible as the Chinese laws indicate the process of closing the RO completely and founding the WFOE from square one. As easy as this may sound, once the decision is made, companies have to undergo a way of long and complex procedures. Therefore, ECOVIS Beijing outlined an action plan for you, summarizing the most important steps:

Step 1

Considering that closing your RO can take up to one year or even longer, it is advisable to set up a WFOE as a first step. A WFOE set up usually takes three to six months, depending on the business scope. In that way, company assets, such as employees, can already be transferred to the new WFOE. This is of utmost importance, since it is difficult to close down a RO that still employs staff, besides, foreign expats might run into trouble with visa regulations.

Step 2

Parallel to setting up the WFOE, you can already start de-registering your RO. Before applying to do so, the RO should pay all outstanding taxes, complete any other outstanding business activities and receive a final tax clearance certificate from both the local and state tax bureau. In order to receive these statements, the local tax bureau requests the past three years’ audit, processed by a local CPA firm. The audits are a crucial point in order to complete the liquidation, because any mistakes can result in a national ban from future investments.

Challenge:
Not only the fact that the RO’s HQ has to issue several documents and the Chief Representative’s Individual Income Tax and employment status will be checked, the list of documents to be provided to the tax bureau is long and detailed. From our experience this step can take up to several months and makes up the most challenging step for foreign companies as there is often a lack of necessary documents. Making sure the entity really paid all taxes, the company has to provide any single document being asked for and proof that all taxes for any bookings throughout the last three years were paid in accordance with the taxation rules.

Step 3

Afterwards, a cancellation application and signed board resolution to close the RO should be submitted to the local and national tax bureau. Depending on the completeness and correctness of the documents provided to the authorities, the RO should obtain the Notice of Cancellation of Tax Registration after one to three months.

Step 4

The next step in the process is to close the bank account of the RO. The RO’s bank account opening certificate, credit code certificate and other documents have to be cancelled and given back to the bank in order to do so.

Step 5

After closing the bank account, the RO should de-register at other relevant authorities. For instance, the RO should receive a Notice of Approval of Cancellation of Registration from the Administration of Industry and Commerce (AIC) and should cancel documents from governmental authorities such as the National Bureau of Statistics, the State Administration of Foreign Exchange (SAFE), the Quality and Supervision Bureau and the Public Security Bureau (PSB).

After completing all these steps, your RO is officially closed and you can continue to do business with your WFOE. If you are interested in the most important steps of how to set up a WFOE, please read our article about this topic.

If you have an inquiry or need assistance with closing your RO or setting up your WFOE, please feel free to contact ECOVIS Beijing at any time.

Richard Hoffmann Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter, give us a call +86 10-65616609 (ext 811/806) or contact us directly via Beijing@ecovis.com.
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Author:
Richard Hoffmann
richard.hoffmann@ecovis.com
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