Starting your business by setting up a representative office in China is an effective and relatively cheap way. However, a representative office is not an independent legal entity. It is prohibited from engaging in direct business activities, such as manufacturing, production and sales. So its business scope is limited. The activities it may engage include liaison with potential client, product introduction, market research, technology communication etc.
The main purpose of a representative office is to guide market research, supervise/coordinate purchase/sales activities and coordinate relationship between oversea company and Chinese partners. Not like WOFE or JV, a representative office does not need registered capital and only require funds for its operation which may be remitted by its HQ.
If the oversea company who wants to set up a representative office in China is a financial institution, an insurance company, an air or sea transportation company, a sea transportation agent, etc, the establishment of the representative office shall acquire approval from the authority before registered at the registration authority. However, for other company like trading company, manufacturer, leasing company, etc, no prior approval is required.
If according to the industry of the oversea company, prior approval is required, the applicant shall prepare and submit required documents to relevant authority for examination and approval. After approval, the authority will issue the approval certificate which shall be used for registration for the next step.
For representative offices which may require prior approval, within 30 days after the approval certificate is issued, it shall apply for registration.For representative office which don’t need prior approval, it can apply for registration directly.A listing of required documents shall be prepared and submitted to the registration authority, which may include application letter, appointment letter for chief representative, bank credibility letter, leasing agreement, chief representative’s resume, pictures, passport copy etc.A registration certificate will be issued after registration, which means the representative office has been duly established.
After obtaining the registration certificate, the representative office should attend to a number of post-registration formalities including:
• obtaining an organization code and an organization code certificate from the General Administration of Quality Supervision, Inspection and Quarantine of the PRC or its designated local bureau;
• registration with the Public Security Bureau;
• opening of a foreign exchange account in the designated bank;
• registration with the local as well as the state tax authority; and
• registration with the local customs bureau;
• if there is a foreign employee, work visa and residence permit is needed.
Term of Operation
In most cases, the term for a representative office is three years. The term of operation of a representative office may be extended upon submission of an application to the original approval authority within 30 days before expiry of its term.
The main tax involved for a representative office shall include the business tax and income tax. When the representative office applies for tax registration in the tax authority, the tax authority will decide to adopt one way for calculating the tax for the representative office, according to the business the representative office engages. Since the representative office is not allowed to engage direct business activities, so how to decide its income is the issue the authority may consider. In Shanghai, there is one model which the authority adopts called Expense converted to Income. The calculation is as follows:
First of all, the representative office shall calculate its total expense for a certain period. The expense may include the employee’s salary, office rent, equipment cost etc.
Then the total income shall be calculated as follows:
The assumed income is equivalent to expense/0.85
The business tax shall be expense/0.85*5% (5% is the rate for business tax)
The income tax shall be expense/0.85*10%*25% (10% is the assumed profit rate and 25% is the rate for income tax)
The authority may decide to adopt other model for tax calculation after examination.
A representative office can use local and foreign employee.Since the representative office is not an independent legal entity, according to Chinese law, it is not allowed to recruit employee directly in its own name. It has to hire employee through a certified agent, like FESCO. The employment contract is signed between the employee and the certified agent and then the agent send the employee to representative office. The agent is the employer of the employee and the representative office is the actual user for these employees. The representative office shall pay service fee to the agent as well as all salaries to employee through the agent.
If the representative office needs to recruit foreign employee (chief representative and representatives excluded), these foreign employees shall apply for Z visa and work permit in China. After application of work permit, they also need to get a residence permit which may enable them to work legally in China.