1. Why and how to open a representative (liaison) office in China ?
Since the early 1980s, the registration of a Representative Office has been authorized by the Beijing government to allow foreign companies to prospect and establish a link with the Chinese market at low cost. The purpose was to help them conduct basic activities like market intelligence, sourcing, establishment of relationships before considering a transformation of their China presence by having commercial or industrial activities. Meanwhile, the Chinese foreign investment regulations gradually authorized the registration of sino-foreign joint-ventures and early 2000 the incorporation of wholly owned companies or subsidiaries (WFOE) by foreign investors.
In the 90s, many western enterprises setup their office in China in order to have a base of contacts with their Chinese suppliers or manufacturers. Operationally, these entities were most often considered a sourcing office or a quality control office.
Since early 2000, other companies setup a China office so as to have a dedicated team of employees capable of prospecting local customers for products or services sold by the overseas parent company. From an operational point of view, the Representative Office is viewed as a commercial representation or remote sales office. In 2023, this legal form is still permitted and remains the lightest option of a legal corporate presence for a foreign company in China. Still, based on every specific project, it is advised to do a comparison with other legal forms permitted.
2. Pros and cons of setting up a Representative Office in China
Key advantages (pros)
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Relative quick registration (1 to 2 months for the complete formalities after the application file are submitted to the authorities.
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No authorized direct commercial activities, nor invoicing.
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No registered capital needed.
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No import export Rights. No possibility of being an importer or exporter in China.
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A taxation method most often based on total expenses ("cost plus" method) related to activity in China. The taxation level is a variable rate currently of 10 to 15% of the monthly expenses. Another calculation method (called "deemed profit") taxes the representative office on a portion of the estimated profit made outside China.
Possibility to legally hire Chinese employees via an authorized HR third party agency.
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A regulation of March 2011 increases the obligations of current management and also imposes reinforced annual audits. It is still valid to this day.
These measures aim to check that a China Representative Office is not engaged in any commercial activity or any activity deemed containing an added value.
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Possibility of hiring foreign nationals and obtaining a work permit and resident visa. Following a January 2010 directive, the maximum number of resident foreigners attached to a rep office is officially limited to 4 people. In some provinces, this number of authorized foreign expatriates may be even lower.
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A Representative Office’s bank account can be used for cash withdrawals and pay for expenses only. The only income authorized on its bank account is a bank transfer paid by its parent company. The payments received in foreign currency (USD, EUR, HKD) are converted into CNY. They are used to pay the Office’ operating expenses.
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Capacity to pay local salaries and welfare costs for employees from China.
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A Rep Office is a legal entity but does not have legal personality. Accordingly, it can not be a direct signatory of business or employment contracts.
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3. Tightened controls over Rep Office's authorized activities
Early 2010, the Chinese authorities imposed that a Rep Office's parent company must be registered since at least 2 years. In Shanghai, this measure is particularly controlled until today.
Following a 2011 regulation, the administrations apply tighter monitoring over the activities conducted in China are consistent with the authorized scope of activities at the time of registration. This annual control happens at the same time of the yearly accounting and tax audit. A detailed report must explain the China activities. It shall prove the activities involve no added value and are in line with the approved business scope. The controlling administration reacts with heavy penalties and fines to any evidence report of discrepancies.
In 2023, opening a Representative Office remains a flexible set-up option still authorized and relatively quick to test the Chinese market or keep a light presence. Still, at sight of obvious business restrictions on commercial activities, it is not an option suitable for a long-term or profitable establishment.
As soon as a business prospective justify, most companies decide to set-up their sales office as a commercial subsidiary (usually a fully owned WFOE). In this case, the China legal entity becomes a profit center able to import, export, sign purchasing and distribution contracts.
You may also check here the current chinese regulation on foreign investment, also called negative list.
Also, since March 2022, a new regulation allows to legally place a Chinese legal entity under a dormant status. This flexibility allows to suspend the local activities for an pre-approved period, in case of economic difficulties for example linked to the impact of Covid-19.
4. Steps to setup a Representative Office in China (Shanghai)
The procedures and requirements vary quite much according to the Chinese provinces considered. Still, the overall administrative logic remain as follows :
- Online pre-registration + formal application for an official registration + obtain the Registration Certificate.
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Registration certificate of a Representative Office in Shanghai |
Chief (legal) representative permit
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- Apply for additional and mandatory registrations with other administrations (Customs Office, Tax Bureau, Human Resources, Labor Bureau, Police, and get the official Chinese chops (seals).
- Apply for and obtain the Chief Representative' work permit and visas for the resident expatriates.
- Finally, open a bank account in local currency (CNY) and foreign currencies. The Chinese Banks will agree to open accounts only after all the required certificates are delivered by the authorities.
The professional preparation and optimization of your China set-up project our core business. We keep at your disposal numerous examples of registration & licensing deliverable for representative offices or commercial enterprises. B2B and B2C services, import-export trading, wholesale & retail distribution, eCommerce, assembly and industrial production.
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