Investment vehicles available for foreign investors in China: The Representative Office. How to set up a representative office (RO) in China. Its features, maintenance, taxation.

1. Lenge & Partners
Representative Office in China
This work was prepared by Pierluigi Damiano Lenge. This work is intended for general information purposes only and is not intended to provide, and should
not be used in lieu of professional advice. The publisher Lenge & Partners assumes no liability for readers’ use of the information herein and readers are
encouraged to seek professional assistance with regard to specific matters. Any conclusions or opinions are based on the specific facts and circumstances
of a particular matter and therefore may not apply in all instances.

2. Lenge & Partners
Lenge & Partners – www.lengepartners.com
TABLE OF CONTENTS
INTRODUCTION
REGULATORY FRAMEWORK
BUSINESS SCOPE AND OPERATIONAL ACTIVITIES
REPRESENTATIVE OFFICE’S EMPLOYEES
SETTING UP OF A RO:
- Documents
- Registration Procedure
MANAGEMENT OF A REPRESENTATIVE OFFICE
TAXATION, CIT CALCULATION METHODS, TAX EXEMPTION AND PREFERENTIAL TAXATION
TREATMENTS
PENALTIES
DEREGISTRATION OF A RO

3. Lenge & Partners
Lenge & Partners – www.lengepartners.com
Introduction
The representative office (RO) has been for many years the most common
business vehicle to enter into the Chinese market.
Foreign companies or individual entrepreneurs usually combined an
offshore account/company registered in Hong Kong, with a representative office
established in Mainland China. Thus, in defiance of the natural business scope of
a representative office and its legal boundaries, foreigners have used ROs to
conduct business directly in China.
The recent reforms related to representative office and foreign-invested
enterprise (FIE) in China try to eliminate this cunning ploy by foreign
entrepreneurs. The new regulations define the nature and scope of a
representative office of a foreign enterprise in more detail, making the registration
procedures more burdensome. The new rules increase scrutiny over foreign
representative offices, enhance supervision of representative office activities, and
impose more stringent compliance requirements.
The legislator has introduced a set of requirements and elements to be able
to evaluate and verify the true existence of a foreign parent company, and that its
representative office does not carry on business directly in China.
For example, to set up a RO it is now required that its parent company has
been established for two years (the offshore scheme becomes more difficult).
Local authorities, even if the parent company has been existed for two years, can
deny the registration of its RO if they suspect that the parent company is part of a
system of shell companies.
Other elements required to verify the authenticity of the parent company are
the certificate of incorporation, copy of the articles of association, bank reference
letter from investor's bank to declaring good standing, resume and documents
copy of foreign employees of the RO. In addition, the new rules have introduced

4. Lenge & Partners
Lenge & Partners – www.lengepartners.com
inspections by authorities, sanctions, obligation to file and keep some accounting
records.
After the reform, however, some advisors discourage the use of a
representative office, exaggerating on its costs and time for its establishment and
maintenance determined by the new rules.
Furthermore, they insist in comparing the representative office with the
wholly foreign-owned enterprise, confusing their constitutive characteristics for
advantages and/or disadvantages. They are two different business vehicles, with
different business scopes. Some companies will need only one to success in their
business, sometimes they can set up both but in different places, and in other
cases, it will be needed to choose other options.
The truth is that the RO is still a valuable option to operate in China,
particularly in light of the last trend of Chinese economy. In fact, because China
has registered in recent years a dramatic increase in capital flight, the
representative office may be the best business form to intercept on the spot those
capitals, without set up a more expensive legal entity. It becomes so, the best
option for financial institutions, insurance companies, real estate, foreign
educational training centers-universities, consulting firms and for the
petrochemical industry (and also for all those enterprises that want to leave China
gradually).
Regulatory framework
The basic legislation of foreign representative offices in China is
“Regulation of Registration of Representative Offices of Foreign Enterprises” (外
国企业常驻代表机构登记管理条例), issued by the PRC State Council on
November 19, 2010 and came into effect on 1 March 2011.
The “Regulation” implements many of the proposals outlined in the “Notice
on Further Strengthening the Administration of Foreign Enterprise Permanent
Representative Office Registration”, jointly released by the PRC State

