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 manufacturing activities.
Foreign investment regulations initially authorised the creation of sino-foreign joint-ventures. Then, after China's accession to the WTO, overseas companies were allowed to be 100% owned (ex-WOFE).
In the 90s, many Western and Asian companies set up a rep office in China to provide a base for liaising with Chinese suppliers and manufacturers.
This structure is often referred to as a sourcing office or quality control office.
Companies gradually want to set up a sales office in China to prospect for customers or find Chinese distributors for their products or services.
This office, often called a sales office, acts as a liaison and support for local customers and business partners. |
-in-China.jpg)
|
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 2024, this legal form is still permitted. It 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)
|
|
Relative quick registration (1 to 2 months for the complete formalities after the application file are submitted to the authorities.
|
No authorized direct commercial activities, nor invoicing. No possibility to register a branch office in another location.
|
No registered capital needed.
|
|
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.
|
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.
|
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.
|
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.
|
Capacity to pay local salaries and welfare costs for employees from China.
|
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.
|
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 as well as in other large cities, this measure is particularly controlled until today.
|
Following an update of the regulations in March 2011, the authorities are carrying out more stringent checks to ensure that the activities carried out are in line with those authorised.
These checks are carried out annually, as part of the accounting and tax audit. It involves describing the activity in detail, in order to provide proof that it has no direct commercial purpose, or one that goes beyond that authorised in the corporate object of the registration certificate.
The authorities have reacted in this way to reports of misuse of the certificate, particularly for commercial activities.
The illegal activities of a representative office may also be reported (denouncement) to the authorities. |
In 2024, 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 allowed to import, export, sign purchasing and distribution contracts.
You may also check here the current chinese regulation on foreign investment, also called negative list.
Last, 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.
4. Steps to setup a Representative Office in China (Shanghai)
Opening procedures and requirements vary considerably from province to province. However, the administrative logic of registration follows the following general procedures:
- First find a commercial (office) premises that will be the legal registration address and sign a lease contract for a minimum of one year. Not all office premises are eligible. You should pay attention before making your choice and signing a lease.
- Define the structure of the Rep office: the foreign or Chinese representative(s) administratively attached to this entity in China.
- Pre-registration in the administration's IT system.
- Formal application and submission of the complete file and obtaining the certificate of registration attesting to the official registration of the Office.
- Apply for and obtain the Chief Representative' permit and work visa for the resident expatriates if any.
| |
|
Registration certificate of a Representative Office in Shanghai |
Chief (legal) representative permit
|
- Apply for additional and mandatory registrations with other administrations such as the Customs Office, Tax Bureau, Human Resources administration, Labor Bureau, Police, and get the official Chinese chops (seals).
- 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.
- Overall timeframe: for local formalities, generally allow between 6 and 8 weeks, including time for legalisation and notarisation (or Apostille) of the investor's documents, to be carried out in the investor's own country.
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.
|
|
|
