Another advantage of Rep Offices is the low cost of on-going operation. Compared to a WFOE, accounting and corporate services are quite simple and low cost.

Where an overseas business is clear about the limits on the scope of activities a Rep Office can undertake, and it matches short and medium term business objectives, a Rep Office is a valuable and useful structure.

Dan is quite correct that a Rep Office is not a 'market entry' strategy where the business objective is to bill clients in China at a later date. Closing a Rep Office down is a major exercise and will invite close scrutiny by tax authorities who will look to extract every possible cent during the shut down exercise. Where the objective is to build a China business, a WFOE is a much more flexible structure.

Where the business objective is to build sales, brand and presence of operations overseas, and a direct arrangement between Chinese partners and overseas operations will be enhanced by a PRC presence, Rep Offices have their place.

Does this mean that there are no capital requirements to forming a representative office?

I own an LLC with just myself in it, (I just freelance and work over the internet). Since most of my family is in China, and I'm a U.S. citizen, do you think this is a viable option?

Thanks so much for your time!

Jing

You are 100% right. There are times where a Rep Office is absolutely the way to go and you have done a great job setting out when those times arise and why it makes sense.

I have no idea. I would need to know so much more to be able to give you good counsel on this. Heck, it is even quite possible that what you are doing does not require a China company at all. I find that to be true fairly often of companies that contact me regarding forming a China Rep Office. In the end, our determination is that they do not need a China office of any sort, at least in the short term.

I do agree that there is a time and a place for an RO. However, I do think that this is becoming less and less. One of the prime reasons for this is tax. Depending on how the SAT's approach to permanent establishments develops, I think there is a significant potential for an RO structure to leave a company in a MUCH worse tax position in the future.

Surely the point of a Rep Office is that, if fully compliant in paying expense based tax, its likely contribution and value to the overseas operation has been taxed at an appropriate level already.

Maybe work on a joint post with Dan on this issue.

The issue does not solely affect Rep Offices, but also WFOE's with related party transaction Agreements with HQ.

I was intending to do a post over at China Tax Insights on my predicitions for tax developments in 2010 and will raise this issue then.

This is more a feeling that I have based on the trends of the past 18 months and a few comments by the SAT. I believe circulars 601 and 698 are just the tip of the iceberg and more can be expected.

The difference with a WFOE is that they are a separate corporate entity and hence are taxable under the Enterprise Income Tax Law in their own right. This means that the transfer pricing and the anti-avoidance rules are a more appropriate, direct mechanism in respect of such entities rather relying on a PE argument.

I will elaborate more on this point in my post which is coming soon.

I used to work for a consulting company that had an RO in Beijing working for American clients; payments occurred in the US, but all the activities that actually generated the profits occurred in China. Was my company looking for trouble?

All of our clients use Hong Kong companies as the gateway to China so that the RO is a subsidiary of the Hong Kong company.

This provides more flexibility ( and security ) than merely using an RO as a direct subsidiary of the foreign ie US / Canadian company.

Thanks for the excellent post. I have a company (internet business) in USA and want to set up a local office in China. The primary purpose of the local office is to do development and research for my US company.So, there will be no profit but only cost/expense. Can you please tell me which entity is the best? If I set up WFOE, how can I deduct my expense in China from my USA tax?

Thanks.

Thanks

I have a question concerning foreign private school (Higher Education). The rep office will engage the following :

-Conducting research
- Promoting the school
- creating alumni network
- Coordinating partership with chinese universities
- Recruiting students (tuition fees paid oversee)

I heard we couldn't register as a school as the education scope is very difficult to get. We have no plan to open a school in China, so do you think we should open a rep office as a private compagny, or considering opening a WFOE if the situation is getting more difficult for rep office?

Thank you,

Best regards

To question1) if everything goes smoothly, it takes around 15 working days,
2)can not establish a RO till parent company has been legally set-up for 2 years

Olivia

I appreciate the help!

Thanks in advance!!

//Agatha - August 16, 2010 9:05 PM
Hi,

I have a question concerning foreign private school (Higher Education). The rep office will engage the following :

-Conducting research
- Promoting the school
- creating alumni network
- Coordinating partership with chinese universities
- Recruiting students (tuition fees paid oversee)

I heard we couldn't register as a school as the education scope is very difficult to get. We have no plan to open a school in China, so do you think we should open a rep office as a private compagny, or considering opening a WFOE if the situation is getting more difficult for rep office?

Thank you,

Best regards
//

I doubt anyone of any real competence will answer your questions and the reason for that is that there is no way to give a good answer without all sorts of additional facts and also additional research (including talking with government officials). The real question is whether what you are planning to do should be a rep office or a WFOE and this sort of analysis can get quite complicated. The fact that it is education related is probably (though not definitely) of far less import than what it is exactly that you will be doing. You essentially have two choices. One, you work with the government to figure all of this out and if you do open your business as a Rep Office, hope that it will be allowed to remain open with your being able to do with it what you planned or you retain legal counsel to figure all of this out for you.

I hate to tell people to retain legal counsel and this is probably the first time I have ever done so on a comment, but I feel it necessary here as you really are pushing it if you expect a serious answer to what you have set out, which really is a very complicated legal question to which a good answer isn't even possible without a lot more information.

Appreciate the help & thanks in advance!

I wish to set up a sourcing office in Shanghai. Due to lack of local knowledge(mainly dealing with government offices and their requirements), I have been contemplating opening a RO and then later on convert to a WFOE. Clearly stated on this blog, this would not be the smart way to go.

However, having hardly any local knowledge, is it a smart thing to jump in with capital and all other associated costs and expenses and set up a WFOE?

Do you foresee any legal ramifications of leaving the RO as is and set up a WFOE once I have a much better understanding of the ground situation(under another company I have ofcourse)?

Thank you & best regards,

Brgds SJ

We pay this person directly into her bank account. Is this legal in China?

I am advised by by MD that we should form an RO and employ her through the RO but from what has been described on your web site the RO can not employ her and she has to be employed through a special employment agency. Is this correct?

If we have to employ her through an employment agency to be legal what are the cost implications?

If we have to employ this person through an employment agency and pay any fees they charge what is the benefit in opening an RO other than showing your company has substance?

Many thanks
Rodney Arnold