2 January 2019
First steps – the Representative Office
What presence, if any, should companies considering investing in China have in the country. This is the first in a series of updates that will introduce the main business entities available to foreigners investing in China. This first post introduces the easiest entity for foreign investors to set up in China: the Representative Office.
When to use a Representative Office
- Consider using a Representative Office if you want to take a first formal step to explore the Chinese market or are considering coordinating your business activities in China.
- Be aware of limitations: A Representative Office cannot earn money in China and does not have limited liability.
Advantages of the Representative Office
A Representative Office is relatively easy and cheap to establish compared with other business entities available to foreign investors. Many entities need authorisations from numerous government departments; for a Representative Office, registration with the State Administration for Industry and Commerce is all that is required. Representative Offices also have a low financial barrier to entry. Investors do not have to contribute a minimum level of registered capital. Once registered, a Representative Office can conduct market research, advertise, negotiate contracts, provide after-sale services and perform liaison activities for its parent company. These activities could allow a company to better coordinate with Chinese suppliers. Those that do business with China often mention the importance of building relationships and having a presence on the ground. The Representative Office can provide a simple platform from which to do just that.
Disadvantages of the Representative Office
However, the activities of a Representative Office are limited. It cannot undertake revenue-generating activities and does not amount to a legal person under Chinese law. This means a Representative Office cannot sign contracts, receive income, issue invoices, or issue business tax receipts. What is more, the parent company of a Representative Office has unlimited liability for that office’s actions.
Finally, companies will incur costs by running a Representative Offices. Despite not being permitted to engage in revenue generating activities, Representative Offices pay tax on their monthly gross expenses. The company establishing a Representative Office will also have to go through an complex procedure should it wish to shut it down.
The bottom line
Companies should think about their long-term plan in China and ask themselves whether the short term savings of setting up a Representative Office will be outweighed by the long term costs of tax and winding up the entity. Normally the alternative form of the Wholly Foreign Owned Enterprise (or WOFE, to be discussed in a future post) will be more appropriate for investors.
Our China Desk
Whether you are in the UK seeking to set up in China or a Chinese business or individual seeking to invest in the UK we will work with you and your other professional advisers to achieve your goals in an efficient and cost effective manner. We can support clients in their relationship with China by giving access to our network of “best friend” independent Chinese law firms. We advise UK-based investors seeking to set up business in China and provide UK law advice to Chinese corporates, individuals and collectives wishing to invest in the UK.
For any queries please contact the head of our China Desk Nick Finlayson-Brown at Nick.Finlayson-Brown@mills-reeve.com