Introduction of Representative Offices ("ROs")

A China representative office (RO) is an office of a foreign enterprise set up in China for liaison with Chinese businesses and customers on behalf of its parent company. A RO is not considered to be a separate legal entity. It must be emphasized that a representative office may not carry out direct revenue earning business activities. For example, it cannot enter into purchase/sales contracts and cannot receive payment for services, issue invoices nor repatriate moneys overseas. However, a RO can open bank accounts and employ staff to maintain liaison with customers and suppliers. Its head office can also enter into contracts with its supplier/customers in China in its own name, but not in the name of its RO. Therefore, before a foreign investor establishes its presence in China using foreign investment enterprises (FIEs) such as equity joint venture, cooperative joint venture or a wholly foreign- owned enterprise, it could first set up a representative office to test the Chinese market.

ADVANTAGES OF REPRESENTATIVE OFFICE

The simplicity and short time required for establishing a RO is the main reason for its popularity in the China market. Unlike foreign investment enterprises ("FIEs"), representative offices are not required to meet stringent requirements for items such as capital contribution. The strong points to establish a RO are as follows:
    - Least capital injection required (currently around RMB100,000).
    - Can handle market research, sourcing, project investigation for mother company, who in turn to execute trading function.
    - Can hire local staff to work from labour market..
    - The parent company should be established least 1 year before.

DISADVANTAGES OF RO

RO is not considered to be a separate legal entity. So it only works as liaison purpose, The restrictions are as follows:
    - Limitation in activity. No trading or invoicing is allowed.
    - Local staff should be hired via government admitted agents.
    - Although not profits, cost expenses still attract tax liability

HOW LONG TO FORMATE

To establish a RO is therefore largely a matter of complying with the prescribed application procedures. Once all the necessary documents for application are ready for submission, government approval can be as long as 30-48working days.

TERM AND TERMINATION

In China, the maximum duration approved for a representative office is three years (five years for insurance companies and six years for banks.) The duration date is calculated from the date on which the approval document is issued by the authority. If the representative office wishes to continue its operations after the expiry of the registration certificate, it must renew its registration by submitting an annual report of its business operations and its application for renewal 30 days prior to the expiry of the existing registration certificate.

Taxable Business Activities

The income tax rate of 33 percent including 3 percent local income tax will be reduced to 15 percent if the Representative Office (RO) is located within the special economic zones or other designated areas.
The State Administration of Taxation (SAT) lists the following types of taxable activities that a representative office may perform:
    1. Acting as a merchandise trade agent;
    2. Consulting services relating to business, legal, tax and accounting matters;
    3. Services performed for fellow subsidiaries of the same non-resident holding company;
    4. Acting as advertising agents;
    5. Providing services relating to visa handling, fee collecting, ticketing, tour operator, and liaison for non-resident tourist companies;
    6. Consulting services given on behalf of non-resident financial institutions;
    7. Providing services within the business scope of a transport company;
    8. Other taxable activities the Representative Office (RO) performs for the clients.
The following activities are not subject to income tax and business tax:
    1. Resident representative offices performing services of market research, providing business information, liaison, consulting for the non-resident head offices on a free of charge basis;
    2. Resident representative offices taking instructions from resident companies to act for them as an agent, and the agency activities are mainly performed outside the PRC.

Features of a Representative Office

1.Legal Status of a Representative Office
The Representative Office is a non-legal entity operating representing its parent company. A representative office is not allowed to engage itself in business activities, issue invoices on its own, remitting outward, signing sales or purchase contracts, or receiving income from services performed but may act as a liaison and promotion office for its parent company.
2.Name
The name of the Representative office should be in the form of "Name of the Enterprise + Name of the City + Representative Office (or Office)".
3. Business Address
At the beginning of setting up the Representative Office, it is advised to decide the place and building where office is going to be located first, as the address of the proposed office will have to be mentioned in the application for approval.
Note the business address must be located in commercial buildings approved by the government.

Some Important Issues Related to Representative Office

1.Business Scope of Representative Office
ROs will have the authority to engage in economic activities and sign economic contracts which are necessary to maintain its existence and functions, and it should also carry out its activities within the business scope as set forth on Registration Certificate.
2.Legal Status of Representative Office
Chinese laws do not expressly provide that Rep Offices should bear liabilities independently with their own assets (i.e. limited liability). ROs may be deemed to be part of the foreign parent enterprise. As a part of the foreign enterprise, the foreign enterprises should bear liabilities of the Representative Office (RO) with all its assets.
3.Authority of Chief Representative
Chinese laws do not clearly specify the limitation of the authorities of a chief representative or a representative. Therefore, foreign enterprises should clearly set forth the authorities of the chief representative and representatives of a Representative Office (RO) in order to avoid, to the greatest extent possible, situations in which the acts of a chief representative or a representative have binding force upon the parent foreign enterprise.

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