Representative Office vs Company

A Representative Office is typically taxed using a cost-based method, with the tax burden amounting to approximately 10 per cent of the total costs incurred. This tax is applicable regardless of the profitability of the business. Additionally, a Representative Office has no capital requirements, allowing the headquarters to transfer funds as needed on a periodic basis. However, it is important to note that a Representative Office can only engage in liaison activities and is restricted from conducting direct economic sales.

On the other hand, a company is taxed solely on its profits, with a special rate of 5% applied if the profit falls below 3 million CNY. This special treatment as a thin profit enterprise is valid until 2027. Unlike a Representative Office, a company does have capital requirements. For small service companies, it is possible to register with a minimum capital of around 30,000 USD. Moreover, a company has the ability to charge back services to the headquarters using a cost-plus method, which involves billing the incurred expenses plus a small margin (e.g., 5%). In this scenario, the function of a small service company can resemble that of a Representative Office with low capital requirements, but with the added advantage of having a license that can be utilized for direct sales and business purposes.