Legal News

The Slow Death of the China Rep Office

China Rep Offices Spain

We have written a number of times recently of how China is cracking down on Representative Offices and how they seldom make sense anymore. This past week, I encountered yet another potential pitfall. First though, a bit of general background on China Representative Offices.

China Rep Offices are pretty much limited to engaging in the following:

  • Conducting research.
  • Promoting their foreign company.
  • Coordinating their foreign company’s activities in China.
  • Other activities that do not and are not intended to generate a profit.

There are three basic requirements for forming a Rep Office:

  1. The most important requirement is that there must be a lease on an approved space for a period of at least one year beyond the approval date of the Rep Office. Care should be taken with this requirement, since many jurisdictions accept leases only from a small group of approved office buildings. Shanghai, for example, is one such jurisdiction. The lease must be registered, which can also cause problems in some jurisdictions.
  2. There must be a designated Chief Representative who will manage the affairs of the Rep Office.
  3. There must a foreign entity (typically a limited liability or a corporation) that the local office represents; private individuals and partnerships cannot establish a Rep Office in China.

There are two major issues that make operating a Rep Office in China unattractive:

  1. Even though Rep Offices are not permitted to earn income in China, they are nevertheless subject to taxation.
  2. A Rep Office is not permitted to directly hire Chinese nationals. All hiring of Chinese nationals must be done indirectly through contracting with a Chinese employment agency such as FESCO. Recent changes in the Chinese labor contract law have made such contracts extremely unattractive. Rep Offices can directly hire foreign nationals.

So this past week, our China business lawyers were talking with a new client from Spain that is interested in getting into China. The company is a service business that spun off from a much larger company about a year ago. I cannot reveal its business, but I can say that it is already representing a number of Chinese companies going overseas and its plan was to open a Rep Office in China to push more China business to its Spain and Mexico offices. After we initially told them that Rep Offices seldom make sense in China any more, we were starting to see reasons why it might make sense for this company. As we were talking through their situation with them, we all of a sudden realized that China now pretty much requires the Rep Office’s parent company to have been in existence for at least two years.

We alerted our client to this and we then talked a bit about possibly buying an older shell company to own the China Rep office. Eventually (and fortunately), we all decided a WFOE made better sense in any event.

China Rep Offices SpainChina Rep Offices Spain

For more on China Representative Offices, check out the following How To Form A Representative Office In China and The China Representative Office (RO). Got WFOE?

9 responses to “The Slow Death of the China Rep Office”

  1. I have been recently writing a series of posts about R.O.s myself, and while I was reading your post I was wondering if the major issue with R.O.s right now is more the “uncertainty” that the new tax treatment is bringing to the table (“Tentative Measures for the Administration of Taxation on Representative Offices of Foreign Entreprises” (Guoshuifa[2010] No.18 (Circular 18)).
    With the existing exemptions under review and the increase in the “deemed profit rate” from 10% to a MINIMUM of 15% (so again, a bit of uncertainty about what the actual estimate will end up being for each R.O.)it is even more difficult to do the math and assess what investment option is best.
    The next few weeks are going to bring some light. As I was mentioning in my post it will be good to see if there are surprises once R.O.s end up submitting their quarterly EIT during this 1st two weeks of April….:
    http://www.foreignentrepreneursinchina.com/2010/04/setting-up-a-representative-office-in-china-iii-less-exemptions-and-more-taxes-the-new-tax-treatment-is-here/

  2. Another thing to note is that if the foreign company opts to name someone from the foreign office as Chief Rep, that person is subject to Chinese income tax for the number of days they are in China to conduct business. Now, what I don’t know is whether or not that Chief Rep could try to argue that s/he was doing business on behalf of the Rep Office or the foreign headquarters (thereby avoiding the Chinese income tax). Any guidance on that?

  3. In practice, local branches of the SAT appear to try to apply income tax to the Chief Rep position, regardless of the number of days present in China. I was made Chief Rep a number of months PRIOR to arrival in China and the Office was required to pay income tax on my income from the time of the Chinese approval of the appointment, not on my arrival in China.

  4. Whether or not you are working for the rep office doesnt matter when it comes to taxation.
    If the rep office issues their visa, they have to pay income tax on the personal income earned from that company while they are in country.
    The Chinese news covered a story a few years ago where some US companies got the idea that they will reduce wages for a while then give bonuses when people return to the states, and the Chinese government found out about it. You can imagine – large fines were levied.
    The taxation bureau has in many cases required the employees to submit their US tax returns for verification of income earned.
    If you fail any of the above, I know other cases where the taxation bureau arbitrarily said, “According to averages, you should be making this much XXX personal income, therefore we will tax you at that amount.”
    Rep offices are a can of worms. Stay away.

  5. Thank you for this valuable information.
    Turning to the legal services sector, could you please tell me what is the talent pool and market like for leadership (i.e. partners) and associates of foreign law firms in China? Are there patterns of loyalty among local attorneys? Is there a pattern among foreign firms, such as a formal or informal “best friend” arrangement with a local Chinese firm? Is there a certain structure the foreign law firm must take on? What are the most promising areas of the law and geographic areas for a new foreign law firm in China?
    Thank you very much for your thoughts, contact, or references to other articles I could read.

  6. I understand that an individual’s worldwide income and gains become liable to tax in China if that individual is classed as being either domiciled or permanently resident in China for tax purposes. The definition of Permanent Residence is slightly vague but does seem to class an individual as being resident if they spend more than 1 year in the country. However there seems to be the possibility that this can be avoided by being out of the country for more than 90 days in each tax year.
    It has been recommended to me that if I want to live in China for more then 183 days per year then an Representative Office (RO) would be the best option but, if I am not careful, I could potentially expose my worldwide income and gains to Chinese tax. However it also seems that one solution might be for me to form an RO and thereby obtain a resident visa which would enable me to reside in China for extended stays. Provided I was out of China for at least 91 days each tax year, I would seemingly not be considered either domiciled or resident for tax purposes and therefore would only be taxed on income derived within China, which could be quite low (despite other income earned outside China, which would not be taken into account or liable to Chinese tax)
    1. Am I right in thinking that having a resident’s visa does not automatically class me as either domiciled or resident for tax purposes?
    2. Am I right in thinking that if I am out of China for more than a cumulative total of 90 days in each tax year then I would be considered non-resident for tax purposes and therefore only taxed on my income derived actually within China and not on my worldwide income?
    3. Does this 90 days need to be made up of trips exceeding 30 days each for those trips outside the country to qualify towards the 90 days cumulative

  7. So true. The problem is there are still plenty of company formation companies setting up rep offices because it is a fast way for them to make money. Then when the foreign company goes back to them after being told they are operating illegally, the formation company blames the foreign company. It’s a real racket and I hope this will help put at least a small dent in it.

  8. It has been recommended to me that if I want to live in China for more then 183 days per year then a Representative Office (RO) would be the best option but, if I am not careful, I could potentially expose my worldwide income and gains to Chinese tax.
    If the rep office issues their visa, they have to pay income tax on the personal income earned from that company while they are in country.

Leave a Reply

Your email address will not be published. Required fields are marked *