When a foreign company decides to try and sell to the Chinese market, there are several options – working through an agency or distributor, or registering a representative office (RO). Whereas an agent or distributor may have limited loyalty or little interest in end-user satisfaction, an RO is an effective way for foreign investors to get a feel for the Chinese market while demonstrating commitment to the market. It is the easiest type of foreign investment structure to set up and, unlike the wholly foreign-owned enterprise, has no registered capital requirements.
The defining characteristic of an RO is its limited business scope – an RO is generally forbidden from engaging in any profit-seeking activities, and can only legally engage in:
- Market research, display and publicity activities that relate to company product or services; and
- Contact activities that relate to company product sales or service provision and domestic procurement and investment.
While an RO is relatively easy to establish and maintain, they are fairly limited in terms of operational scope since they cannot actually issue invoices (i.e., fapiao, the basis for obtaining tax deductions in China) or sign contracts.
An RO has no legal personality, meaning it does not possess the capacity for civil rights and conduct, cannot independently assume civil liability, and is limited in its hiring ability. Chinese staff working for an RO, although not limited in number, must be employed through a human resources agency that will sign a contract with the RO on the one hand and with the Chinese staff on the other in order to ensure social security and housing fund contributions are paid on a regular basis. No more than four foreign employees can be hired per RO. Foreign staff working for ROs should have an employment relationship with the parent company abroad, and any disputes should be settled under the laws of that country.
From 2010 on, companies that intend to register a RO must be at least two years old. The registration certificate for an RO is only valid for one year. Every year when an RO renews its license, a notarized and legalized incorporation certificate of the parent company will need to be provided. In addition to the incorporation certificate, a bank reference letter will also will need to be notarized and legalized. All ROs have the same business scope: “engage in non-profit making business activities related to its parent office.”
ROs are required to submit an annual report between March 1 and June 30 every year providing information on the legal status and standing information of the foreign enterprise, ongoing business activities of the RO, and payment balance audited by their accounting agencies. The registration authorities will issue fines if the RO fails to provide such reports on time or if it provides false information.
ROs are usually taxed on gross expenses with the overall tax burden around 11.75 percent of total monthly expenses; however, these rates may be increased by the relevant tax bureau according to the industry. If the chief representative is a foreign national, whether they stay in China or not, they shall be subject to individual tax based on the income derived from the RO.
This article was first published on China Briefing.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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Nov 25, 2013