Spoke 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 firm as well, 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 Rep Office situation but with the additional twist of the company wanted to trade off and even enhance its foreignness.
China is killing Rep Offices and the reason it is doing so is to increase its tax collections. In the past, Rep 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, and because WFOEs are so much more flexible in terms of what they can do in China, it has truly become the rare instance where 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 simply cannot earn any money in China or take any payments from a Chinese person or business for any reason.
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 are not engaging in anything more than “liaison” activities, and instituted various other provisions to make them less favorable/more expensive. Just by way of example, 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 all of these agencies (at least as far as we know) 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 that work permits will be for one year not three as was formerly the case for Rep Office employees and is typically the case for WFOE employees. The article concludes by noting that the SAIC will perform on-site inspections within three months of the issuance of their registration certificates 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.
For more on Representative Offices in China, check out the following: