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Representative Office (RO)
Wholly Foreign Owned Enterprise (WFOE)
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AS-EAP is pleased to cooperate with a specialized Chinese government approved Enterprises Registration
Company to offer the following two business registration services. Please contact us directly for further information and
latest pricing.
Representative Office
OVERVIEW
A China
representative office (RO) is an office of a foreign enterprise set up in China for liaison with Chinese businesses and customers on behalf of its parent company. A RO is not considered to be a
separate legal entity. It must be emphasized that a representative office may not carry out direct revenue earning business
activities. For example, it cannot enter into purchase/sales contracts and cannot receive payment for services, issue invoices
nor repatriate moneys overseas. However, a RO can open bank accounts and employ staff thru government agents to maintain liaison
with customers and suppliers. Its head office can also enter into contracts with its supplier/customers in China in its own name, but not in the
name of its RO. Therefore, before a foreign investor establishes its presence in China using foreign investment enterprises
(FIEs) such as equity joint venture, cooperative joint venture or a wholly foreign- owned enterprise, it could first set up
a representative office to test the Chinese market.
ADVANTAGES OF REPRESENTATIVE OFFICE
The simplicity and short time required for establishing
a RO is the main reason for its popularity in the China market. Unlike foreign investment enterprises ("FIEs"),
representative offices are not required to meet stringent requirements for items such as capital contribution. The strong
points to establish a RO are as follows:
- Least capital injection required (currently around RMB100,000).
- Can handle
market research, sourcing, project investigation for parent company, who in turn can
execute trading function.
- Can hire local staff thru government agents to work.
- The parent company should
be established least 1 year before RO application.
DISADVANTAGES OF RO
RO is
not considered to be a separate legal entity. So it only works as a liaison,
The restrictions are as follows:
-
Limitation in activity. No trading or invoicing is allowed.
- Local staff should be hired via government admitted agents.
- Although not profits, cost expenses still attract tax liability
HOW LONG TO FORMATION
To establish a RO is therefore largely a matter
of complying with the prescribed application procedures. Once all the necessary documents for application are ready for submission,
government approval can be between 25-45 working days.
TERM AND TERMINATION
In China, the maximum duration approved for a representative office is
three years (five years for insurance companies and six years for banks.) The duration date is calculated from the date on
which the approval document is issued by the authority. If the representative office wishes to continue its operations after
the expiration of the registration certificate, it must renew its registration by submitting an annual report of its business
operations and its application for renewal 30 days prior to the expiration of the existing registration certificate.
TAXATION
In General
a RO is subject to foreign enterprise income tax (FEIT) and Business Tax (BT) under the PR China FEIT Law and the PR China
Provisional Regulations of BT. There are different ways in which a representative office may be taxed but the most common
basis is the cost-plus-basis. As at April 2005, the total tax burden under this assessment method is approximately 5-10% of
the operating expenses incurred by the representative office. The FEIT and BT for a RO should be filed on a quarterly basis
within 15 days after the end of each quarter.
Although a RO is not to conduct business, it attracts tax as stated
below:
- Chief Representative and local staff’s Individual Income Tax (IIT) ,rating from 5% to 45%, IIT depends on
salary amount. Presently starting point is RMB1500.
- Cost Expense Taxes base on monthly operational expenses (CET) ,rating
from 5% to 10%,
In accordance with the relevant Chinese tax regulations, a RO may claim for tax exemption if it satisfies
certain criteria stipulated in the regulations. Suppose the head office takes responsibility of all the expenses incurred
from the representative office, no tax is levied. Additional tax information should be obtained from a certified Chinese tax
accountant.
DOCUMENTS REQUIRED
1.
Investors' business licenses & certificates of incorporation;
2. Bank reference letter for the foreign
investors, stating a 7-digits (or USD300,000) bank balances, issued within 6 months & in both English and Chinese language
and certified by the Chinese Embassy or Consulate in your country.
3. Copies of passport and China entry permit of all the legal representatives
and 4 photos of the chief representative; Appointment letters and resume of the chief representative
4.
Copies of lease agreement and title deed sealed by Housing Authorities.
5. Documents evidencing the details
of shareholders and directors for investors (e.g. annual return for a HK company);
6. Certified true
copied of incorporation of applicant’s company certified by the Chinese
Embassy or Consulate or rotary agency in your country.
