China Rep Office or WFOESpoke with a China lawyer friend of mine today who told me his firm had not “done” a single China Rep Office for the last six months. Every time someone had contacted them with plans for a China Rep Office, it ended up as a WFOE. I told him the same thing had been happening at my law firm also, and that the only time I could remember not trying to talk a client out of forming a Rep Office was for a company that would have one foreigner in China doing nothing but shilling for an offshore service whose cachet was based in large measure on the fact that it is foreign. In other words, a classic China Rep Office situation, but with the additional twist of the company wanting to trade off and even enhance its foreignness.

China is killing Rep Offices to increase its tax collections. In the past, China Representative Offices virtually always provided substantial tax savings. In the past, forming a Rep Office was nearly always faster, cheaper, and easier than forming a WFOE. Now, it is usually a push on money, but because WFOEs are much more flexible in terms of what they can do in China, it is rare when a Rep Office makes sense. Rep Offices, unlike WFOEs, are not allowed to engage in profit making activities. Chinese law limits them to performing “liaison” activities.They cannot sign contracts or bill customers. They cannot supply parts and after-sales services for a fee. They cannot earn any money in China or take any payments from a Chinese person or business for any reason. They also cannot hire employees.

In the last year or so, China has increased the tax rate on Rep Offices, greatly stepped up its enforcement of Rep Offices in terms of making sure they do engage in anything beyond “liaison” activities, and instituted various other provisions to make them less favorable and more expensive. Just by way of example, China Rep Offices have always been required to “hire” their employees through an outside third party agency such as FESCO, but what makes that so onerous now is that these agencies now require a minimum two year employment contract.

And now there’s more. The Seyfarth law firm’s visa group just came out with an article, entitled, China Changes Rules Governing Representative Offices, [link no longer exists] talking about some more rules for Rep Offices:

China’s State Administration for Industry and Commerce (SAIC) recently instituted new regulations for representative offices of foreign companies (ROs) in Shanghai , limiting head count as well as the validity period of the RO’s registration. ROs are now only able to sponsor a maximum of four foreign representatives. In addition, the registration certificates for ROs must be renewed annually. Though these restrictions are only being implemented in Shanghai currently, they will be implemented throughout China in 2010. These new restrictions do not apply to representative offices of foreign law firms.

The article goes on to note that these new regulations mean work permits will be for one year, not three years, as was previously true for Rep Office employees and is typically what WFOE employees get. The article concludes by noting that SAIC will perform on-site inspections within three months of the issuance of a Rep Office registration and Rep Offices that have performed any illegal activities could face fines and a delay in their renewals.

China does not like Rep Offices and the situations in which they still make sense are becoming even rarer.

If you still think it makes sense for you to have a China Rep Office, check out How to Form a Representative Office in China.

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.