Introduction to China Resident Representative Offices
A Resident Representative Office (also known as Permanent Representative Office, RO ) is an office of a foreign enterprise that is set up in China to liaise with Chinese businesses and customers on behalf of the RO's home company. Establishment of an RO is subject to approval by the relevant authorities under Chinese law.
Although ROs are not allowed to directly conduct business, there are still certain benefits that foreign enterprises can gain from setting up and legally registering a Representative Office. Perhaps the most important reason is that an RO can help its home company to generate income from sources inside China. Other possible benefits of setting up an RO include: ROs can function as a liaison between the home office and related industries in China; ROs can conduct market research and do preparatory work for their home company to possibly directly enter into the Chinese market. Other benefits include ease of obtaining Chinese visas for employees, easier direct communications, etc.
Since China first started allowing the establishment of trading WFOEs, some foreign enterprises, especially those that conduct trade with China, have elected to set up a trading WFOE instead of an RO. From a total business operations standpoint, setting up a WFOE to directly conduct business in China is much more efficient than merely having an RO acting as a middleman in China. We can discuss the options with you to determine which type of business registration makes the most sense for your specific situation.
Compared to registering a WFOE, registering an RO is relatively faster and easier because there are fewer approval authorities involved and there are fewer documents required. The main benefit of registering an RO compared with a WFOE is that for an RO, there is no Registered Capital requirement, whereas a WFOE must have physically deposited a minimum amount of registered capital in a Chinese bank (currently RMB100,000; RMB30,000 after January 2006). The total registration fees for an RO are around RMB1000, which includes carving the RO's company chops (seals).
Key Points of Registering an RO
Requirements for foreign enterprises
- Foreign enterprises that want to set up a Representative Office in China must be an officially registered business in its home country or region. A copy of the official Registration Certificate (e.g. Articles of Incorporation in the US or Certificate of Incorporation and Business Registration Certificate in Hong Kong ) issued by the foreign enterprise's home country is required in order to prove that it is properly registered in its home country. The Chinese government removed the regulation that formerly required the home-based business to have been in existence for no less than one year in April 2004. Now even a foreign enterprise that is newly registered in its home country can register an RO in China.
- A bank reference letter is required from the country or region where the enterprise headquarters is based. The bank reference letter should state the name of the foreign enterprise, that the foreign enterprise has maintained bank accounts with this particular bank, and that the foreign enterprise is in good standing with the bank (e.g. no large outstanding debts, etc.
Requirements for the RO
- A Chief Representative must be designated for the RO. An appointment letter that specifically designates someone as the RO's chief representative will be required. The chief representative can be an expatriate or local Chinese.
- An office site in China is required for the RO. A lease agreement and the landlord's official documents will be required. The lease term must be for no less than one year.
Representatives of the RO
- There must be at least one Chief Representative appointed for an RO.
- All other foreign employees of the RO can be designated as "representatives". A formal appointment for each representative will be required. Expatriates can only be representatives; local Chinese can either be designated as representatives or as local employees.
- All expatriate representatives are required to apply for Working Cards and Work Permits from the relevant authorities.
- New representatives can be added after the initial RO registration has been completed.
Lifespan of an RO
An RO may register for existence as a legal entity for between one and ten years, depending on the needs of the foreign enterprise. (The maximum lifespan was only three years prior to changes in the law in April 2004.)
RO Bank Accounts
An RO is allowed to open both a foreign currency account and an RMB account. The foreign currency account is used for receiving funds from its parent company in the home country. The RMB account is used for expenses in China. Normally all money deposited into the RMB account must come from its foreign currency account via a bank transfer, i.e. the RMB account cannot receive any money from any other sources.
To fully and legally register an RO in China, visits to about ten different governmental bureaus and agencies are required and some of them will require numerous visits. A tremendous amount of complicated paperwork and physical footwork is involved. Each bureau has its own specialized documents that are required, and only Chinese language documents or certified translations are accepted. It could take 4~6 weeks for completion of the full registration process. Below is a list of the bureaus or agencies that must be visited during the registration process:
Administration of Industry and Commerce (AIC) . The AIC is the first authority to be visited in the registration process. This authority will issue a Registration Certificate for the RO and working cards for all representatives. The Registration Certificate is the most important document that indicates that your RO is approved and certified by the Chinese government.
Public Security Bureau . This authority will issue two documents: a PSB Registration Certificate that is used to apply for visas for the RO's employees; and a Notice of Chop Carving, which allows the RO's representative to go to the appointed RO chop-carving shop to obtain the official company chop. The "chop" is the official company seal that is used to stamp all official company business documents, much like a corporate "signature".
Institute Code Center . Here the RO will obtain the Code Certificate and the IC Card. The IC Card and the Code Certificate are very important, similar to a person's ID card and ID number. They will be used in the following registration procedures and in the future operations of the RO.
Foreign Currency Bureau. This authority issues the RO a formal permission notice for use in opening the company's foreign currency account. The permission notice contains information about the bank where the RO must open its foreign currency account, the denomination of the foreign currency that the account will contain (e.g. USD), usage limitations on the account (only for receiving overseas funds for ROs), etc.