7. Minutes of Board Meeting to authorize Chief Representative
,Minutes of Board Meeting to setup RO
8. Last annual return to Company Registry and to Tax Department
WFO ENTERPRISE (WFOE)
The Wholly Foreign Owned Enterprise (WFOE) is a Limited liability company wholly
owned by the foreign investor(s). In China, WFOEs were originally conceived to encourage manufacturing activities
that were either export orientated or importing advanced technology. However, with China’s entry into the WTO, these
conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting
and management services, software development and trading as well.
ADVANTAGES OF WFOE
From
the foreign investors’ point of view, the advantages of establishing a WFOE include: profit tax-free for two years and
half profit tax-free for three years; Independence and freedom to implement the worldwide strategies of its parent company
without having to consider the involvement of the Chinese partner; Ability to formally carry on business rather than just
a representative office function, Issue invoices to their customers in RMB (Chinese Currency) and receive RMB revenues .Convert
RMB profits to US dollars for remittance to their parent company outside China, Employ staff directly within China, Protection
of intellectual know-how technology. Not required to share profits with Chinese counterpart; and Greater efficiency in its
operations, management and future development.
COMPANY NAME
In China, only
Chinese company names are officially used, while English company names are for reference only. NOT every name will be accepted
by the Company Registry. And in China some sectors need special license, it is interesting for you to know the wording of
a company name should be in conformity with the registered capital, such as with the words “international” or
“investment” or “industrial” within a company name the registered capital should be more than RMB
10 millions, while “group’’ or “holding” more than RMB 30 millions. Your company name should
be distinguished.
BUSINESS SCOPE
One of the
most important issues covered in the project documentation is the business scope of the WFOE. Business scope is narrowly defined
for all businesses in China and the WFOE can only conduct business within its approved business scope, which ultimately
appears on the business license. Amending the business scope requires further application and approval. Inevitably, there
is a negotiation with the approval authorities to approve as broad a business scope as is permitted. General business scope
usually includes, investment consulting, international economic consulting, trade information consulting, marketing and promotion
consulting, corporate management consulting, science and technology , manufacturing, etc.
With China’s entry into
WTO, more and more business are open to wholly foreign owned enterprises. Especially, trade, commercial and wholesale businesses
are gradually granted to WFOE to enter into the Chinese markets.
TRADING IN CHINA
Now more and more foreign businessmen attach great
importance to the trading role in China’s import and export business. In order to protect China’s domestic trading companies,
China government is not likely to open the trading sector to the outside world widely yet anytime soon. Therefore If a foreign
individual or enterprise intend to be involved in trading business in China, they will face some difficulties and they have
to find some solutions or alternatives: Here are some advice for those who intend to be involved in the trading sector in
China:
※
After we have a WFOE incorporated in China, we have the right to import and export the type of the products within the business scope indicated on the business
license, but the actual business operation may need more flexibility in trading business scope. If a foreign individual or
enterprise wants to have wider business scope, he can discuss with the authorities relevant at the time of application. If
a foreign individual or enterprise wants to get the same business scope in trading as Chinese counterparts, they should go
to Beijing for special approval at present.
※
In order to meet the demand from foreign individuals or enterprises in import and export business, and also not affect the domestic competitors, China government
set up some TAX-FREE-ZONES for foreign businessmen to trade freely in, such as THE WAIGAOQIAO TAX-FREE-ZONE in Shanghai and
THE YANTIAN TAX-FREE-ZONE in Shenzhen, but the products are all buying from and selling to the foreign markets, not from China
market. If China goods go into the zone, export duty should be levied before doing so.
※ All the problems will be solved if we could find two nominee shareholders with Chinese
Identity, so we can set up a local trading company in replacement of wholly foreign owned company. But there arises another
problem whether you can find the right shareholders and their trustability.
※ Time will solve this kind of touchy problem, China has become a member of WTO,
China is working hard to reach the standard and requirement of WTO, so the trading environment is getting better and better,
and eventually not only domestic but also foreign company enjoy same policy and business convenience in China.
