Determine the right China legal structure for foreign enterprises - China Representative Office

Representative office (RO) can be a right legal structure for a foreign company to establish its presence in China. Representative office (RO) is an extended arm of a foreign company in China. It is not a separate legal entity but a liaison office of a foreign company in China and hence it has no registered capital.

Since the RO is not a separate legal entity, it does not assume liability on its own. Rather, the foreign parent company assumes the liability of the RO. Strictly speaking, a representative office is not a company in China. Therefore a RO enters into business transactions on behalf of the parent company that is incorporated outside of China.

Business Operations

A representative office may only engage in non-profit making activities. Accordingly, the representative office may engage in any of the following functions:

• Work on research and market intelligence for its parent company in China
• Provide data and promotion materials to potential clients and partners
• Promote its parent company products, hold seminars, take part in exhibitions
• Receive and send out marketing samples of the parent company’s products
• Liaise with local and foreign contacts in China on behalf of parent company
• Act as a coordinator for the activities for the parent company in China such as coordinating travel arrangements for parent company representatives and potential customers
• Perform other non-profit making business activities.

A representative office is not allowed to engage in the following activities:

• Engage in any business for profit directly such as providing services for fees or selling goods for revenue
• Collect money or invoice within China for services or products
• Sign contracts or deals on behalf of the parent company in China
• Represent any company other than its parent company
• Buy property or importing production equipment.

Bank Accounts

RO has 2 bank accounts denominated in foreign and local currency. The foreign currency account is to receive money from the parent company; whereas the local currency account is to pay for its local expenses.

Local Employment

As a liaison office of a foreign compnay in China, the RO is not able to enter into local employments. One reason is that it cannot provide the statutory national insurance and social welfare security.

Local staff can be hired with the aid of the authorized human resources companies like FESCO in China. The monthly outlay includes the staff’s salary, statutory social welfare and insurance and a service fee to the human resources company. An employment contract is signed between the staff and the human resources company. An employee handbook is to be given to the staff. The employment contracts are more or less standardized with little modifications.

A RO can appoint its own Chief Representative and Representatives. Both foreign and local staff can fill in these positions. If a foreign staff is appointed, the parent company needs to send out appointment letter, apply for the work and residence permit and obtain the corresponding work visa.

Office Premises

The office of RO should be within authorized commercial buildings. In fact, all business registration should accompany the duly signed and stamped lease agreement and the property certificate of the landlord. The Government officers are to ensure that the office is situated in authorized commercial buildings.

Taxes

Although the RO is not allowed to conclude sales and revenue in China, it is still liable to pay taxes based on a deemed revenue. The deemed revenue is calculated based on the following subject to the approval of the tax bureaux:

• A percentage of the operating expenses of the RO
• A percentage of the profits generated by the RO for the foreign company – this method is less common as the proportion of profit generated by the RO is difficult to ascertain.

All employees (both local and foreign staff) are liable to pay individual income tax according to local tax laws. This tax is deducted at source by the authorized human resources company before the payment of salary to the employees.

Other Registration Issues

There are other compliance issues that a RO must follow in order to be registered. The following documents are normally required:

• The financial position of the parent company – Normally the reference letter from the banker of the parent company and the latest audited financial statements
• The appointment letter, resume and passport of the Chief Representative
• The duly stamped lease agreement, property certificate in approved commercial building of the office premises

Understand the implications of China legal structure is of utmost importance

We should be grateful to be engaged and work with you to set up your right legal structure in China.

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