China: Types of Company
Nature of a Representative Office
A Representative Office (RO) does not formally speaking have legal personality, although that doesn't save it from having to pay taxes in some circumstances. If the eventual intention is to make sales within China or to export from China then it may be better to begin straightaway with a Wholly Foreign-Owned Enterprise (WFOE) or a Joint Venture (JV), to avoid two sets of formalities. A Representative Office can't be converted into another format; it has to be closed down and the new format opened up.
On the other hand, if there is likely to be a long period of investigation, negotiation and discussion before operations commence in China, or if there is simply a need for a long-term supervisory or information-gathering function, then an RO may be the way to go.
The activities that are permitted to an RO include:
- Information collection;
- Customer support services;
- Market research;
- Product marketing, but not selling (a difficult distinction to make);
- Importation of office equipment and personal items;
- Operation of bank accounts.
The RO must not engage in 'direct business activities' which would include manufacturing, production, and sales. Certainly it cannot issue invoices.
Formation of a Representative Office
Except in certain business sectors where central government permissions are required (eg banking and financial services) the formation of an RO is a regional affair. Central government ceased to be involved in 2004. Sectors in which registration can be carried out regionally include manufacturing, trading, freight, consulting, contracting and advertising.
An RO must have a name of the form: Parent Company - City - Representative Office. It is required to have physical premises in a building designated for such a purpose by the government. The RO's Chief Representative is a person appointed by the parent company, and can be either foreign or Chinese. In many regions of China, a foreign Chief Representative must on his first visit apply for a visa notice from the Chinese authorities and return to his home country to apply for an employment visa at the Chinese embassy before returning to China.
The entire formation and registration process will take between 70-90 days, depending to some extent on the region or city of registration. The initial registration of an RO must be renewed annually. Registration is carried out by the local Administration of Industry and Commerce (AIC) without the involvement of the Ministry of Commerce (MOFCOM).
The registration process is conducted by and through a 'sponsor', being a local company which is appropriately authorised, and can itself be foreign-owned. The sponsor submits the required paperwork to the AIC, and this includes:
- an application letter and standard application form;
- the certificate of incorporation of the parent company;
- relevant extracts from the statutes of the parent company;
- a credit reference from the parent company bankers;
- a document appointing the Chief Representative and any other representatives;
- a brief description of each representative and copies of their passports or other ID;
- evidence of the lease or purchase of office space;
- power of attorney in favour of the sponsor.
The AIC issues a Registration Approval Notification Letter and in some regions a Registration Certificate for Foreign Enterprise Representative Office within three or four weeks. Once the registration has been approved, certain other formalities must be completed within 30 days:
- Purchase of a 'chop' (carved stamp used to authenticate documents) from an approved maker;
- Issue of an Enterprise Code Certificate by the Bureau of Quality and Technology Supervision, which is required when registering with the tax authority, the customs and in order to open a bank account;
- Registration with the local and central tax authorities;
- Registration with the customs authority (if it is intended to import office equipment, automobiles or personal effects);
- Registration with the local Statistics Bureau.
Ongoing Formalities for a Representative Office
The RO's Registration Approval or Certificate, and the Enterprise Code Certificate must be renewed annually. Renewal applications must be submitted one month before the date of expiry.
Books of account must be set up within 15 days of approval of registration, and must be kept in the Chinese language.
Remittances overseas will almost certainly be subject to foreign exchange controls, and specific permission will probably have to be obtained on every occasion, although this process can very often be administered by local banks. Many types of overseas remittance incur withholding tax.
If an RO ceases operations in China it must apply for de-registration and return its tax certificate to the tax authorities.
Employing Staff for a Representative Office
ROs can employ foreign staff, who will require employment visas and residence permits. They will be subject to tax on China-source income (unless they are in the country for less than 90 days a year, or 183 days if a tax treaty applies), and after five years will be taxed on their world-wide income. Legislation introduced in 2011 requires all foreign workers of an RO to be registered with the local social security authority within 30 days of receipt of work permit.
Local staff can also be employed, but not directly. They have to be provided by a 'labour service organization' licensed by the Ministry of Labour and Social Security. The RO is responsible however for paying taxes due in respect of Chinese employees.
Taxation of a Representative Office
If an RO has income, this will be liable to taxation through the Corporate Income Tax Law as if it was a regular limited company. Previous exemptions were removed in February, 2010, with the enactment of the Provisional Measures for Tax Collection and Administration for Foreign-Enterprise Representative Offices.
Many ROs do not have income as such, but may still be liable to deemed tax. Although certain types of activity carried on by an RO do not incur tax, including market research and liaison work, especially in connection with exports, other types of activity are deemed to be China-source income and are taxed on a cost-plus basis, including:
- Agency trading;
- Services provided to parent companies;
- Provision of travel services;
- Provision of financial services;
- Provision of transportation services.
Gross income is taken to be 117.65% of the related operating expenses, which would include depreciation of fixed assets, with taxable net income taken to be 15% of gross income (10% prior to February, 2010). Certain offsets are permitted, including an allowance for expenses related to services provided outside China.
There is a great variety of different taxes in China, and an RO may have to file various different types of tax return, monthly or annually, covering Enterprise Income Tax, Value Added Tax, Business Tax, Consumption Tax, Stamp Duty, Land Appreciation Tax, Withholding Tax (on foreign remittances), and, if there are employees, Income Tax and social security contributions.
If tax is due on local activity it is likely that an annual audit will be required.