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How Foreign Enterprises Set up Branches (Representative Offices) in China

Sun, 28 Feb 2021
Categories: Insights

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If you are about to enter the Chinese market, and your company outside China can conduct cross-border transactions with business partners in China, then, you only need to set up a branch (representative office) in China, through which you can do market research, get in touch with business partners, and contact import/export trade.

If you need to further localize your company in the Chinese market, for example, doing business within China, then you may consider setting up a limited liability company (i.e., “a foreign-invested enterprise”) in China.

Generally, it is easier for foreign enterprises to set up representative offices than foreign-invested enterprises in China. However, with the promulgation of the new Foreign Investment Law in 2019, China has gradually relaxed the restrictions on the establishment and operation of foreign-invested enterprises, and thus the advantages of representative offices are gradually fading away.

1. Differences between representative offices and foreign-invested enterprises

In general, the differences between them are as follows:

i. Is the establishment subject to approval?

For representative offices: No. 

The establishment of a representative office in China by a foreign enterprise is usually subject to registration only.

For foreign-invested enterprises: Yes. 

The establishment of a foreign-invested enterprise in China is, under specific circumstances, subject to both approval and registration.

ii. Is there any restriction on the industry available for them?

For representative offices: No. 

As representative offices are not allowed to engage in any profit-making activities (subject to certain exceptions), Chinese laws do not limit the industries they contact.

For foreign-invested enterprises: Yes (in some cases). 

China has set a negative list for foreign investment, restricting or prohibiting foreign investment into the industries in the negative list.

iii. Is there any restriction on the proportion of shares held by investors?

For representative offices: No. 
Representative offices are established by foreign enterprises independently, that is, they are 100% owned by foreign enterprises.

For foreign-invested enterprises: Yes (in some cases). 
In specific industries, China limits the proportion of shares held by foreign investors.

2. What is a representative office?

A representative office is an office set up in China by a foreign enterprise to engage in non-profit activities related to the business of the foreign enterprise.

3. What can a representative office do?

Generally, the representative office can engage in marketing and liaison work related to the foreign enterprise, but cannot carry out profit-making activities such as production and sales. Specifically, the activities it can engage in include:

i. Market research, exhibition, and publicity activities related to the products or services of the foreign enterprise;

ii. Liaison activities related to product sales, service provision, procurement, and investment in China of the foreign enterprise.

If a foreign enterprise establishes a representative office without registration or engages in activities other than the above-mentioned business activities through the representative office, the registration authority may order it to cease its activities and impose a fine of less than CNY 200,000.

If a registered representative office engages in profit-making activities, the registration authority may confiscate its revenue and property, impose a fine of less than CNY 500,000, or even revoke its registration certificate.

4. Under what circumstances can a representative office engage in profit-making activities?

Only under certain circumstances, that is, if an international treaty concluded by China allows the establishment of a representative office engaged in profit-making activities, and the foreign enterprise meets the relevant provisions of the said treaty, can its representative office apply for the establishment of such representative office.

For example, China allows representative offices of foreign law firms, foreign accounting firms, and foreign air companies to provide legal services, accounting and tax consulting services, ticketing services, etc. in China.

5. What is the nature of a representative office?

A representative office is not a legal person, but a branch of the foreign enterprise.

The foreign enterprise shall be liable for the debts of its representative office in China. For example, the Supreme People’s Court (SPC) held in a case that the legal liabilities arising from all business activities of the representative office in China should be borne by the foreign enterprise it represents.

In addition, a representative office shall not engage in any business in China that requires a legal person status.

For example, a representative office cannot apply for a trademark in China. The China Trademark Office expressed this view in a case and indicated: first, a representative office cannot engage in business activities, which include applying for trademark registration; second, given that a representative office is not a legal person, and according to China’s trademark law, only legal persons, natural persons and other organizations can apply for trademark registration, therefore the representative office is not qualified to do so.

