Representative Office Incorporation in China
Representative Offices (RO) are the cheapest, fastest and easiest way to incorporate in China, compared to WFOE and JV. However, such advantages come with several weak points you should be aware of before choosing to set up an RO. Let’s have a closer look at their characteristics:
- Legal status: A RO isn’t liable for its actions in China, but its Chief Representative and the head office situated overseas are. Most of the time, the head office has to be at least 2 years old, a criterion to set up a representative office in China.
- Funding:Funds can only be injected from RO’s head office. Loans are not permitted.
- Hiring:The RO can’t hire by itself. Even though it can run interviews, it needs to use a local human resources agency, such as FESCO, to handle the recruitment process.
- Accounting: ROs, as all other kind of companies, are submitted to annual audit of accounting books. It takes place during the first three months of each year.
- Taxes:even though ROs aren’t authorized to make profits, they are subjected to a tax on the office’s gross expenses. The tax rate is usually around 12%.
- Offices:ROs have to be located in a building owning the appropriate classification.
- Business Scope: Golden rule is that ROs can’t make profits. Therefore, they can’t issue invoices and they can’t receive payments. However, they are the perfect vehicles for conducting market researches, sensing the Chinese market, coordinating your company’s activities in China, promoting your products, providing help and guidance to your clients.
- Switching Costs: Be aware that switching from a Representative Office to a Wholly Owned-Foreign Enterprise is not just a paperwork problem. You will basically need to deregister your RO and register the WFOE in a timely manner so as to minimize switching costs, tax burden and activity disruptions.
- License renewal: the RO’s license has to be renewed every year.
- Registration duration: between 1 and 2 months (6 months for WFOEs).
When does opening up of a RO make sense?
This is a question that has to be seriously addressed by any company willing to open a RO. It is often seen that a WFOE is more interesting than a RO, because the company’s long term strategy is to expand business in China and start to make money. In such cases, setting up a RO will be a burden: it is better to go for the WFOE directly. Even though the costs look higher at first glance, setting up a RO and then switching for a WFOE will have an even higher cost.
However, if your plans in China do not involve profit making but rather to insure a presence on the Chinese market – so as to maintain local relationships, promote your products and have a better sense of the local trends – then setting up a Representative Office can be the most-fitting solution, leading you to save time and money.
S.J. Grand’s teams have more than 10 years of on-the-ground experience in China. We can guide you through the administrative paperwork and help you in planning your incorporation in China. Don’t hesitate to ask us your questions: contact.
More about China: here.
Setting up a business in China: here.
Recommendations before and after setting up a business in China: here