Establishing A Representative Office In China
Among foreign investors, the most popular form of business establishment in China is the Representative Office. Its main attraction is that it is simpler and cheaper to establish than either a Joint Venture of a Wholly Foreign Owned Enterprise – since no Registered Capital is required, startup costs are roughly 10% of the cost of establishing either of these. Representative Offices are also open to almost all industry sectors, including some sectors that are off-limits to Joint Ventures and Wholly Foreign Owned Enterprises. Furthermore, the Chief Representative need not reside in China. However, Representative Offices are very limited in the activities that they may carry out. Why do foreign companies establish Representative Offices in China? 1.
To conduct preliminary research before deciding whether or not to make a direct investment in China. 2. To provide data and promotional materials to potential partners and/or clients. 3. To coordinate the activities of its parent company in China.
4. To make travel arrangements for representatives of its parent company or Chinese clients or potential clients. 5. A foreign company might already be doing business with China from overseas but lack the market penetration to justify a full-blown investment (some of these Representative Offices later upgrade to Wholly Foreign Owned Enterprises, Cooperative Joint Ventures, and Equity Joint Ventures. Note that in certain industries such as insurance and finance there are sectors that require foreign investors to operate a Representative Office for at least 2 years before making a direct investment. 6. To hire local employees to help them find suppliers. 7. As a cheap and simple way of doing business in China by exceeding its legal scope of business. This is not a good idea because it is likely to get the company in trouble with the authorities.
8. To establish a presence in a business sector currently forbidden to direct foreign investment with a view to getting to know the market in anticipation that China will liberalize its regulations in the future in line with its WTO commitments. Representative Offices are generally allowed to: * lease office space and arrange for utilities * purchase office supplies * coordinate the issuance of work permits and visas for foreign employees * open and maintain bank accounts in local currency and foreign exchange * display office signs and distribute promotional materials * hire local staff though labor service organizations (this requirement might be partially lifted if the draft Labor Contract Law goes into effect. Taxation of Representative Offices Although a Representative Office may not engage in profit-making activities and cannot receive income, it is still somehow subject to taxation under certain circumstances (usually on a deemed profit basis) Two types of taxes are generally applicable to Representative Offices are Enterprise Income Tax and Business Tax. It may be subject to taxation, for example, when it acts as business liaison for a transaction that generates commissions. The Enterprise Income Tax rate applicable to Representative Offices is 33% (inclusive of a 3% local surcharge). Fortunately, however, the business activities of a Representative Office can be exempted under certain circumstances, although these exemptions vary from industry to industry. Representative Offices are required to pay value added tax (VAT), consumption tax, and customs duties on any domestic purchases and/or imported equipment, as well as stamp duties (usually a negligible sum). The Representative Office need not pay property-related taxes for leased office space, so don’t let your landlord convince you otherwise. Legal Status of a Representative Office A Representative Office is not considered an independent legal entity but rather an extension of its parent company.
Accordingly, the parent company must bear all of the Representative Office’s legal liabilities and debts. The foreign company should carefully safeguard the Representative Office’s financial and corporate seals to ensure that they are not misused. The authority of the Chief Representative is governed not by Chinese foreign investment law, but rather by the foreign parent company’s jurisdiction of incorporation. However, the parent company is still subject to the jurisdiction of the local Chinese courts with respect to all contractual issues, including property rights. Establishment Procedures Only one Representative Office may be established in each Chinese city. Set-up is accomplished in 4 steps: 1. Pre-approval Procedure - The foreign parent company must first locate a Chinese sponsor to help it obtain the required approval and registration. This can usually be done with the help of the local Ministry of Commerce (MOFCOM) office, which will introduce the foreign parent company to a designated agent (a Foreign Enterprise Service Company, a/k/a FESCO) that is licensed by MOFCOM to handle foreign Representative Office applications. The sponsor will charge a fee of approximately US$800 - $1,000 for notifying the foreign company of upcoming deadlines and any problems with the application materials. The foreign company will also be required to enter into a lease for ‘Grade A’ office space prior to approval, because a signed lease agreement is one of the prerequisites for approval of the Representative Office.
2. Application – The Representative Office application and supporting documents should be submitted to the appropriate examination and approval authority. The examination and approval authority for a Representative Office will normally be MOFCOM, but foreign companies in certain industries such as banking, insurance, law, accounting and media will need to apply to the authority with jurisdiction over the foreign company’s particular industry. If the application is approved, a Certificate of Approval will be issued by the examination and approval authority, usually for an extendable initial term of 3 years. 3. Registration – Registration must be completed within 30 days after the certificate of approval is issued. An application (together with supporting documents; see this site’s section on “Documentation” under “Rep Offices” for details) is submitted to the local branch of the State Administration of Industry & Commerce (SAIC). This process normally takes 1-2 months and concludes with the issuance of a Certificate of Registration (similar to a business license), which must be renewed annually. Any subsequent change must be registered with the local SAIC.
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