China Representative Offices: Got WFOE?

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 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

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.

China has increased the tax rate on Rep Offices

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 not 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.

New regulations for representative offices of foreign companies

And now there’s more. 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 and the registration certificates for ROs must be renewed annually. Though these restrictions are being implemented only in Shanghai now, they will be implemented throughout China in 2010.

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 China Representative Office.

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