Nevertheless, foreign enterprises can certainly entrust trademark agencies directly to apply for trademark registration.

6. How does a representative office pay taxes?

The foreign enterprise establishing the representative office shall pay enterprise income tax and value-added tax.

As a non-resident enterprise in China’s Enterprise Income Tax Law, a foreign enterprise shall declare and pay taxes on the income derived from its representative office in China and the income generated outside China but factually connected with the representative office.

China’s enterprise income tax rate is 25%.

China’s VAT rate is 17% for trade and 11% for service. The VAT rate of small-scale taxpayers is 3%.

If a representative office can provide financial information to Chinese tax authorities to prove its tax base, it should make tax declaration according to the actual data.

If a representative office is unable to provide accurate financial information to prove its tax base, it should make tax declaration according to the tax base calculated from the expenditure and the profit ratio specified by the tax bureau. In other words, the less the expenditure of the representative office, the less the tax payable.

7. How can a representative office choose its resident place?

A foreign enterprise may choose the resident place of its representative office at its own discretion. However, if required by national security and social/public interests, the relevant departments of the Chinese government may require the representative offices to adjust its resident place. 

8. How should a representative office name itself?

The name of a representative office shall consist of the following parts in sequence: the nationality of the foreign enterprise, the Chinese name of the foreign enterprise, the name of the city where the representative office is located, and the words “代表处” (meaning representative office); the name shall not contain any words prohibited by the law. For example, 德国默克公司北京代表处, the name of Beijing Representative Office of Merck KGaA of Germany, has the said four elements.

9. Who is the chief representative?

A foreign enterprise shall appoint a chief representative who, within the scope of the written authorization by the foreign enterprise, can sign the application documents for registration of the representative office on behalf of the foreign enterprise. The foreign enterprise may appoint one to three representatives, including the chief representative, according to its business needs.

The candidate of the chief representative shall neither have been subject to criminal punishment in China, nor have served as the chief representative or representative of any other representative office whose registration certificate has been revoked or withdrawn.

10. How long does it take to establish a representative office?

The registration authority shall decide on whether to approve the registration within 15 days from the date of accepting the application.

11. What documents are required to apply for the establishment of a representative office?

When applying for the establishment of a representative office, a foreign enterprise shall submit to the registration authority the following documents:

(1) An application form for registration of establishment of a representative office;

(2) A residence certificate of the foreign enterprise and a valid business certificate of its existence for more than two years;

(3) Memorandum or articles of association of the foreign enterprise;

(4) An appointment document of the chief representative and/or the representative of the foreign enterprise;

(5) Identity documents and resumes of the chief representative and/or the representative;

(6) A credit certificate issued by a financial institution that has business relations with the foreign enterprise;

(7) A legal use certificate of the resident place of the representative office.

It is worth noting that items (2) to (6) above shall be notarized and authenticated.

After the establishment of a representative office, the registration authority will issue a registration certificate of the representative office and the representative certificates of the chief representative and/or the representatives.

For materials and procedures required for the establishment of a representative office in Beijing, click here to visit the website of the Beijing Municipal Government.

For materials and procedures required for the establishment of a representative office in Shanghai, click here to visit the website of the Shanghai Municipal Government.

12. Can the representative of a representative office stay in China for a long time?

After the establishment of a representative office, the representatives and their family members shall, with the approval certificates, apply to the local public security organ for the residence permit.

The validity period of a foreigner’s work-related residence permit ranges from 90 days to five years; the validity period of a foreigner’s non-work-related residence permit ranges from 180 days to five years.

After obtaining the residence permit, a representative may enter China without a visa. Considering that it is usually cumbersome for foreigners to apply for a Chinese visa, holding this residence permit will greatly facilitate foreigners in doing business in China.

 

This post was originally published on DR. EBNER LAW FIRM, and is reproduced with the consent of the author and DR. EBNER LAW FIRM.

 

Contributors: Guodong Du 杜国栋

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