Setting up a Representative Office in China is a common choice for foreign companies venturing into the market. Although it is less flexible than the more extensive WFOE structure, it offers several benefits for specific types of businesses in China. In this guide, we will cover what a representative office is, its limitations, the steps involved in setting one up, and the ongoing management of one.
Why setup a Representative Office in China?
A Representative Office (often shortened to Rep Office or RO) is the simplest and fastest option for overseas businesses to set up an operation in China. To put it in the simplest terms, a Representative Office 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 Representative Office brings several advantages:
- It has the lowest cost to open and maintain.
- An RO 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 Representative Office can hire both local and foreign employees, with employment and payroll handled by a Chinese agency.
Do you need a Representative Office?
When considering opening a Representative Office in China, it’s important for companies to carefully evaluate whether this structure is the right fit for their needs. While it may seem appealing due to its lower cost and simplified setup process, the limitations of not being able to generate profit can be significant. Here are a few things to keep in mind:
- Don’t assume that you can easily switch to a WFOE structure later on. Some companies may view opening a Rep Office as a way to get started in China before transitioning to a WFOE down the line. However, it’s important to note that upgrading from a Rep Office to a WFOE requires a complete shutdown and re-registration process, which can be expensive and time-consuming.
- Don’t assume that a Representative Office is necessary for doing business in China. It’s possible to sell products and hire staff in China without opening a Rep Office. Before embarking on the process of setting up a Representative Office, make sure you understand what your specific needs are and whether this structure is the best way to meet them.
Representative Office Registration In China – The Setup Process
If you’ve determined that a Representative Office is the best choice for your business in China, you can begin the setup and registration process. While it’s generally simpler and less expensive than setting up a WFOE, it’s still important to approach it carefully to avoid potential issues. Setting up an office in China can be a complex process, especially for those who are new to the market, so it’s crucial to seek accurate advice.
The good news is that the setup process for a Representative Office is typically faster than for a WFOE, and can usually be completed within 2-3 months.
For full details on the Representative Office setup process and required documents 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 Administration of Industry and Commerce (AIC) for verification and approval.
2. Sign rental lease for office space
To set up a Representative Office in China, one of the necessary requirements is to provide an appropriate rental agreement. This agreement must meet specific criteria, including being located in the city of registration, having a minimum duration of 12 months, and being for an approved commercial property (not a residential one).
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 Representative Office can obtain visas for up to 4 foreign employees.
8. Open Chinese bank account
Opening a Chinese bank account is an essential step for companies setting up a Representative Office or a WFOE in China. It enables them to carry out local transactions, pay salaries to employees, and receive payments from clients. The process typically involves providing various documents, such as business licenses and registration certificates.
Rep Office taxes and administration
Managing a Representative Office in China is generally simpler than managing a WFOE, although there are still ongoing administrative tasks to consider. For example, quarterly tax payments are required, and full settlement of tax payable for the previous year must be completed by the end of May. Additionally, maintaining an audit and report requires some administrative effort.
In terms of corporate income tax (CIT), the most common method for a Representative Office is the Deemed Revenue Method, which is based on expenses. This method calculates the rate of profit based on the number of expenses and an appraised and specified rate.
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.
Representative Offices in China are subject to various taxes and administrative requirements. Expenses such as salaries, bonuses, allowances, welfare expenses, and the purchase price of belongings, among others, are used to calculate deemed taxable income for corporate income tax (CIT) based on the Deemed Revenue Method. Additionally, Rep Offices are subject to VAT and Consumption Tax on necessary purchases.
An annual audit report is also required for Rep Offices, which must be completed by a licensed Chinese accounting firm. The audit report will examine various factors, including expenses, bank statements, and employee registration and details such as IIT (Individual Income Tax) filings. This process is typically completed at the beginning of the year after the calendar year-end.
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