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Foreign companies have several options for expanding into the Chinese market, including opening branches attached to an existing Chinese subsidiary. This option, however, involves specific nuances depending on the purpose and type of branch.
In this article, we take a detailed look at the types of branch office for foreign-owned companies in China, distinguishing between the office branch, with no commercial activity, and the sales and distribution branch.
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Publication updated on August 19, 2024 |
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1. The branch office: an administrative presence
1.1 Definition and use for a company already established in China
A branch office is a separate entity attached to a company established in China, set up to carry out an activity that is not of a commercial nature. For example, an investor may register a foreign-owned enterprise in a Chinese free trade zone but, for practical reasons, prefers to have its business office located in another area or district of the parent municipality. This is a classic case in major Chinese large cities such as Beijing, Shanghai, Guangzhou or Shenzhen.
China's 21 free trade zones are often located far from urban centers, regardless of the facilities they offer, notably in terms of the practicality of managing bonded stock.
1.2 Distinction between branch and representative office
The main function and role of a branch office is to represent its parent company registered in China, without engaging in commercial transactions or generating separate income. This entity is not the same as the legal form of representative office. The latter enables a company with no presence in China to benefit from a minimum, non-capitalized entity capable of representing it and studying locally some business opportunities, and coordinating activities with local partners.
1.3 Example of a branch office license
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Opposite is an example of an office branch license.
It is distinct from that of its parent company, which was issued in another locality (district).
Registered and having an office located in downtown Shanghai.
It is attached to a foreign-owned import-export trading company (ex-WOFE) registered in the Waigaoqiao free trade zone.
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2. The sales branch: sales outlets with a commercial activity
2.1 Definition and function
Sales outlets have their own commercial activity. They are set up to sell products or services directly to Chinese consumers. A sales branch generates and collects income from its own sales. These branches are, for example, stores in large shopping malls or directly on the street.
Such a branch enables us to penetrate the Chinese market directly and more incisively, by establishing a physical presence that facilitates direct sales to the consumer. It is also the typical legal form chosen for the creation of a flagship store, pending the establishment of other stores.
Provide for regular inspections and administrative controls to ensure that the activities conducted comply with the content of the license. As publicly accessible entities, regular inspections illustrate the implementation of China's corporate social credit system.
2.2 Advantages and limitations
Advantages
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Direct commercial presence: sales branches enable direct interaction with Chinese customers, which can improve sales and customer loyalt
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Initial investment: set-up and running costs are high: rent, staff, royalties or commissions on sales to a department store.
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Local control: they offer greater control over how products or services are presented and marketed in the Chinese market.
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Regulatory complexity: sales branches must comply with regulations specific to China. For example, additional licenses or permits may be required for distribution of regulated products including food, alcohol, catering and take-away.
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Growth opportunities: sales outlets can rapidly expand their operations to meet growing market demand, and help reinforce the image of a brand and the company that operates it.
Examples include international brands distributing luxury goods, textile clothing chains, cosmetics brands and restaurant chains.
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Need for solid accounting organization and logistics management:
The local head office in China is subject to tax and reporting obligations. It will have to manage the logistics aspect of supplying the sales outlet, global accounting, declaration of income and payment of taxes.
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2.3 Example of a retail branch license
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Here is an example of a retail branch license attached to a foreign-owned enterprise (WOFE) registered in Shanghai. It shows, from top to bottom:
- Business license, in Chinese (商业执照)
- License number
- Registered credit number of head office in China
- Full legal name of the branch, in Chinese
- Operating and registered address
- Type of entity (foreign-owned)
- Name of branch person in charge
- Date of legal registration
- License expiry date
- Branch authorized business scope
- QR code linking to public information
- Seal of the licensing authority
- Date of license issue
Since simplified Chinese is the only official language, the branch license shows no Roman letters at all.
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3. Registration, licensing and legal status of branches
3.1 Registration and licensing
The office or commercial branch is subject to registration in addition to that of the Chinese parent company. It is issued with a separate registration certificate or business license, at the address it occupies. In this respect, a commercial lease at an eligible address (for an office or commercial premises) is required. No registration allowed at a residential address. China's land registry distinguishes between residential, office, commercial and industrial uses.
A branch will have its own official stamps too. The corporate purpose stated on its license is limited to the authorized scope of that of its parent company, with no possibility of exceeding it. As a branch is also financed by its head office in China, no capital is required for its establishment.
Here, therefore, we distinguish the branch (分公司) from the domestic subsidiary (子公司), which would, in turn, have authorized business activities separate from its parent company. For example, a
- A production company in China concentrates its activity on garment manufacturing or assembly
- Its domestic subsidiaries carry out local marketing (wholesale or retail).
3.2 Legal status of branches entities
The branch depends on a main company in China (its parent company) and has no separate legal personality. This means that legal responsibility for its actions lies with its parent company in China. The latter may be a 100% foreign-owned company (ex-WOFE) or, in the case of Chinese subsidiaries of international companies, a Sino-foreign joint venture. Of course, Chinese companies can also open branches anywhere in China.
If foreign employees or French expatriates work in a branch, their visas and work permits will be applied for on behalf of the parent company.
The conditions for setting up a branch of a foreign-owned company logically follow China's Comp[any Law Company Law, and the sectors authorized or prohibited appear on the national foreign investment list.
TO REMEMBER: setting up one or more branches in China is permitted for companies already established in China, which have a service, trading or production activity there. Companies based outside China are not allowed to set up a branch. A Chinese branch is subject to local company regulations and, depending on their specific activity, must comply with safety and compliance standards for :
- Public health and hygiene regulations (medical devices, foodstuffs, etc.)
- Environmental protection standards
- Dangerous operating conditions (e.g. for hazardous or chemical products)
- Compliance with other international rules or agreements (e.g. IATA or NVOCC licenses)
- Cultural and publishing activities.
Obtaining these licenses is not automatic. It's a case-by-case approval process, not a simple declaration. With good preparation and anticipation, they can be obtained within a few days or weeks.
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Our added value for your branch office incorporation |
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Our experience and accreditation in foreign owned enterprises setup, registration and licensing |
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A foreign management residing in China for over 30 years |
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The complementary of our multicultural team |
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Our extensive network with Chinese administrations and authorities |
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A long term knowledge of Chinal business practices and local cultural codes |
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