Rep Office Setup Guide
Opening a Representative Office in China is one of the most popular options for foreign companies entering the market. Whilst more restricted to do business than the more comprehensive WFOE structure, it has many advantages for certain types of business in China. In this guide to Representative Offices, we will discuss:
- What is a Representative Office and why set one up?
- How is it limited in business
- The process for setting up a Representative Office
- Ongoing management of a Representative Office
Why setup a Representative Office in China?
A Representative Office (often shorted to Rep Office or RO) is the simplest and fastest option for overseas businesses to set up an operation in China. To put Rep Office definition in the simplest terms, it allows a foreign company to engage in market research or business operations in China, but not to make a profit.
Whilst a WFOE structure overcomes these limitations and allows more complete business and profit making in China, it is more time consuming and expensive to set up and requires much more ongoing efforts to run and maintain.
For certain business activities, a Rep Office is a great choice. In our experience, we find the structure suits well in the following areas:
Early stage market exploration, particularly smaller companies with restricted budget and resources. Activities such as market research, publicity, and marketing are permitted.
- Companies looking to make an investment in the Chinese market, but require time to explore or research further beforehand.
Companies which only need a simple local presence to carry out activities such as liaising with suppliers, or for quality assurance.
For companies engaged in these activities, a Rep Office brings several advantages:
- It has the lowest cost to open and maintain.
- A Rep Office does not need capital input to open. Although a WFOE in theory now requires no minimum capital, in practice capital injection is needed and is hard to extract once made.
- Faster setup time and simpler process than for a WFOE. A Rep Office can normally be set up in several months less than a WFOE.
- A Rep Office can hire both local and foreign employees, with employment and payroll handled by a Chinese agency.
Do you need a Representative Office?
When opening a Rep Office in China, we always advise companies to think carefully if a Rep Office structure is right for them. Despite the lower cost and complexity, the limitation of not being able to derive profit is considerable. There are some situations to be careful of:
Assuming you can switch to a WFOE structure later. Companies may take the view that opening a Rep Office will be an easier start in China, prior to transitioning later on to a WFOE. There is, unfortunately, no easy process to “upgrade” a Rep Office – it essentially involves closing down and re-registering, an expensive and time-consuming option!
Believing you need a RO to do anything in China. It is possible of course to sell your products in China, and also to hire on the ground staff/representatives (through an employment agency) without opening a Rep Office. Make sure you know what you need before embarking on the process!
Rep Office registration in China – the setup process
Once you have established that a Rep Office is the right option for your business in China, the setup and registration process can be started. This is a simpler and less costly process than that for WFOEs, but nevertheless should be approached correctly to minimize problems. How to set up an office in China is often confusing, and those new to the market should get accurate advice.
Setup is faster than for a WFOE with all steps usually being completed in around 2-3 months.
For full details of the Rep Office setup process, and documents required, see our Rep Office services guide. The following is a summary of the steps involved:
1. Obtain approval for company name
As with any company in China, a name needs to be chosen that meets set requirements and is appropriate for the company’s image and brand. This is then submitted to the local AIC (Administration of Industry and Commerce) for verification and approval.
2. Sign rental lease for office space
It is a requirement for Rep Office setup that an appropriate rental agreement is provided. This must be in the city of registration, of at least 12 months duration, and be in an approved commercial (non-residential) property.
3. Make application to AIC for registration
The application form and all required documentation is submitted to the local AIC. Provided everything is in order, a business registration certificate usually takes around 2 weeks to be issued.
4. Carve company chops
A Rep Office, like all companies in China, uses a series of chops, or seals, as its official representation. These need to be obtained through the Public Security Bureau (PSB).
5. Enterprise Code
Apply Organization Code License by Technical Supervision Bureau
6. Register for tax payment with the local tax bureau
Tax will need to be paid from date of registration, and tax registration is not handled as part of the main AIC application.
7. Obtain visas for foreign employees
A Rep Office can obtain visas for up to 4 foreign employees.
8. Open Chinese bank account
Rep Office taxes and administration
As well as simpler setup than for a WFOE, a Rep Office also has simpler ongoing management. It does still have to pay taxes quarterly, however (and to fully settle tax payable for the previous year by the end of May), and requires administration effort to maintain an audit/report.
The most common method of Corporate Income tax (CIE) for a Rep Office is the Deemed Revenue Method based on expenses. This method is based on the number of expenses and the appraised and specified rate of profit.
Deemed Revenue = Expenses / (1 – 0.15)
Amount of CIE = Deemed Revenue x 15% X 25%
The appraised and specified rate of profit often used is 15%, however, it is important to note that 15% is a minimum and may vary per local.
The expenses are the salaries, bonuses, allowances, welfare expenses, the purchase price of belongings (including vehicles, office equipment, and other fixed assets), communication fees, travel expenses, house rents, equipment lease charges, car fares, entertainment expenses and other expenses paid to employees inside and outside China.
Rep Offices are also subject to VAT and Consumption Tax as necessary on purchases.
An audit report needs to be completed annually for a Rep Office. This happens at the beginning of the year after the calendar year-end and needs to be completed by a licensed Chinese accounting firm. This will look at the following:
Expenses of the Rep Office. This is used to calculate deemed taxable income and is the main focus of the audit. Expenses include salaries, rental fees, utilities, audit and administration costs, employment agency fees and operating expenses.
- Bank statements and bank reconciliation report.
- Employee registration and details, including IIT (Individual Income Tax) filings.
The information contained in this article is valid on August 16th, 2018. For updated information, please contact us via email at firstname.lastname@example.org.