Why Set Up a Representative Office in China
With over 1.4 billion potential consumers and a wide array of potential business opportunities, China is one of the fastest-growing economies in the world. Because of this many foreign companies consider setting up a base, a branch, or a representative office in China. Therefore, when it comes to foreign companies moving to China, they must consider numerous factors. What are your business’s needs? Is it trading, manufacturing, exporting or plain networking? Depending on your choices It may not be necessary to establish a legal presence in China, with all of that in mind. Do you have limitations for incorporation requirements or China’s tax systems? Do you want to have any incentives from the local government whilst you are working in that region? And lastly what are you looking for your products material? Are there any specific supply chain that you need to establish for specific industries in different regions? All these factors and decisions go into what makes your company in China stand out and what it will need to take to make your business successful.
What Foreign Companies Need to Take Note
Once you have decided on the type of approach and location you wish to use for your setup, you need to start preparing your company for due diligence. Foreign companies specifically need to keep an eye out for the following things:
- Adapting the procedures and requirements for company incorporation and licence applications applicable to their own business type and selected regions.
- Complying with foreign currency controls on fund transfers in and out of China
- Make sure you meet the requirements of various layers of tax systems and archetypes.
- Comply and conform with cultural differences at the country and district levels in terms of in-person and e-commercial concepts as well as employer-employee and social relationships.
This is according to a PRC government publication, which covers all eligible and forbidden business nature types and industries, as well as the respective capital and incorporation requirements for eligible businesses. It is subject to review consistently over a period. The current version in this PRC publication covers the following categories: “encouraged”, “permitted”, “restricted” and “prohibited” categories. Industries relating to the industry of environmental protection, improving the extraction of natural resources such as minerals, waste management, recycling energy efficiency, venture capital and IP are among some of the industries that are “encouraged” in China. Please note that anything not “encouraged”. “restricted” or “prohibited” is “permitted. There are four main types of foreign investment business set-ups in China. In this article, we will be briefly talking about each type whilst going into great detail on how representative offices are set up in China.
The Four Main Types of Foreign Investment Set and Representative Offices
Before deciding how to establish a business in China, foreign investors must be aware of and define their long-term and medium-term objectives. There are various corporate set-up options available, these setups include:
- Equity joint ventures (EJV) enterprises
- Contractual joint venture enterprises (CJV a.k.a cooperative joint venture)
- Wholly Foreign Owned Enterprises
- Representative Office
For each form, we will outlay all of its legal requirements, benefits and advantages in comparison to other business set-ups in China. For this article, I will go over the two more common option we have come across most at Primasia. These are Wholly Foreign Owned Enterprises and Representative offices:
Wholly Foreign-Owned Enterprise:
Wholly Foreign-Owned Enterprise (WFOE) are those set up in China by foreign individuals or firms where the investment is 100 per cent provided and operated exclusively by foreign investors (without any Chinese partners). According to Chinese Law, if several foreign partners jointly invest in a company, it will also be regarded as a WFOE.
A WFOE is a legal entity and is a limited liability company. The liability of the shareholders is limited to the assets they brought to the business. Setting up a WFOE requires currency input or equipment contribution, and the registered capital must correspond to the enterprise’s business scale.
In the last 4-5 years, the Chinese government has steadily increased the scope of businesses allowed to WFOEs, such as consulting, management services and trading. However, although WFOEs can engage in an increasing variety of sectors, there are some restrictions still in place on specific industries. This refers to the aforementioned four categories in the previous paragraph of “encouraged”, “restricted”, “prohibited” and “permitted” guidance lines for all foreign investment setups in China.
WFOEs offer an advantage in that foreign investors have complete control over major decisions, products, and costs. They are also allow strategic alignment with any parent company and greater control over (hence protection of) intellectual property.
Here is a short summary of the characteristics of WFOEs:
- 100% foreign ownership
- 100% management control
A WFOE has limited liability: An investor’s liability is limited to its hare of the WFOE’s registered capital (equity).
Manufacturing Joint Ventures and WFOEs are subject to a Chinese value-added tax (VAT) of 13-17 per cent and a corporate income tax of 25 per cent. (This number may increase or decrease in time). Business service JVs and WFOEs are subject to Chinese style business tax which is about 5% except for some businesses and specific industries. Business tax is planned to be eliminated as part of the VAT tax reform and therefore could be eliminated in the time of writing.
The Representative Office (RO) is an office set up in China by a foreign investor (including foreign companies and economic organisations.) Compared to other foreign entities in China (JVs and WFOEs), applying for an RO business licence is quite simple and easy, except in some special industries such as banking, insurance, security, and investment. Most RO applications do not need any Central government approval and are directly submitted to the local Administration of Industry and Commerce.
As it currently stands, the Chinese government is now discouraging Ros in favour of WFOEs
However, an RO is not a legal entity. An RO (like its Hong Kong namesake) can only carry out liaison and coordination work, market research and promotion for its parent company. An RO is not allowed to conduct other business activities such as signing contracts in its own name and invoicing, to name a handful of disadvantages. An RO is also subject to business tax normally approximately 10 per cent to 12 per cent of its total expenses. This includes office rental, staff salary, travelling and office expenses.
The following is a summary of the characteristics of an RO
- Not a legal entity
- Conducts research and promotion
- No Invoicing
Entering this market can have its many risks, however, it can have its many rewards. Tackling this market is a big leap, Primasia can be your guide to the Chinese market every step of the way with our one-stop-shop China services.