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How to set up a Representative Office in China

(December 20th, 2013)

By Richard Hoffmann, ECOVIS Beijing China

If you want to enter China, you should pick the right entity which will allow you to do all the business related activities you want. For certain activities a Representative Office (RO) will be the right choice, for others it might be a waste of time and money, as the purpose of an RO is quite clear but very limited. Why a waste of time? Because you cannot directly change the status of an RO into a WFOE in the future if you want to really get your feet into China and thus you need to register the WFOE separately and close the RO! This implies that you should have a clear plan of what you want to accomplish when setting up a business in China. The set up process, starting from collecting all necessary documents to opening the bank account at the end, will take between eight to twelve weeks. Please consider that all ROs have the same limited business scope, that is: “engage in non-profit activities related to its parent office”.

Usually an RO is used as a basis for doing market research within China and other not for profit seeking activities like e.g. meeting and researching / acquiring suppliers and potential customers. It is thus the easiest way to officially step into the Chinese market but also a quite efficient one, if you just want to improve supplier or customer relations quickly. Of course there are some disadvantages coming with it. As you can imagine there are certain activities, which you will not be allowed to do and thus create a trade-off between quick and cheap market entry versus limited commercial activity options. In the following chart you can see the opportunities you will have after setting up an RO but also some limitations of a Representative Office.

AnOpportunities and Limitations of a Representative Office RO is not a separate legal entity and thus can only represent the parent company overseas but has no rights to sign sales or purchase contracts. It is also not allowed to collect money for any services or products. That means, a RO cannot issue Fapiaos which for example are the basis of Value Added Tax deduction. It also has limited recruitment options. If Chinese staff is necessary to run the business, then it must be employed through a HR agency, which will sign a three party contract with the RO and the employee. A maximum of four foreign employees can work for one RO, in contrast to unlimited employment of Chinese employees. The foreign employees should also have a working relationship with the parent company. Furthermore a RO can only represent one parent company.

The RO has to file an annual inspection report between March 1 and June 30 like any other foreign company in China on its financial and legal situation and also its business activities. As a fact, this report can only be issued by a certified accounting firm. Another important point to consider is the relatively high tax on the RO’s expenses. Because of not existence of positive income for the RO, it will be taxed on its gross expenses like e.g. office rent, employee salaries etc. This tax rate is not always the same for every RO as the laws keep silent on this. Furthermore the foreign chief representative might be subject to Individual Income Tax (IIT).

Practical Steps of the Representative Office Set Up

Before renting office space, you should make sure, the landlord has the license to rent commercial office space to a foreign RO. Otherwise you might not just waste time with looking for alternatives but also your already paid deposit. Starting to look for office space in a business center might be a good choice if you want to avoid initial costs for renovation of fixed assets etc. But before renting any space you should ensure, that Chinese authorities will allow you to set up an RO with this specific address. In the following you will see an overview of the formal necessary steps.

Steps for Setup

 

We can help you to set up your RO including all necessary legal and formal steps. Of course we can also check if your landlord has the necessary license to rent office space to your RO.

Being the trusted partner of several embassies in China, we can give you in depth knowledge and help you to take the right steps, when doing business in China or with Chinese entities.

With our monthly newsletter and on our LinkedIn Group FocusChina you can stay up to date on current tax regulations and legal changes or connect with others and look for help.

Fur further information also check our Doing Business in China Guide 2014, which you can download here!

Contact us for further information about Doing Business in China!

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Author:
Richard Hoffmann
richard.hoffmann@ecovis.com
Office website

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