Generally, to set-up Representative Office (RO) first is the most common form of business vehicle in China through which foreigners may enter the China market and also it is still a popular and relatively inexpensive method.
Approval Authorities
Authorities for approval are distributed among various State Council Departments and are delegated to their local offices. Some of major types of industries and their approval authorities are:
Industry Approval Authority
➤ Trading, manufactory, forwarding agent, advertising, ➤ State Administration for Industry and Commerce
➤ Consulting, exhibition
➤ Finance, insurance ➤ People’s Bank of China
➤ Marine transport, marine forwarding agent ➤ Ministry of Communications
➤ Post and tele-communication ➤ Ministry of Information Industry
➤ Travel and tourism ➤ National Tourism Administration
The establishment procedures described below are based on the assumption that the representative office to be set up is not subject to approval by a competent approval authority. Under current rules, most representative offices, in particular representative offices of foreign companies that are engaged in manufacturing, trading, consulting, exhibition and procurement fall in this category.
Establishing a representative office, which can service a liaison between the foreign company and its local customers, is often the first step in gaining a foothold in the Chinese market.
• Pros & Cons
• Documents need for applying for set-up RO
• Set-up key points
• Tax of RO
1) Pros & Cons
Pros
- As RO is not a legal entity, there is no minimum capital required.
- Permitted activities include establishing and arranging contacts, rendering advice, products introduction, preparing market studies and collecting general information
- RO can hire local people
Cons
- RO is not allowed to be engaged in direct business activities, and must not issue the invoices
- Although RO is not profit centre, the cost expenses still attract tax liability
- Staff who are citizens of the PRC may only be recruited through local service agencies
- At present, only banks and insurance companies are allowed set-up branch offices in China
2) Documents need for applying for set-up RO
✦ Application letter
✦ Letter of appointment of the Chief Representative and Representative
✦ Resumes of the Chief Representative and Representative
✦ Copies of passport of the Chief Representative and Representative
✦ Certificate of Registration and Testimony
✦ Bank statement of the creditability for the applicant company
✦ Leasing agreement of the office premises
3) Set-up key points
- Company applying for set-up RO has to be at least two consecutive years old
- I will take around 1.5 – 2 months to apply
- We can undertake the one-step service for basic registration to post-registration handling
- Rep office shall not exceed four representative persons (including the Chief Representative)
- Representative office's business registration certificate shall be valid for non-fixed period and shall be annual inspected in each May
4) Taxation of RO
RO’s with a head office engaged in business advisory, tax advisory, law, accounting, auditing or other types of consulting services are required to maintain complete accounting records and evidence of properly calculated revenue and taxable income. Their tax liabilities will be based on actual revenue and profit
RO’s of entities that engage in agency or trading activities perform business activities on behalf of the head office. Since such ROs do not enter into agreements with their customers directly and since income attributable is normally collected by the head office, revenue of these RO’s is determined on a cost-plus basis
Any RO that does not fall into the above two categories, but still carries out taxable activities, will be taxed according to the actual revenue generated, including amounts received by head offices outside of China and attributable to the RO. If no revenue is generated then annual activity reports must be filed with the tax bureau within one month of the year-end
5) Tax Exemption of RO
RO that conducts market research, provides commercial information, liaison and other services of an auxiliary or preparatory nature to its head office for its production and sales of its self-produced products. This does not include similar activities conducted in connection with the agency and other service activities provided by its head office
RO’s of entities that engage in agency or trading activities perform business activities on behalf of the head office. Since such ROs do not enter into agreements with their customers directly and since income attributable is normally collected by the head office, revenue of these RO’s is determined on a cost-plus basis
RO of foreign governments, non-profit organization and non-government groups will have tax exemption. With regard the before mentioned RO (or their head offices, higher authorities) should apply to the State Tax Bureau after receiving the approval from the local tax authority with a letter certified by the competent tax authority of the home country on the nature of the RO
6) Tax of RO
RO with taxable activities is subject to Business tax (5%) and Enterprise income tax (25%) which shall be done quarterly
There are additional surcharge of RO in Shanghai as below: River way management fee (1%), Urban construction & Maintenance tax (7%) and Education surcharge (5%). All the surcharge may vary according to the government further policy
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