Tips to set up a representative office in China
After your first study visit to China, you may realize that doing business in China requires a local presence of your firm to facilitate business communications, or you may wish to further assess a better understanding of the size and potential of the China market before investing committed resources.
The next step is to consider setting a representative office, which is the fastest and the most economical way to competitively position your firm’s presence in China. But first of all, you need to understand if a representative office’s structure is the most appropriate for your firm’s China’s market entry strategy.
A representative office’s primary function is to conduct China market research, and to coordinate parent firm’s activities in China. This includes liaison with local contacts, contract negotiations, warranty and after sales service, lastly import, export and distribution services.
However, a representative office is not allowed to conduct profit making activities which includes collecting payments or issue product or service invoices. Besides, the representative office can only represent its parent company for its existence in China. It is important to note although there is no with no profits, taxes to are still payable to the Chinese government. Furthermore, recruitment of staff cannot be done directly through your office but has to go through a local human resource agency.
Depending on your nature of business and its intended operations in China, the location of your representative office cannot be overlooked in your market entry process. Most representative offices are often located in major cities like Beijing, Shanghai, Guangzhou and Shenzhen as these cities offer higher agglomeration of the same industry players. However, 2nd or 3rd tier cities should also be considered for an early mover advantage into China market.
In addition, your representative office portrays your commitment and business operation in China and therefore an above average office furnishing will aid to leave a good impression on your Chinese partners or clients when they visit your office for discussion.
A representative office in China not only demonstrates your firm’s commitment to stay competitive in China, it also helps to improve communication between partners and in turn building up the much needed “Guan Xi” (Relationship) for more business opportunities and cooperation.
However if you are considering to set up a manufacturing or processing facility in China, a wholly foreign owned enterprise (WFOEs) will be of a better option, but would require a higher capital injection.
A point to note is that, even if you have set a WFOE in a city where your manufacturing facility is based, you may want to consider having a representative office in your target sales cities to facilitate business operation. On the other hand, a good distribution partner with regional coverage can help to rectify this problem.
Setting up a representative office in China primarily requires 4 stages and this entire process can take up till 4-5 months time.
Stage 1 – Pre-approval Stage
Once you have decided to base your representative office in which city, the next thing is to approach the local Ministry of Commerce (MOFCOM) for contacts of a local designated foreign enterprise service company (FESCO) who will be in charge of your representative office application process. You should be paying a designated FESCO for their service of notifying you on the relevant upcoming deadlines and administrative procedures. In addition, a signed lease agreement is one of the pre-requisite for the approval; therefore it is vital to secure a lease for a “grade A” office space before submitting the application.
Stage 2 – Application Stage
Generally your application approval should be done by MOFCOM, but if your industry is specific to banking, insurance, law, accounting and media, you may have to approach the relevant authority which has jurisdiction over your industry sector. Once approved, you should have the Certificate of Approval certifying your legal presence for the next 3 years which can be further extended.
Stage 3 – Registration Stage
This stage is to register for your representative office’s business license which must be renewed annually. It is important to note that you must complete the registration within 30 days of your approval from stage 2. The application together with the supporting documents is required to be submitted to the local State Administration of Industry & Commerce (SAIC and the process normally takes about 1-2 months time.
Stage 4 – Post Registration Procedure
Firstly, In China, it is expected for your representative office to register the office location with the local police (Public Security Bureau) and to register with local and national tax bureaus. Secondly, you should make financial and corporate seals as it is a practice in China to use them on official documents. Thirdly, opening a foreign exchange bank account will aid to facilitate overseas fund transfer. Fourthly, to import the relevant equipments or materials, remember to complete the relevant customs registration. Lastly, get a FESCO to assist you in recruiting of Chinese staff.
Once all this is done, your representative office is set to establish its presence in China. However before getting to this stage, a good market research study is required to ensure that your products or services are viable in the Chinese market.
Procedures and costs to set up a representative office in China
Setting up a representative office (RO) in China seems to have a lot of paperwork and bureaucracy involved. Therefore, it is of most importance that foreign enterprises have an overview of the various approval and registration steps in order to facilitate a timely market entry into China. The entire process may take 3-5 months time to complete.
A. Main application procedure for setting up a RO
The 2 main agencies involved with the setting up a RO will be the local Ministry of Commerce (MOFCOM) and the local State Administration of Industry & Commerce (SAIC).
1. Local State Ministry of Commerce (MOFCOM)
Approach the MOFCOM or relevant agencies depending on your industry, to obtain the approval certificate that is necessary to set up your RO. Also, obtain the business license registration form for submission in the later stage with SAIC. Approval should take about 5 working days.
