Issue 8 - 24 November 2003

tax notes

　

Setting up a representative office in China

　

　

Representative offices are one of the most popular and low-cost vehicles that allow foreign investors to explore the market and search for business opportunities before they consider committing significant resources in China.  There are a number of key advantages to the representative offices structure.  Contrary to investing in a company in China, the cost of setting up a representative office is relatively low.  There are few barriers to entry and approval is relatively easy.

　

Scope of business

It is of key importance to note that a representative office (RO) is not a separate legal entity.  Rather, it is an extension of its parent company.  A representative office may only engage in non-profit making activities.  It has the freedom to carry out the following functions:

　

• Conduct research and survey for its parent company in the local market;

• Liaise with local and foreign contacts in China on behalf of the parent;

• Conduct research and provide data and promotional materials to potential clients or trading partners;

• Act as a coordinator for the parent company's activities in China;

• Make travel arrangements for parent company representatives and potential Chinese clients;

• Other non-direct profit making business activities;

Under no circumstances may a representative office do the following:

• Directly engage in any business for profit;

• Sign contracts or deals on behalf of the parent company;

• Represent any firm other than its parent company;

• Collect money or invoice organisations or individuals within China for services or products;  

• Buy property or import production equipment.

Although representative offices are officially forbidden from engaging in direct profit making activities, some foreign investors have found their way around this.  However, the consequences of not operating within the permitted scope of business can be serious.  A representative office may face a warning, hefty fines, confiscation of illegally generated income or even cancellation of its registration.

　

The application process

Where the parent company is engaged in trading or manufacturing operations, the application for the establishment of a representative office should be submitted to the Ministry of Commerce (MOFCOM) or its local bureau at the provincial or municipal level.  In some specialised industries (such as banking, insurance, legal services, accounting, airline and media, etc), the parent company has to apply for approval to the relevant Chinese government authority with jurisdiction over that particular industry.  All applications for setting up a representative office should be submitted through a designated Chinese sponsor (often known as foreign services company or FESCO).

　

The following documents have to be submitted to the authorities for approval.  Submissions have to be in Chinese.  If in English, a Chinese translation has to be provided:

　

• An application letter signed by the Chairman of the Board or the General Manager, describing the company's business background including history, nature and scope of business, name of its Chairman of the Board, General Manager and directors, its major trading partners in China and business volume.

          The letter should also contain the proposed name of the representative office (usually in the following format:

          "Head Office Country + Company Name + Chinese City Name + Representative Office"), the purpose for  

           setting up the RO and its scope of activities, the duration of the office and its chief representative.

• Certified copies of the company's Business Registration Certificate, Certificate of Incorporation, Memorandum and Articles of Association, etc.

• An original bank reference letter to testify the company's financial standing.

• A letter appointing the Chief Representative to the representative office.

• The Chief Representative's resume showing his/her working experience and education/professional qualifications, copies of his identification, passport and photos.

• A copy of the lease agreement for the representative office's premises from an approved unit, e.g., a hotel or a commercial building.

If the application is approved, an approval permit is normally issued to the representative office within one month after submission of the application.  Upon receipt of the approval permit, the representative office has to apply for business registration and complete other post-registration formalities (including tax, customs and foreign exchange registration) within a specified period of time, usually 30 days.

Employment of staff

A representative office can only proceed to hire and register local Chinese staff when its application is approved by the authorities.  Since a representative office is not a legal entity, it can only hire staff through specific state-approved foreign services companies (FESCO).  However, this formality does not hold back a representative office from nominating or selecting suitable candidates not currently registered with the FESCO, and employing them through the FESCO for the representative office.

　

During the staff registration process, both the FESCO and the representative office have to verify the previous employment status of the candidates.  This is an important process because as a new employer, the representative office can be held liable for the employee's breach of labour contract with his former employer if that labour contract was not properly terminated.  In practice, a potential local Chinese employee should be able to provide a "release certificate" issued by his previous employer.  The certificate normally contains the name of the employee, duration of employment, date of termination, job description and the reason for termination.

 

The wages of the staff must not be lower than the minimum pay scale in the place where the representative office is registered.  As an indication, the minimum wage in Dongguan is RMB450 per month, whereas the minimum wage in Shanghai is RMB975 per month.

　

Under the Chinese social security system, both the representative office and its local staff are obliged to make contributions to various social security funds.  The contribution requirements vary across different cities, but in general, contributions for basic old age, unemployment and medical insurance are required.  Some cities require contributions for work related injury, maternity and housing funds insurance.  Contributions to social security funds should be made via designated agents or FESCO.  The agents usually charge a monthly service fee for the provision of personnel administrative services.

If you wish to discuss the above please notify your usual Grant Thornton contact or contact:

Paul Chow

T +852 2218 3188

E paul.chow@gthk.com.hk

　

David Southwood

T +852 2218 3103

E david.southwood@gthk.com.hk

　

Tom Corkhill

T +852 2218 3167

E tom.corkhill@gthk.com.hk

　

Brenda Cheung

T +852 2218 3136

E brenda.cheung@gthk.com.hk

　

Daisy Ip

T +852 2218 3168

E daisy.ip@gthk.com.hk

　

Gary James

T +852 2218 3137

E gary.james@gthk.com.hk

　

Michael To

T +852 2218 3046

E michael.to@gthk.com.hk

　

Tax notes are issued in summary form exclusively for the information of clients and staff of Grant Thornton and should not be used or relied upon as a substitute for detailed advice.  Accordingly Grant Thornton accepts no responsibility for any loss that occurs to any party who acts on the information contained herein without further consultation with ourselves.

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