How to set up : Representative Offices, Foreign Invested Commercial Enterprises
A Brief Introduction
So if you want to come to Beijing or northeast China, what type of structure should you use ? You can choose from Representative Offices (RO), Wholly Foreign Owned Enterprises (WFOE), Joint Ventures (JV), and the new Foreign Invested Commercial Enterprises (FICE). These are explored in more detail in our new book, but we summarise the main characteristics of each here.
When choosing an appropriate investment vehicle, many factors must be considered, as these will lead to different legal and tax considerations. You will need to address questions such as :
- do you require an entity in mainland China or is a Hong Kong incorporation sufficient to reach your aims ?
- do you need to invoice locally for services or products ?
- are you getting a feel for the market or have you decided to commit on a larger scale operation ?
- are you planning to set up a production-oriented entity (both for goods or services) or do you need only a representation in the country to carry out liaison activities ?
- is the sector you are investing in fully opened to foreign investors’ participation or do you still require a local partner ?
- would you need to conduct the business alone, or would you require a Chinese company chipping
in with assets or distribution networks ? - could the foreign enterprise itself carry out the business directly or through the medium of a separate, sometimes unrelated, entity in China ?
A marketing presence to promote your parent company’s products
An RO is a way to give you corporate presence in China for minimal outlay. Such a structure is relatively straightforward to establish and are a good initial low-risk venture into China while finding your feet in this market. In particular, if you do not need to invoice locally for services or products, and you just need a local presence to manage services or goods being sold by your parent, or wish to co-ordinate sourcing activities or conduct marketing to “get a feel” for the domestic market, then you can establish an RO.
ROs can be used for purposes such as conducting market research, QC facilitation or monitoring purchasing activities, marketing and sales administration for sales conducted between China and your parent company, and administration for group activities elsewhere in the country.
Other key points to note on ROs include :
- ROs must usually be located in Grade A buildings (with the highest costs, unfortunately)
- ROS must hire local staff via an organization known as FESCO, or other payroll agents, who will ensure mandatory welfare payments such as pensions, unemployment fund and so on are maintained for local Chinese staff – such fees plus the agent’s fee amount to about an additional 50% on top of the salary received by the employee
- ROs must also register for tax and submit monthly reports and annual audits
- RO are subject to both Business Tax and Foreign Enterprise Income Tax in China, which usually amount to a liability of approx 10% of the total expenses of your RO
The application procedure for what is quite a modest structure can be quite bureaucratic. The consolidated documentation is submitted to several bureau for registration – the local industrial and commercial bureau, the tax bureau, and so on. It should also include registration at the tax bureau or other registrations such as with the PSB for expat staff residence permits, immigration for expat staff work permits and visas, and the opening of the bank account. The application process should take three to four weeks before your license is ready.
To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
