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:

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  • S. Maruvian

    Thank you for this blog. I have been seeing the same thing in that the China representative office for my company is always getting more difficult to keep up because the government is making it that way. If I had it to do over again, I would have started out as a WFOE but now we are looking at terminating our representative office and then starting with a WFOE and it is a big mess.

  • richard C

    I attended a seminar in Beijing on Friday on this topic. There is also a big move by the Chinese tax authorities against RO’s.
    One of the thoughts was that not only would there be a flight to WOFE but that arrangements whereby foreign companies aren’t carrying on business in China or don’t have a permanent establishment for tax purposes will become more prevalent. On review, it may be be that foreign companies do not now require a presence in China and ‘agency’ or similar arrangements with Chinese companies may be sufficient.
    An thoughts on this issue and on some of the ‘threshold’ issues for ensuring that foreign companies are not required to register as either a WOFE or RO.

  • Quote: One of the thoughts was that not only would there be a flight to WOFE but that arrangements whereby foreign companies aren’t carrying on business in China or don’t have a permanent establishment for tax purposes will become more prevalent
    If you *really* are not doing any business in China then this will work, because in this situation the domestic company is going be paying the taxes.
    If you have some sort of agency relationship in which you are doing business in China and are relying on a corporate structure to avoid taxation, then this likely will not work well, since China is also cracking down in transfer pricing taxation. One problem with this is that if you don’t have “boots on the ground” it makes it difficult to deal with day-to-day business issues. You don’t have any rationale to get visas to send over business staff, and you can’t sue or lobby officials. And all your business is run through an independent entity whose interests may or may not be identical to yours.
    I think in the end it will be less painful to live with the rules than to work around them.

  • China: Don’t Let The Tail Wag The Dog.

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  • The Slow Death Of The China Rep Office.

    I have written a number of times recently of how China is cracking down on Representative Offices and of how they seldom make sense anymore. This past week, I encountered yet another potential pitfall. First though, a bit of general background on China…

  • Alex

    Hi Dan,
    I refer to your post dated March 21, 2006: “Chinese Company Formation, Part II — WFOE Minimum Capital Requirements.” (https://www.chinalawblog.com/2006/03/chinese_company_formation_part.html)
    Any changes in the outlines you provided back in 06 or are the RC amounts for a WFOE still dependent on the amount of capital required to start and run the company (manufacturing: high capital investment requirements versus consultancy: Asset light organization as an example)?
    You make a very interesting point that RC required for the WFOE may be significantly less in one city versus another. This point certainly requires further investigation by anyone looking to drop the RO and go down the WFOE road.
    Thank you for another very helpful post.

  • Would you please tell us if existing Rep.office have easy solutions to become WOFE? We would be interested to do so. if you can assist me, please contact me directly.

  • Ngo Yan Ni

    My company is from Singapore. We just set up a RO in China. As we started to renovate the office, incurred expenses and purchase the necessary, the vendors and suppliers started to ask us whether we need an invoice (paper issued by the relevant government taxation authority, “fa piao”). If we want, it means our purchases will be more expensive. Also as a RO establishment, we are not allow to issue invoice to customer, thus the additional tax on purchases have no way to offset.
    I would like to know if it is an option to either want a ‘fa piao’ from the tax authority or do not need. If we do not ask for a ‘fa piao’, are we offend any law ?
    Thank you very much.

  • Rudy Chen

    Dear Ngo Yan Ni
    I’m an Accountant who has been working in China in the last 5 years. I think I can answer your queries.
    Legally speaking, you’d need an official ‘fa piao’ from the supplier. Unlike S’pore and other Western countries, the tax bureau here does not recognise invoice which is printed on a piece of paper. The supplier must purchase official ‘fa piao’ from tax bureau and fill it up whenever there are sales and submit to buyers like yourself. The ‘fa piao’ has an anti-counterfeit feature and every single one of them is controlled by the tax bureau (imagine the humongous system used to control it).
    When you file in tax return, only those expenses which are accompanied by ‘fa piao’ are recognised by tax bureau.
    Why don’t some vendors provide ‘fa piao’?
    Ans: The vendors would like to evade tax. By not providing any ‘fa piao’, the vendors can save on tax as they don’t need to ‘purchase’ it from the tax bureau and therefore pay tax to the tax bureau.
    As an RO, even though you can’t issue invoice and the tax on the ‘fa piao’ can’t be offset, you’re still required to obtain the ‘fa piao’ as the tax bureau may perform an audit on your RO.

  • Once you have a WOFE complete in one city like Chengdu, can the WOFE open an office is say GZ?
    It’s would be a business consultancy WOFE in Chengdu. Doing business consultancy in Gaungzhou .

  • Sumantra Chaudhuri

    My company has a representative office in Beijing. The legal entity having a representative office in China is changing its name. Do I need the change the name of the representative office immidiately, if not, what is the timeline?

  • Ash

    Interesting Post. I was wondering, are the “head count” restrictions in place in Guangzhou as well and if yes, what is the head count limit for the co. as a whole, no. of chinese employees and no. of foreign employees?
    Many Thanks