China: Types of Company
This page was last updated on 2 July 2019.
A representative office does not formally have legal personality, although it still has to pay taxes in some circumstances. An RO cannot be converted into another format; it has to be closed down and opened up in a new format. Hence if the eventual intention is to make sales within China or export from China, it may be better to form a wholly foreign-owned enterprise (WFOE) or joint venture (JV), to minimise red tape.
On the other hand, an RO is the best way to proceed if there is likely to be a long period of investigation, negotiation and discussion before operations start in China. This is also the case if there is a need for a long-term supervisory or information-gathering function.
An RO may perform activities including:
- Information collection
- Customer support services
- Market research
- Product marketing but not selling (sometimes a difficult distinction to make)
- Import of office equipment and personal items
- Operation of bank accounts.
The RO must not engage in 'direct business activities' which include manufacturing, production and sales and can never issue invoices.
Except in business sectors where central government permission is required (e.g. banking and financial services) the formation of an RO is a regional affair. 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’, and must have physical premises in a building that the government has designated for such a purpose. The RO's chief representative is appointed by the parent company and can be either foreign or Chinese. In many regions of China, on his first visit, a foreign chief representative must 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 formation and registration process takes 70-90 days, depending partly on the region or city of registration. An RO must be re-registered annually. Registration is carried out by the local Administration of Industry and Commerce (AIC) without the involvement of the national Ministry of Commerce (MOFCOM).
The registration process is conducted by a sponsor - a local company that has been appropriately authorised, and can itself be foreign-owned. The paperwork the sponsor must submit to the AIC includes:
- Application letter and standard application form
- Certificate of incorporation of the parent company
- Relevant extracts from the statutes of the parent company
- Credit reference from the parent company bankers
- Document appointing the chief representative and any other representatives
- 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 a 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; this is required when registering with the tax authority, customs and when opening 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.
The RO's registration approval or certificate and enterprise code certificate must be renewed annually. Renewal applications must be submitted one month before the expiry date.
Books of account must be set up within 15 days of approval of registration, and must be kept in a Chinese language.
Remittances overseas will almost certainly be subject to foreign exchange controls. 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 de-register and return its tax certificate to the tax authorities.
Foreign staff employed at an RO require employment visas and residence permits. They will be subject to tax on China-sourced 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 worldwide 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 a work permit.
Local staff can also be employed, but not directly. They have to be provided by a 'labour service organisation' licensed by the Ministry of Labour and Social Security. However, the RO is responsible for paying taxes due in respect of Chinese employees.
Any income the RO receives will be liable to taxation through corporation tax law as if it was a regular limited company. Previous exemptions were removed in February 2010.
Many ROs do not have income as such, but may still be liable to pay tax. Although certain types of activity an RO carries on (such as market research and liaison work) do not incur tax, especially in connection with exports, other types of activity are deemed to be China-sourced 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% before 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. These include 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.