5. Lenge & Partners
Lenge & Partners – www.lengepartners.com
Administration for Industry and Commerce (SAIC) and the PRC Ministry of Public
Security (MPS) in January 2010.
The new rules apply to representative offices of all foreign profit-making
enterprises. A number of regulations relating to specific enterprises/businesses,
such as financial institutions and insurance companies, law and consulting firms,
completes the regulatory framework of a RO.
Business scope and operational activities
The Representative Office is a non-legal entity operating in China, which
represents its parental company located overseas. A RO is not allowed to:
conduct business directly
collect money or issue invoices within China for services or products
represent any firm other than their headquarters
buy property or import production equipment
sign contracts or deals on the behalf of the parental company
A RO is only permitted to:
carry out market research
perform presentation and promotional activities in relation to its
parent company’s products or services
undertake liaison activities in relation to product sale
service provision
domestic procurement and domestic investment
In order to operate as permanent presence in China, a RO can also:
rent commercial and residential premises
obtain work permits and residence permits for expatriate employees
of the representative office
use company logos at the business premises of the representative
office
use business cards referring to the representative office

6. Lenge & Partners
Lenge & Partners – www.lengepartners.com
open bank accounts in the PRC on behalf of the representative office
make travel arrangements for parent enterprise representatives and
potential Chinese clients
Representative office’s employees
According to the new rules, the maximum number of foreign employees in
a Ro is four (including the Chief Representative). A RO cannot hire Chinese
employees directly, but only through an officially authorized human resource
company, such as e.g. FESCO.
These agencies will sign a contract with the RO and one contract with the
Chinese staff in order to ensure that social security and housing fund contributions
are paid on a regular basis. After the RO registers with the local administration for
industry and commerce office (AIC), the foreign employees can apply for
residence permits to the local MPS.
In addition, the new regulation list categories of individuals who cannot work
as representatives:
Individuals who have been prosecuted criminally for harming China’s
national security or public interest
Individuals who have served as a representative of a RO that was
closed down or its licence was revoked or canceled for harming
China’s national security or public interest or other unlawful activities
other individuals as indicated by SAIC regulations
Because a Ro has no legal personality, it cannot independently assume
civil liability, and all liabilities or obligations (and penalties) incurred will be directly
imputable to the foreign parent company. The employment relationships of the
foreign staff and their (eventually) disputes will be settled under the laws of HQ’s
country.

7. Lenge & Partners
Lenge & Partners – www.lengepartners.com
Setting up of a RO
The new rules order stricter requirements to register a RO. First, to establish
a representative office, the foreign enterprise must have existed for more than 2
years. Below the main documents and steps of the procedure to register a RO,
which may slightly diverge from city to city.
Documents:
Certificate of incorporation or equivalent document notarized by
Chinese embassy or Chinese consulate overseas
Copy of Articles of Association notarized by Chinese embassy or
Chinese consulate overseas
Letter of authorization from parent company's director (with Name
and passport number) to authorize someone in China to sign the
documents, notarized by Chinese embassy or Chinese consulate
overseas
Letter of Authorized Signatory (Parent company's director with Name
and passport number) notarized by Chinese embassy or consulate
overseas
Passport copy of proposed China Chief Representative and other
Representatives notarized by Chinese embassy or Chinese
consulate overseas
Appointment letter of China Chief Representative and other
Representatives notarized by Chinese embassy or Chinese
consulate overseas
Bank Reference Letter from investor's bank to declaring good
standing and notarized by Chinese embassy or Chinese consulate
overseas
A brief summary of the operations of parent company and the China
Representative office
Resume, photos, passport copy of the China Chief Representative
and the other Representatives

8. Lenge & Partners
Lenge & Partners – www.lengepartners.com
Documents provided by landlord of office in China: original leasing
contracts of the office premise (lease term should be at
least 12 months), certificate of real estate ownership, and landlord
identification (individual or company)
If a foreign enterprise is a financial institution or insurance company,
additional requirements such as business experiences in the relevant
fields and no record of major illegal actions must be fulfilled
Registration procedure:
The first step is to apply for registration certificate with the local AIC,
submitting the above documents indicated.
Once the application is approved and the business registration licence
issued, there are other steps that can be summarized in:
get the chops made by Public Security Bureau
apply for Organization Code License by Technical Supervision
Bureau
register with Local Taxation Bureau
register with the State Administration of Foreign Exchange
registration
open a foreign currency and RMB bank account
register with Statistical Bureau.
The representative office is legally established once the registration
certificate has been issued. In some locations such as Shanghai, foreign
companies are not permitted to submit the application directly but they must
engage a so-called sponsor, which is an authorized PRC company. The time
needed for the registration process may be, according to the regulations, from 60
days to 6 months (but often is less than 30 days).

