As foreign businesses look for a safer way to enter China, we are receiving more enquiries about a Representative Office (RO) set up. While Representative Office seems to be a risk-free choice for China expansion in the current environment it might not be the best option for your business expansion as there are several factors to consider.
PRC Representative Office
A representative office is a branch of an overseas company that can only carry out supporting activities in China. As it is not a separate legal entity, RO cannot partake in direct profit-generating activities, issue invoices, enter contracts or hire staff.
Rep offices are established for marketing and network building activities and local employees are hired indirectly through an HR agency. Set-up costs would be lower than the ones for an LLC and the incorporation process could be slightly faster.
It is important to keep in mind that even without generating profit your RO will still be taxed with a 10% tax on total expenses.
Representative Office VS foreign-invested Limited Liability Company (ex-WFOE)
The main difference between RO and LLC is that the latter can generate profit.
An LLC is the most common entity form for doing business in China. Foreign invested enterprises can sign contracts, issue invoices, and hire employees directly. If you don’t require an office space, most regions accept a virtual address for the registration purposes. On the other hand, for the RO you will have to rent a physical office.
You can’t convert from RO to an LLC
It is a common misconception among foreign businesses that an RO could apply for a different “status” and become a legal entity. Transition to an entity that can generate profit in China will include closing of the Representative office and incorporating a brand new LLC.
De-registration process in China is complex, lengthy, and expensive.
Before, incorporating a WFOE could take up to 6 months when you could set up a representative office in less than a month. Nowadays China LLC will take approximately 4 weeks after getting the required documents in order.
It all depends on your current and future business objectives. If you need to be on the ground in China to represent and promote your brand, meet with customers and partners face-to-face, establishing a Representative office could be the right option.
Prior to China RO establishment
If China RO set up corresponds to your immediate and future business objectives, here are three pre-establishment considerations:
- Make sure the foreign entity meets a basic requirement
The overseas company must be established for more than two years prior to registering a China representative office.
- Sign a lease for at least one year
ROs require a physical office located in an approved office building. Not all the office buildings qualify as such, so make sure to run the contact by a trusted advisor. In addition, property ownership certificate, floor plan, landlord’s business license or ID card will be required.
- Appoint a Chief Representative
A Chief Representative will be responsible for the affairs of the representative office. Foreigners can only be registered as representative; representative office can have a maximum of four.
To find out more about Representative Office establishment, get recommendations for the approved office space and get assistance with employment of the local personnel, please contact our team at contact@sjgrand.cn.
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