Representative Office in China: How to Set Up One?

Establishing a Representative Office (RO) is arguably one of the fastest, most straightforward solutions to enter the Chinese market. Although there is general consensus in the business community that a WFOE (Wholly Foreign-Owned Enterprise) is “the way to go” for foreigners looking to set up legal operations in China, a representative office may, in some specific cases, be more suitable depending on your business scope and long-term ambitions in China.

Take a look at some of our previous posts: Doing business in China got easier according to World Bank

What is a Representative Office?

A representative office merely acts as the extended arm of an overseas business in China and isn’t considered as an independent legal entity. It offers far less room for on-the-ground operations than a fully established branch office or subsidiary. Due to this lack of legal personality, the foreign parent company remains liable for all obligations assumed by its China liaison office.

Based on our experience, ROs can be an attractive option in the following cases:

• You are an entrepreneur looking to establish a presence or invest in China but need to conduct market research before making your final decision. An RO allows you to spend time on-the-ground and understand the intricacies of the Chinese market.
• Not-for-profit entities such as tourism boards or sports associations seeking to test the waters and conduct marketing activities. Setting foot on the market shows the foreign entity’s commitment to China and can be helpful in securing local investment.
• Companies simply need a physical presence to carry out factory visits, meetings with suppliers, or quality controls. ROs would be the preferred route in that case as they offer a much lower HR and administrative burden than other types of incorporations.

Pros and Cons

Pre-establishment Considerations

Prior to starting the registration process, companies intending to open a representative office in China should respond to the following criteria:

• The parent company must have been established for over 2 years according to the State Administration of Industry and Commerce (SAIC) (Gong Shang Wai Qi [2010] No.4).
• The parent company needs to sign a minimum 12-month lease for the office space to be used by the Representative Office.
• According to the Regulations on Administration of Registration of Resident Offices of Foreign Enterprises, The name of a representative office follow this format：nationality + Chinese name of foreign enterprise + name of the city where the office is located + representative office.

Application Documents

While registering an RO is a far less daunting process than for a WFOE, there’s still a fair amount of red tape involved. In general, the following documents will be needed for the application. However please bear in mind that this is not an exhaustive list as requirements vary depending on the city:

• Representative office application form (stating basic details such as the RO’s name, office address, business scope, intended activities, and Chief Representative name)
• Appointment letter for the Chief Representative issued by the parent company
• Passport copies, photos, CV of the rep office chief representative
• Office rental contract (in the city of registration, must be in commercial building and valid for at least one year)
• Business license of the parent company
• Bank reference letter showing that the parent company is in good standing

The above documents will have to be translated and certified by the Chinese embassy in the parent company’s country. After that, the documents can be submitted to the relevant AIC (Administration for Industry and Commerce) office. In Shanghai, the company needs to apply online first – the authorities will check the application within 5 working days.

Following the screening stage, companies should formally apply with their local AIC office. The RO Registration Certificate will be issued after 10 to 15 working days. In other jurisdictions, the total process approximately takes 15 working days.

Post-Registration Formalities

Getting the RO Registration Certificate is not the final step in the set-up process. In fact, it takes 20 to 25 working days to have a fully operational representative office. Companies should follow the following steps:

• Carve and file company chops (3 in total: RO chop, Chief Representative chop, and Financial chop) through the Public Security Bureau (PSB)
• Apply for an enterprise code license
• Register with the local tax bureau and state tax bureau
• Open an RMB corporate account

Tax Liability

There are three different methods to calculate the tax liability of representative offices:

• Actual amount method: if the RO is able to provide an accurate record of its expenditures and revenue.
• Deemed profit method: if the RO has kept clear records of its revenue but not its expenditures.
• Cost-plus method: if the RO has kept complete records of its expenditures but not its revenue. This is the most commonly used method. In this case, the tax bureau will calculate revenue using the below formula.

Revenue = Expenditures / [1 – deemed profit rate* – tax rate].

*Since 2010, the standard deemed profit rate has been raised from 10% to 15%.

Hiring Staff for Your RO

One of the particularities of representative offices in China is that they can’t directly recruit employees as they don’t have a legal personality. Chinese and foreign employees must be hired through a government-qualified 3rd-party known as FESCO (Foreign Enterprise Service Company). There is no direct labor contract between the RO and its employees. In other words, the FESCO acts as a one-stop-shop for all HR matters, including the signature of employment contracts social security benefits management, and tax contributions.

A maximum of 4 foreign staff can work for the representative office, including the Chief Representative. They can’t be employed by the parent company and therefore must apply for the appropriate visa for their activities in China. In addition, they are liable for IIT (Individual Income Tax) whether they reside in China on a full-time basis or not. The IIT will be calculated based on the number of days spent in the country.

Conclusion

To sum up, foreign investors should not rush into setting up a representative office. While an RO offers undeniable benefits, it is nonetheless a very rigid type of business entity. In recent years the tax burden has also considerably increased, making representative offices less attractive than they used to be. We thus strongly recommend clarifying your long-term business goals in China from the outset as switching from an RO to a WFOE is a time-consuming, costly process.

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