With so many changes in China’s market development and the jockeying for position amongst international companies wanting a piece of the action, an increasing number of companies are finding that they need to change their structures to stay competitive.
This might involve upgrading their existing China operations, merging them, or housing different entities under one controlling China venture in order to become more effective and efficient.
In this issue we look at a variety of different scenarios and how you can best merge or re-structure your business to suit the needs of your China operations in the years to come.
REPRESENTATIVE OFFICE TO MANUFACTURING WFOE
[By Richard Hoffmann, Dezan Shira & Associates Beijing office]
It may happen that due to the company’s development abroad or in the PRC, the representative office (RO) structure no longer suits the needs of the investor and must be altered accordingly.
If you wish to sell or import/export, you will need to set up a wholly foreign owned enterprise (WFOE) or joint venture (JV). You will need to consider whether to keep the RO going, or to close and replace it with a local branch of the WFOE or JV. You can't just change the RO to a WFOE or JV: this is a common misunderstanding. If the RO doesn’t suit your needs anymore, close it. Closure of the RO can be implemented at the same time as the establishment of the new entity.
Here are a few examples of instances in which an RO may not suit your requirements any longer:
- the holding company has closed down or changed business activities so you may want to wind down the RO activities
- the RO has not been operating in compliance with its business scope or the local regulations and you may want to re-start on a “clean sheet”
- the current location needs upgrading (bigger/smaller office space) or you want to move location, effectively changing the government agency regulating your RO and closing the old office at the same time
- you need a local RMB billing entity
- the current RO business scope does not suit your requirements any longer
- you need to upgrade your China structure/entity
Closing down a representative office
A closing audit must be performed by the tax bureau before an RO is allowed to complete the closing down procedures. As long as the RO has no overdue taxes or other issues to be reported to the authorities, then the de-registration procedure can begin.
The first step is to obtain an approval certificate from Customs together with a declaration on the reasons behind the decision to wind up operations in China (the same written explanations shall be given to all other bureaus involved in the closing procedures). This is required in order to clear up all records at Customs involving any office equipment, cars or samples imports.
Subsequently, applications need to be made at the tax bureaus (both local and national) with related papers and the RO closure resolution of the parent company, with director’s signature and the parent company’s chop. In most cases, the following documents need to be provided:
- an audit report up to the current month
- RO tax returns
- ledgers and vouchers
- tax registration certificates (original and copy with RO chops)
- if the RO is not subject to taxation, then a tax exempt notice from the tax bureau confirming this status has to be presented