REGISTERED AND PAID-UP CAPITAL
For
the WFO enterprises, the minimum registered capital is required as much as RMB1,100,000(about USD140,5000) in Shanghai. With China’s entry into
WTO, RMB500,000 is also accepted in some areas, In China the paid-up capital is equal to registered capital, Investors or
shareholders must pay their shares to the specific bank account within one year’s time, and the bank report should be
audited by the certified public accountant after business license is approved and issued.
With the registered capital
of RMB1 million or less, you are required to pay in the company’s bank account within 12 month, for the first 3 months,
30% pay-in is mandatory.
Here are some tips for the registered capitals under the CEPA agreement: the registered capitals
for the sectors of consultancy, technology, market research and development are usually required RMB100,000 or above; for
the sectors of retailing, wholesaling and trading are RMB1 million or above; for the sector of trading in the tax-free trading
zone, the registered capital is USD300,000 or above. But the sector of investment is USA10 million. For chain-retailing is
RMB50 millions or above.
GENERAL TAX INFORMATION
The tax
system is quite complicated in China, consultation with an accountant certified in China tax laws are highly recommended.
In China we have BUSINESS TAX and PROFIT TAX for consultancy and technology companies, VALUED ADDED TAX(VAT), IMP/EXP TAX and
PROFIT TAX for manufacturing or trading companies. The business tax is 5.5 to 6% based on the business volume, while the profit
tax ranges from 15% to 33%, depending on different regions, Shenzhen’s profit tax is among the lowest in China, only
15%, VAT is 17% around China. China encourages export, so enterprises enjoy tax rebut after each export is
finished. Any WFO enterprises enjoy profit tax-free for two years and half profit tax-free for three years, if the investment
is big, tax-free period could be longer or negotiable. In China monthly tax returns to the authorities is compulsory.
ANNUAL RETURN
Any
limited companies in China should summit annual return to the relevant authorities.
TERM AND TERMINATION
In China, terms of 15 to 30 years are typical
for a manufacturing WFOE (although some may have a longer term). It is also possible to obtain extensions of the WFOE’s
duration. For projects in which the amount of investment is large, or the construction period is long and the return on investment
low, projects producing sophisticated products using advanced or key technology provided by the foreign partner, or for projects
producing internationally competitive products, the term of WFOE may be extended to 50 years. With special approval from the
State Council, the term may be even longer than 50 years.
The WFOE may be terminated under certain conditions, for example,
the inability of the WFOE to operate due to heavy losses, in the occurrence of an event of force majeure, etc.
Back
DOCUMENTS REQUIRED
※ The documents required for setting up a WFOE are listed
below. Some of the
documents could be prepared with our assistance.
※ Personal information of the chief legal person for WFOE, including the name, address, telephone
number, resumes, photocopies of the passports and 6 passport size photos of all investors
※ Original copies of the application paper and the resolution signed
by the Chairman of the Board of the foreign investor (in printed form signed by members of the Board and with company chop);
※ Copies of the business licenses
, certificates of incorporation, M&A of the foreign investor and a set of certified true copies signed by CPA. All the documents should be certified by the
qualified institutes.
※
Two original bank reference letters for foreign investors’ credibility, issued within 6 months in both English and Chinese language.
※ Two original copies of leasing
contract s with signature by Housing Management Authority , showing the recognized registered address of WFOE
※ Total investment and registered
capital, layout and proportion of investment injection.
※ Detailed information about the WFOE business scope ; . Company operational structure and number of employee
※ Products, production scale, detailed
list of equipment, and process scheme
※ If it is manufacturing sector, reports are necessary for the approval by the relevant environmental and fire departments.
REGISTRATION PROCEDURES
Foreign
companies are not allowed to directly submit the application documents to the relevant authorities. They must retain a PRC
entity that is authorized or permitted by relevant authorities to act as a sponsor. The sponsor will submit all documents
to the government on behalf of the foreign enterprise. Procedures to set up the Wholly Foreign Owned Enterprise in China are
as follows:
※
Step1: Company name search and confirmation
※ Step2: Apply for the Approval Certificate
※ Step3: Apply for Business License
※ Step4: Apply for the company’s seals
※ Step5: Apply for the Organization Code License
※ Step6: Opening RMB bank account
※ Step7: Register Foreign Currency Certificate
※ Step8: Register in relevant taxes
bureau
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