Setting Up Your China Rep Office. What It Really Takes.
I feel a little bit silly doing this post right on the heels of my having done a number of posts on how China Rep Offices are becoming such a rarity (here and here). However, the post from which I got this idea is so good and so much of its information is relevant to establishing any business in China, that I just could not resist.
The post is from the Foreign Entrepreneurs in China blog and it is entitled, "Setting Up a Representative Office in China (I): 10 Steps and Some Practical Tips" and it is based on a conversation with Barbara Cisneros from INAEL Electrical Systems SA, a Spanish company that established its Representative Office in Shanghai in 2008. I really like the post because it collects in one place so much of what my firm tells its clients over time as we help them establish an office in China.
So here are some of Ms. Cisneros's Rep Office steps/tips:
1. Get Help in Obtaining the License.
There is a huge amount of paperwork and you will not be able to do it on your own. Ms. Cisneros's company used a Spanish law firm as they "also needed to legalize/authenticate paperwork for Spain." Smart move. We are always telling our clients that one of the benefits to using my firm is that we can help them with both the China side and the U.S. side of the registration.
2. You Will Need to Designate a Chief Representative.
You will need to designate a Chief Representative who will be authorized to act on behalf of the office.
3. - You Will Need to Register with the Tax Bureau.
Ms. Cisneros used her law firm for this also.
4. - You Will Need Someone to Handle Your Accounting.
Ms. Cisneros notes that you must pay "the income tax monthly and the office taxes every three months." I note that this creates a real hassle and we always strongly recommend our clients either bring in an accountant/bookkeeper to handle this or contract out for this work.
5. - You Will Need to Use a FESCO Type Company to Hire "Your" Employees.
Ms. Cisneros correctly notes that China Rep Offices are not allowed to hire employees directly; they must hire indirectly through authorized third party companies. Ms. Cisneros recruited her own employees, but used FESCO (Foreign Enterprise Human Resource Service Co) to actually hire them.
6. - You Will Need to Open a Chinese Bank Account.
7. - You Will Need a Proper Office.
Ms. Cisneros correctly notes that China requires Rep Offices be established in buildings authorized for such business.
The remaining three tips primarily deal with operations and I suggest you go to the post for those.
With the exception of Number 5, all seven of the above tips apply with nearly equal force to foreigners registering any business in China.
Comments (9)
Read through and enter the discussion by using the form at the endMao Ruiqi - April 6, 2010 6:01 AM
Dumb question, but relative to number 4--paying income taxes on a monthly basis, what income can a rep office earn when it specifically cannot conduct meaningful business in China?
Leon Koh - April 6, 2010 9:47 AM
Happened to surf into your blog randomly while I was researching for some china government offices
you post great information~
I’ll come back to see what you post next!
Greetings from a fellow blogger.
doroto - April 6, 2010 6:58 PM
i think you should have noted that china state administration of tax has recently issued a new piece of regulation on rep office taxation which has made it easier for rep office to follow tax rules.
Franklin Roberts - April 8, 2010 1:12 AM
Great post. It is posts like this that keep me coming back. Thanks.
robertb - April 8, 2010 6:37 AM
@Ruiqi, she means the chief representative's individual income tax.
Linford Liu - April 8, 2010 11:05 AM
Normally, the expenses of a rep office will be converted into income, upon which the tax will be levied.
Also, it's worth mentioning that the real work (paper and registration) is far more complicated than indicated in the 10 points.
Joe - April 8, 2010 12:03 PM
I don't know why anyone would assume that you could go into a foreign country to do business without some sort of legal guidance.
Edward Lerner - April 9, 2010 12:03 AM
We set up our operations in Beijing last year and I just wish I had read something like this before we embarked on it. Very helpful.
robertb - April 10, 2010 4:14 AM
@Ruiqi, what they want to do is tax the income earned by your home office from the activities of your representative office in China (income originating from China). There are different ways of assessing that, and some types of rep offices have to prove actual income, but most just use the cost method. Under the cost method, that income is imputed, using the operating expenses of the representative office as a crude measure of the scope of your taxable business activity. A function is applied to your operating expenses to determine [imputed] taxable income.
But that monthly assessment she's talking about is probably the representative's personal, individual income tax.
btw, I'm not affiliated in any way with Dan or his firm. Take anything you read in these comments with a grain of salt and always ask a Chinese CPA.