Setting up a Representative Office (RO) in China
A Representative Office is often the first step and entry strategy of foreign companies to China. Representative Offices are preferred due to the relative ease of establishment and lower investment requirements. Representative Offices generally need only to be registered with the local authorities and do not require a registered capital. However, they are also not separate legal entities and are only allowed to engage in a limited range of activities as a marketing or liaison office. Although Representative Offices are not allowed to enter into any contracts or engage in any commercial or profit-making activities, they are still taxable on a cost-plus basis.
The relaxation rules for Wholly Foreign-Owned Enterprises (WFOE), in particular the abolishment of the registered capital and contribution rules, albeit in practise still applicable, and expansion of free trade zones which may have their own specific regulations and incentives to attract Foreign Direct Investment, made the registration and administration of Representative Offices in certain areas in China more difficult than registering for a WFOE.
Nevertheless, a Representative Office is still the cheapest and fastest way to establish a presence in China, provided that the limited activities are in line with the foreign company’s strategic goals in China. This is also a strategy of expansion in China, if the foreign company already has a WFOE in China and is looking at establishing a presence in other cities.
Choosing an Investment Strategy
The choice of a suitable corporate strategy and decision where an entity is most suitable may involve complex considerations of the existing organisation structure, tax, credit, scalability and future expansion, repatriation or divestment plans. A Representative Office can only be established if an overseas entity has been in existence for at least two years. Hong Kong-based parent entities of a Chinese Representative Office benefit from preferential tax rates under the Closer Economic Partnership Agreement (CEPA) between the two jurisdictions. In addition to possible tax benefits, a Hong Kong parent company also offers a simplified and proven procedure for a Representative Office registration.