Representative Office in China

Establishing a representative office (RO) is one of the most common adopted strategies at first stage of entry in a new country. When a subsidiary is not required, a representative office is the extension of a company or legal body that is established to carry out non-transactional activities in a foreign country, such as:

• Conducting market research, publicity and business development activities;

• Liaison activities with potential customers, suppliers, distributors or agents located in China;

• Reception of delegates from parent company.

Establishing a RO is considered the easiest way to enter the Chinese market, as it does not require a registered capital and it is only allowed to be used to assist the foreign company's business in non-profit seeking activities in China.

Since representative offices are not capitalized legal entities, they are subject to a number of limitations, including those governing the employment of local and foreign workers. In fact, a RO can directly employ up to four foreign representatives, however in case of hiring Chinese personnel a labor dispatch agency must be involved. It’s mandatory for a RO to appoint a chief representative in order to be compliant to the Chinese regulations and law. The chief representative can be either one of the employees, a manager of the parent company or an external professional.

The following documents are required in order to apply for RO establishment:

• 2 (two) copies, legalised by the Chinese consular authority in the country, of the business license of the parent company and articles of association;

• 2 (two) legalised copies of the passport of the legal representative of the parent company;

• 2 (two) legalised copies of Board of Director resolution of the establishment of the RO and attribution of power of attorney to one representative of the company to set up the RO;

• 2 (two) legalised copies of Board of Director resolution of the Chief Representative appointment;

• 2 (two) legalised copies of reference letter from the bank cooperating with the parent company.

Even though a RO does not generate any income, it shall keep a proper accounting and bookkeeping system and it is taxed in China as a permanent establishment (“PE”) of the overseas entity. The RO is subject to China Company Income Tax (“CIT”), China Value-added Tax (“VAT”), and the local additional surcharges (“LAS”) that are calculated on the VAT payable. There are three alternative calculation methods to determine taxable income:

• Actual Revenue (Taxable income = Revenue - costs) for law firms, ext.

• Expected profit: Expected Revenue = % of HQ’s sales to China.

• Cost-plus: revenue and profit are calculated on the basis of actual costs.

According to the cost-plus method, the estimated total fiscal burden is around 10% of the expenses recorded for the period.