The rep office advantages of a light, easy to set up and affordable solution are offset however with severe limitations. Critically, a reprepresentative office cannot issue invoices in RMB or make any profit from its activities in China. A representative office also cannot directly hire staff, and instead must place them with a local agency in China.
The alternative to a representative office is to open a more substantial WFOE. In contrast this permits full business operation in China, can invoice clients and make profit, and can directly hire staff. It is though more time consuming and expensive to set up (both from a direct setup cost and need for capitalisation), and carries more responsibility for owners. A good analogy is to view a rep office as a cost center of the foreign parent, whereas a WFOE is a fully operating subsidiary.
Recent simplifications to the process for establishing a WFOE have certainly made them more appealing to many clients. But there still remains a strong difference and choice to be made when choosing a WFOE or a representative office. As with any business process, the key here is in understanding the details, differences and requirements.
Our guide to China Representative Office registration
At FDI China, we have many years’ experience advising companies on their setup options, and aiding representative office in China setup if this is deemed best.
Take a look at the details for representative office setup that we provide here. We would welcome discussion of your plans for a Shanghai representative office or a wider China representative office. Opening an office in China is an exciting first step to doing business and we look forward to helping you start this.
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Key-points of a Representative Office
Why choosing a Representative Office?
Despite the major limitation of not making profit in China, there are many good reasons to open a China representative office. For many companies, this lighter option is the best to go for.
- Although it cannot make a profit, a rep office can carry out any non-profit making business activities in China.
- As the simplest form of Chinese company for non-residents to set up, a representative office has the lowest cost.
- No capitalization is needed. Although a WFOE in theory now requires no minimum capitalisation, in practice capital injection is needed and is hard to extract once made. A rep office does not need this, lowering cost and risk.
- Much faster setup time and complexity than for a WFOE. A representative office can normally be set up in several months less than a WFOE.
- Much lower tax and HR administration burden than for a full WFOE.
- A representative office can hire both local and foreign staff, with employment and payroll handled by a Chinese agency.
Opening an office in China is a complex task, but best approached with good advance planning. At FDI China we have successfully opened many china representative offices and we know the value in early consideration of set up specifics. This will both help you establish if a rep office structure is right for your business, and speed the eventual set up process.
Some key areas to consider before opening a rep office in China:
– Company location
As with any company in China, one city location must be chosen for company registration. This will be linked to the company name and is very difficult to change later. Shanghai representative offices are a popular choice, but are not the only options. Consider the location of potential staff, partners, suppliers and Free Trade Zone preferences for example.
– Company name
The choice of company name for a rep office is arguably not as critical as for a WFOE, as the company is not selling direct to customers. It is still however an important part of branding, and will be scrutinized by AIC for availability and correctness. The format for naming a rep office is “Company Name + City + Representative Office.”
– Company structure
Note that (following rule changes in 2010) the parent company of a rep office must be at least 2 years old. In addition, the law states that rep office registration is only valid if the parent office remains registered. This limits the use of SPV or holding company structures as is common with WFOE setup.
– Tax and expense planning
It is important to consider that a rep office is taxed even though it derives no profit. This is usually based on the expenses of the rep office, and has risen in recent years from 10% to closer to 15%. A WFOE of course is taxed instead on its actual income / profit.
– Staff requirements
A rep office can hire staff in China, but this is not as flexible as permitted for a WFOE. Staff will need to be hired and managed using an employment agency (FDI China can assist with this) rather than directly by the company. There is also a limit on foreign employees of 4, including the chief representative.
– Future plans in China
For many companies, opening a rep office, with its lower cost and complexity, is their best start-up option in China. It is worth considering options carefully at the outset however if you know that a transition to a WFOE structure is preferable within a short timeframe.
With simplifications in recent years to the WFOE set up procedures, application methods and capital requirements, it may be advantageous to move straight to that rather than go through two separate setup procedures. Our advisers can discuss this in detail with you depending on your current situation and future plans.
China Representative Office required documents
The documentation required for representative office registration is much less cumbersome than what is needed for a WFOE. There are strict requirements however, and it is best to start preparing documentation as early as possible.
In general the following documents will be needed, but this can vary for different company types or operating location.
- Representative office application form.
- Passport copies, photos, CV and appointment letter for the rep office chief representative.
- Office rental contract (in city of registration, must be in commercial building and valid for at least one year).
- Certification, registration and articles of association of the parent company.
- Bank reference letter for parent company (showing time with bank and good standing).
Note that all of these documents relating to the parent company will need to have a Chinese translation, notarized by the Chinese embassy.
How to set-up a Representative Office in China?
We provide here an outline of the steps required to set up a representative office. This is not a challenging process, but it does involve liaison with several different Chinese authorities. The procedure here is based on our extensive experience working with many different clients.
Obtain approval for company name
The first step in opening an office in China is to choose a name. Company names are strictly regulated for all types of company. A proposed name should be checked for availability, and that it does not contradict any rules regarding special characters or words. This is then submitted to the local AIC (Administration of Industry and Commerce) for verification and approval.
Sign rental lease for office space
It is a requirement for representative office application 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. The responsibility is on the applicant to verify property status properly through the landlord’s documentation.
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. At this point the representative office is fully licensed and established.
Carve company chops
Chops, or seals, are used for a representative office just as they are for any Chinese company. These represent the highest level of company authorisation. Separate chops are needed different areas, and are obtained through the Public Security Bureau (PSB).
Register for tax payment with the local tax bureau
Tax will need to be paid from date of registration, usually calculated as a percentage of total expenses.
Obtain visas for foreign employees
Application is made via the PSB, and visas will be needed for the rep office chief representative and any other foreign employee (up to 4 in total).
Open Chinese bank account
A basic Chinese RMB account is needed for company day to day spend. If foreign exchange is required, we can also apply for a foreign exchange registration certificate.