2. Local State Administration of Industry & Commerce (SAIC)
Once approval certificate is obtained from the MOFCOM, the appointed Chief Representative has 30 days to apply for the business license with the SAIC. Business license approval may take up till 1 or 2 months time. In total, processing fee should be about RMB 600. With the business license, the representative can go about applying for other procedures mentioned in the below section.
B. Further requirements
1. Registration with the Public Security Bureau Exit-Entry Administration
a. For the company seal registration and the carving of company seal.
b. Within 2 working days. Carve seal fee is at RMB 500.
2. Registration with the local police (Public Security Bureau)
a. For representative and family’s permanent residence.
b. Within 1 working day. No processing fee is required.
3. Opening of company bank account
a. Preferably with established banks like Bank of China.
b. Within 1 working day and processing fee of RMB 300 – RMB 600 depending on the bank.
4. Register with State Taxation Bureau for the tax registration Certificate and subsequent tax payment.
a. Within 1 working day. Processing fee is RMB 10.
5. Recruitment of local staffs through Foreign Enterprise Service Company (FESCO).
6. Register with Regional Bureau of Statistics of China Representative office for annual audits.
a. Within 2 working days. No processing fee is required
7. Register with Customs Bureau for importation of foreign goods.
a. Within 5 working days. Processing fee is RMB 50.
8. Register with State Administration of Foreign Exchange
a. Register only if required to have a foreign exchange account.
b. Within 7 working days. No processing fee is required.
C. Overview of the documents required for the establishment of RO in China
1. Copies of lease agreement and title deed sealed by the housing authorities. (Done in China before approaching MOFCOM).
2. RO’s Business License & Certificates of Incorporation (Done in China local SAIC).
3. Bank reference letter for foreign investors (issued within 6 months and in both English and Chinese languages, certified by the Chinese embassy or Consulate in your country).
4. Minutes of Board Meeting to setup RO.
5. Minutes of Board Meeting to authorize Chief Representative.
6. Certified true copied of incorporation of applicant’s company certified by the Chinese Embassy or Consulate or relevant agency in your country.
7. Copies of passport and China entry permit of all the legal representatives, appointment letters, resume and 4 photos of the Chief Representative.
8. Documents evidencing the details of shareholders and directors.
9. Last annual return to Company Registry and to Tax Department in your home country.
With that, your representative office is set to establish its presence in China. However before getting to this stage that requires a lot of time and resources, a good market research study will be helpful to ensure that your products or services are viable in the Chinese market before you embarked on this registration process.
Remarks: please use these information as guideline only, procedures and fees can be varied from times and cities.
Tips on avoiding representative office set up problems in China
A Chinese Representative Office (RO) may be the easiest and the cheapest way to establish your firm’s presence in China. However there are some traps which you should be aware of before and after the RO’s set up.
Firstly, non-payment of taxes is a serious matter in China. A RO may overlook in paying the relevant taxes and the tax bureau deemed the tax payment responsibility as the RO’s and will not provide notification. All ROs are generally subjected to Foreign Enterprise Income tax (FEIT) and Business Tax (BT).
One of the most common tax assessment what we called the cost-plus-basis in which the total tax burden is charged approximately at 5-10% of the RO’s operating expense on a quarterly basis. It should be noted that the filing should be filed within 15 days after each quarter. If taxes have not been paid, then the tax bureau has the right to levy up to five times the total amount due plus the original amount. This can be a substantial amount of money if it has been overlooked over a long period of time.
Secondly, all ROs are permitted to import foreign made vehicle at a duty free rate which will be recorded the tax bureau. This should be recorded as an asset in the accounts and at the annual audit. If not done, the tax bureau will assume that the RO had sold the vehicle for a profit and subsequently taxed it for the transaction. There are instances where employees may secretly arrange with vehicle dealers to sell off the vehicle rights by arranging the relevant documents to be chopped and in turn making a profit of 20,000RMB. As such, when it comes to auditing or office closure, this can become a big problem.
Lastly, making sure your business is economically viable in China. Though one of the main roles of the RO is to conduct market research, However if you found your business not viable, closing down the representative office is difficult as compared to setting up one. Furthermore, some potential partners may encourage you to look at the long term potential of the market and sacrifice your profits in the early stage. This may snow balled your operating expenses, resulting in higher losses.
In any case, a good market analysis of the Chinese market, which can include your competitors, target markets and support services should be done before any plans for setting up a RO. In addition, you may want to source for a market research firm to give you a better understanding of your product/service’s viability.
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