What you need to know to set up a Representative Office in China
If you’re planning to set up a new business in China you’ve got some
exciting challenges ahead of you. There is plenty to think about, and
many options as well. Overseas companies who want to do business in
China can choose from many incorporation options, the two most
commonly explored being an establishment in one of the many free
trade zones and onshore Limited Liability Companies (LLCs). Both have
their advantages and disadvantages.
Free trade zones offer a host of benefits for trade transactions and customs clearances, whereas business activities and trade with the mainland can be limited. What first-time companies venturing overseas don’t always realize is that there is another way: opening a representative office in China.
The difference between representative offices and branch offices
A representative office (RO) is essentially an extension of an existing business – which is based overseas. Often confused with branch offices, there are a few defining characteristics that set the two apart. The most notable difference relates to business activity: whereas a branch office can conduct business in China and turn a profit under its main entity which is already located in China, a representative office in China cannot – it must outsource all its work back to the parent company located overseas.
Why set up a representative office in China?
For one, it can be a very cost-effective way of breaking into the local market. There is no share capital requirement to open a representative office. And since operations are usually smaller – as most of the business’ resources remain with the parent company – running costs are often lower as well. You can maintain 100% ownership of your company since it is treated as an extension of the parent. Essentially, representative offices act as a powerful marketing and promotional tool for your existing business, allowing you to get a foothold in the ever-growing Chinese market while you expand your business at home – all at a low cost and with favorable tax conditions.
Criteria to establish a Representative Office
The parent company must have existed for at least two years to be eligible to establish the Representative Office in China;
Representative Office may not hire local employees directly and must rely on a government-authorized employment agency – called a Labor Dispatch agency;
A Representative Office is limited to employing four foreign employees;
There is no investment requirement because Representative Office are not designated as legal entities;
The registration process takes approximately six to eight weeks to complete depending on location.
7 things to know about setting up your representative office in China
If everything mentioned above sounds tempting, here is what you need to know to get started.
1. Easy incorporation:
The process for setting up a representative office is like the usual process for China onshore businesses and free trade zones, but with a fewer steps because the company is not operational. The first step is to identify an incorporation agent who will act as your representative when setting up your China Representative Office with the China authorities – a company formation specialist can usually act in such authority,
Your business activity is standardized as follows:
Market research, product display and publicity activities relating to the foreign company’s products or services, and liaison activities relating to the sale of products or provision of services, and local procurement or investments, by the foreign company.
Your parent company / shareholder must be a minimum of 2 years incorporated in your home jurisdiction. The reason behind this regulation is that the Chinese authorities want to see that the parent company has had enough commercial and economic substance created within the overall operation. A registered office address is a must and the lease agreement together with documents published from the real estate bureau will be required. Keep in mind that the parent company documents must be notarized, attested and translated into Chinese before submission – and this should be done as early as possible in the application process.
2. No partnership requirements:
Nearly all China onshore companies and representative offices do not need to have a Chinese partner to “sponsor” or act as “partner” in the local operation. This allows you as a company and/or business owner the freedom to incorporate and expand as you wish.
3. Straightforward pricing structure:
The cost of applying to establish a representative office in China is slightly cheaper than a standalone business – due to the smaller number of steps needed in the application process. The pricing structure is simple and transparent – not only for the incorporation of the company, but for the ongoing accounting, tax and payroll functions that are still needed to be maintained.
4. Apply for multiple visas:
As with most China mainland companies, setting up a representative office allows overseas companies to apply for multiple visas. While there is an upper limit on the number you can apply for – i.e. four visas will be granted per representative office to employ foreign individuals, it should also be linked to the size of your office. Remember the purpose of the Representative Office is to act as a liaison with the parent company and as such should not require more than a handful of foreigners working in it.
5. Sponsor dependents’ visas:
Although the regulation states that only four work permits, and residence visas will be granted to foreign individuals working within a Representative Office, dependent visas will be granted as well – allowing you to bring your spouse and children. As this is an important process, it is a good idea to get advice from an expert in setting up China businesses, to ensure that before starting an application, both you and those you are hoping to sponsor meet the entry criteria.
6. Set up with a single shareholder (i.e. parent company):
The beauty of the operation is that you can go it alone when setting up your representative office in China – simply establish your business with one single shareholder and more importantly one single decision-maker.
7. Possibility of no paid upfront share capital:
It is possible to set up a representative office in China without the need for share capital. Capital from the parent company will be transferred over (as often as needed) to pay for all local costs – remembering that the Representative Office is a pure cost-center. How these transactions occur can be a tricky area, but a company formation specialist can advise you on the requirements.
Representative Office is a stepping stone into the Chinese market
Setting up in a new country for the first time can be a daunting experience, even for entrepreneurs who already own and run businesses elsewhere. This is particularly true when setting up in China – with its well-known quirks and intricacies regarding foreign ownership. Setting up a representative office is a fantastic way to get a foot in the door of the Chinese market without getting bogged down in these complexities. Representative offices offer foreign business owners the opportunity to expand their enterprise overseas – promoting their products and services directly to the local Chinese market to boost their business back home. For entrepreneurs looking to move quickly to gain a presence in China – one of the world’s fastest-growing and most strategically placed economies – there’s nothing quite like it. What’s more, for many business people, opening a representative office acts as stepping stone to other types of business ownership – an opportunity to get to know local customs and business practices and assess the viability of launching a standalone company. Whatever your reasons for launching one, there’s never been a better time to do it.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.