It happens that market entry and legal research converge towards the need to open a representative office as opposed to a limited liability company (formerly known as WFOE); this is usually due to legal requirements, such as the registration of an entity that is operated by an association (NGO) at the head office level; in some other case, it may be a requirement of the overseas shareholders.
What is a representative office?
A representative office is a branch of an overseas company located in China that does not make a profit but can conduct an extensive array of operations. It follows the overseas company’s name, and so does the brand.
Such an office is used as a small base of operations to meet potential business partners, maintain and manage supply chains and channel sales, liaise with online platforms, conduct marketing operations, coordinate projects, market research, quality control, liaison and other support activities.
The representative office has some limitations, as its activities are not revenue-generating. It cannot sign contracts, issue invoices, conduct paid services, or have a warehouse for logistical purposes. The only services and operations it can conduct must be with the parent company it represents in China.
Does a representative office have directors?
A representative office as a branch does not have a board of directors, but it requires a named individual registered as its Chief Representative. This person does not need to reside in China and can be of any nationality.
Their passport would need a copy to be notarised and authenticated. Depending on the bank, the person will have to visit China with their passport to open a bank account (some flexibility has been possible on this for special cases). The Chief Representative is ultimately responsible for ensuring that the representative office complies with the law and regulations of China.
A representative office can also name up to three additional people as representatives. Foreigners can only be registered as representatives, so there is a cap of four. There is, however, no cap for local hires.
How to staff and fund a representative office?
Funding for the representative office to cover its running costs can be sent from the overseas company headquarters to the representative office’s Chinese bank account.
The representative office can hire both foreign and local staff. However, local staff are hired indirectly through a Government HR agency, which is an overhang from the early days of foreign companies operating in China.
A representative office of such sort is not profit-making (there are some profit-making types, such as law firm representative offices), but they are taxed.
The tax is determined on a cost-plus basis, considering operating costs, rental, travel, staff costs etc., with the cost divided by 85%. The deemed revenue is subject to VAT and local city taxes unless exempt in some parts of the country, and the deemed profit is subject to Corporate income tax (CIT) of 25%, as being qualified as non-resident from a tax perspective; the reduced rate that may apply to small profit companies does not apply to a representative office.
An example of the tax is as follows:
Representative office in Shanghai tax example
Deemed profit calculation
- Total expenditure: CNY 1,600,000
- Deemed profit rate: 15%
- Deemed revenue: CNY 1,600,000 ÷ 85% = CNY 1,882,353
- Deemed profit (15% of revenue): CNY 1,882,353 x 15% = CNY 282,353
- VAT rate (small-scale taxpayer): 3%
- VAT: CNY 1,882,353 x 3% = CNY 56,471
- Urban city maintenance tax (7%): CNY 56,471 x 7% = CNY 3,953
- Education surcharge (3%): CNY 56,471 x 3% = CNY 1,694
- Local education surcharge (2%): CNY 56,471 x 2% = CNY 1,129
Total surcharge: CNY 6,776
Corporate income tax calculation
Corporate income tax (25%): CNY 282,353 x 25% = CNY 70,588
Total tax payable
CNY 56,471+ CNY 6,776+ CNY 70,588 = CNY 133,835
In essence, the representative office, in this case, pays 8.36%* in tax.
*This percentage would increase to 12.32% if the representative office is qualified as a general taxpayer (GTP), as its VAT would change from 3% to 6%. A representative office with expenses of more than CNY 4.25 million over 12 months automatically qualifies as GTP.
Once the representative office is operational, it is required to maintain proper accounting records locally, and it is required to have an accounting firm conduct an annual audit and file quarterly taxes and a yearly tax return. The head office of a representative office can pay costs directly, or the representative office can pay by itself, but all related costs, regardless of the location of payment, should be included within the accounting records of the representative office.
As tax is paid on a deemed basis, the parent must be able to take the expenses into its books, as branches are consolidated in most jurisdictions, and it can claim a credit for the CIT paid under the double tax treaty between that jurisdiction and China.
How long will it take and what is needed to establish a representative office?
Representative offices are reasonably quick to establish, taking around two weeks from the time of filing, excluding the bank account, depending upon the location. However, there are two essential factors that overseas companies must be aware of. Firstly, the overseas company should have been established for at least two years. Secondly, the representative office is tied to its location in China, i.e., it cannot have its branch in another Chinese city, and the representative office can’t be converted to any other legal entities like a wholly foreign-owned enterprise (WFOE), etc.
As for documentation, the overseas company must have a letter from the bank stating the company’s good financial standing and the company registration certificates to be authenticated by the Chinese Embassy overseas. The Chief Representative’s information on passport, photos, and CVs will also be required. And lastly, a lease contract of where the office will be based in China. Where a formal office is required in most cities, there are serviced office centres that can provide a registered office address with the proper documentation required for registration.
A representative office provides a way for a company to have a base in China, a brand presence and carry out supporting activities, including brand building and marketing activities. It is slightly easier to set up than a company and has fewer compliance requirements, and there is no investment required; it is normally just an expense line in the HQ’s P&L account; a comparison with a cost-plus WFOE should be made before confirming the registration of a representative office.
Overseas companies should seek firms that can offer one-stop-shop services like Acclime China to reduce the time needed to begin operations in China. Acclime, for example, on top of providing HR and accounting services, has an extensive network of partners that can offer prime office real estate for the business needs of the company.
To find out more about representative offices in China and how to establish an office for your business needs, please send your enquiries to firstname.lastname@example.org.
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