State Tax Bureau and local State Tax Office . This bureau will issue a State Tax Registration Certificate to the RO. The Local State Tax Office will interview the person that the RO has designated for handling its tax affairs, check the nature of the foreign enterprise in order to determine the tax calculation method to be applied, set a tax payment schedule and the method of reporting taxes paid, etc.
Local Tax Bureau and Local Tax Office . This office is similar to the State Tax Bureau and Local State Tax Office. The only difference is that the State Tax Bureau handles the Enterprise Income Tax and Business Tax that is levied on the RO, while the Local Tax Bureau handles the Individual Income Tax that is levied on employees of the RO.
Bank. The RO can open both a foreign currency account and an RMB account in the bank suggested by the RO and subject to be approved by the Foreign Currency Bureau.
Statistics Bureau and Local Statistics office . This authority issues a Statistics Registration Certificate to the RO. The Statistics Office will interview the representative of the RO to give he/she a lesson on the importance of reporting statistics figures to the office and set up a schedule for reporting the appropriate statistical figures.
Customs . This authority issues a Customs Registration Certificate to the RO. The Certificate will be used when employees of the RO have personal belongings, office equipment, samples for exhibitions, samples of goods from overseas, etc. that need to go through Chinese Customs. If the RO has none of these items, this step can be deleted.
Whether your RO is subject to paying taxes and what taxes will be applied will depend on the nature of the "Foreign Enterprise".
ROs of foreign governmental agencies, non-profit organizations, and agencies of certain international organizations such as the U.N. are non-taxable, but this is subject to the approval of the China Tax Bureaus.
ROs of foreign law firms, accounting firms and auditing firms are subject to paying the Enterprise Income Tax (EIT), the Business Tax (BT), and the Individual Income Tax (IIT) for their employees. The EIT and BT will be determined according to the contractual income generated by the ROs through the providing of consulting services in China on behalf of their parent firms.
ROs of foreign enterprises engaging in trading, advertising, tourism, etc., are also subject to paying EIT, BT, and IIT. The EIT and BT will be determined by the operational expenses of the RO. Roughly speaking, EIT and BT together total nearly 10% of the total amount of the RO's expenses.
For foreign enterprises that do not fit into any of the above categories, EIT and BT will be levied only when the ROs assist their parent companies in earning income from sources inside China; otherwise they are free of EIT and BT. IIT will be levied the same as on the other types of foreign enterprises.
Among the different methods of computing EIT and BT, the method that determines taxes based on total expenses could be the most expensive method. If the RO cannot provide the proper documents that indicate the true nature of its parent office (law firm, advertising company, etc.), the computation method will most likely be determined by the tax officials. We assist our clients in proper registration with the tax bureaus, but even more importantly we help our clients to negotiate with the tax officials to get the best possible treatment on the applicable taxation method imposed on our clients. For more details on your specific business situation, please contact us.
See also: Methods of Taxation of Representative Offices
Working Documents and Visas
For the RO to employ expatriate representatives that can legally work and reside in China, in addition to the Working Card that will be obtained during the registration process, the expatriate representatives will also be required to obtain a Work Permit and a Residence Permit. Expatriate representatives from Taiwan, Hong Kong and Macau will only require a Work Permit; foreign representatives will also require a Residence Permit.
Both Work Permits and Residence Permits are normally good for one year, and can be renewed by submitting the appropriate documents to the Labor Bureaus and Public Security Bureaus respectively.
Residence permits also function as multiple-entry visas, which are very useful for those expatriate representatives who need to travel in and out of China frequently.
An RO may also have foreign clients that wish to visit their office in China. An RO is allowed to issue Invitation Letters that will allow their clients to obtain Chinese business (F) visas so that they may legally enter China.
Our company assists in obtaining these working documents for your expatriate representatives and we can also help with obtaining official invitation letters for your guests.
Changing the Registration of a RO
In the event that certain changes are necessary for the RO, for example, office relocation, the appointment of a different Chief Representative, the addition of new representatives, etc., the RO will need to go through the proper formalities with all of the same authorities that were involved in the original RO registration process. The RO will have to return all of the original certificates and documents that were issued before the authorities will issue the new certificates and documents.
Changing the Chief Representative can be problematic so special attention must be paid to always keeping the proper records and documentation for the Chief Representative and tax payments. Under the regulations, to change the Chief Representative, the RO must first present all documents showing that the current Chief Representative has paid his/her IIT for the previous three years. If any of the required documents are missing, the RO could be forced to re-pay the taxes or pay a fine. This is just one example of why it is crucial that the RO maintain proper management and filing of its business documents.
Changing the official office address may become another problem in some situations. The problem often originates with the legality of the new office site location. It is very important that RO representatives do not sign a lease with a landlord (both those that manage office buildings and those that own an apartment) if the landlord cannot provide the official property ownership certificate for the building. For some newly built office buildings or apartment buildings, the landlord may not yet have the property ownership certificate; in this case it may be acceptable if they can provide relevant documents that prove that the office site in question is truly their property and that they are merely waiting to receive their official certificate. The RO representative must be able to determine whether the landlord's documents will be able to be used to register the new office location with the proper authorities. Our office can assist you with ensuring that the landlord's documents are legal for the re-registration process, as well as any other problems that may be associated with changing the RO's registration.
For questions regarding above or further information, please contact us.