9. Lenge & Partners
Lenge & Partners – www.lengepartners.com
Management of a Representative Office
The business term of a representative office is now no longer limited but
subject to the term of the foreign enterprise. In other words, the certificate of a RO
is valid as long as its foreign parent company legally exists.
Any change regarding both the RO in China and its parental company (e.g.
name of representatives, registration address, or business scope, business form
and registered capital of the foreign enterprise) shall be registered or filed with the
AIC, within 60 days of such change occurring, or 30 days after PRC approval (if
required) has been granted.
ROs are required to perform tax registration within 30 days after the
business registration certificate is issued. When there are any changes to the
registration or the RO is to be closed, the RO shall amend the tax registration or
deregister it after liquidation and settlement of all the outstanding tax liabilities.
A representative office must now submit an annual report on its business
activities together with audited financial statements to the competent AIC,
between 1 March and 30 June each year.
If a representative office has been ordered to shut down or its registration
certificate has been revoked or canceled by the AIC, no new representative office
of this foreign enterprise can be registered within the following 5 years, except in
case of voluntary deregistration.
Taxation, CIT Calculation Methods, Tax Exemptions and Preferential
Taxation Treatments
China State Administration of Taxation issued new measures on 20
February 2010, the Provisional Measures for Tax Collection and Administration
for Foreign-Enterprise Representative Office (国家税务总局关于印发 “外国
企业常驻代表机构税收管理暂行办法”).

10. Lenge & Partners
Lenge & Partners – www.lengepartners.com
The Provisional Measures bring the taxation of Corporate Income Tax (CIT)
of RO in line with the CIT Law, and clarify that ROs are subject to business tax
and value-added tax (VAT) on their relevant taxable incomes.
The Provisional Measures require all representative offices to keep
accurate accounting books and records according to laws and regulations and to
determine the taxable income according to the principle commensurate with the
functions and risks that the ROs actually undertakes. In case of occurrence of any
individual income tax, the representative office shall withhold and pay the
individual income tax to the competent Chinese tax authority.
ROs can use actual taxable income to file the CIT returns. If the actual
taxable income is used, the RO shall file quarterly the CIT and business tax
returns within 15 days of the end of each quarter (the business tax has been
abolished by the VAT Reform).
Filing of VAT returns is required to be done in accordance with the rules set
out in the Provisional Regulations on Value-Added Tax and the implementing
regulations.
The Provisional Measures allow three methods for calculating the CIT
taxable income of ROs：
1. The Actual Taxable Income Method. This method applies to the
ROs that keep accurate record of the incomes and expenses, and
can accurately prove their taxable income to the tax authority. The
calculation and tax rate are the same as those applying to corporate
entities under the CIT Law. If this method cannot be used due to the
inadequate ability of accounting book and record keeping or lack of
proof of its taxable income of the RO, the tax authorities are free to
choose to apply one of the following two methods in calculating the
CIT.
2. The Expenses -Plus Method. This method applies to the ROs that
are not able to prove its income but can keep verifiable records of its

11. Lenge & Partners
Lenge & Partners – www.lengepartners.com
expenses. According to this method, the following formula shall be
applied in calculating the Rep Office’s CIT:
- Deemed Income of the Rep Office = Expenses/(1 - Deemed Profit
Rate - Applicable Business Tax Rate) or,
- Rep Office CIT = Deemed Income of the Rep Office x Deemed
Profit Rate x Applicable CIT Rate.
3. The Actual-Income and Deemed-Profit Method. This method
applies when a RO is able to keep verifiable account of its income
but cannot prove the relevant expenses to the tax authority. If this
method is applied, the CIT of the RO shall be calculated by using the
following formula:
- Rep Office CIT = Actual Gross Income x Deemed Profit Rate x
Applicable CIT Rate (the Deemed Profit Rate is no less than 15% and
local tax authorities have the discretionary power to apply a higher
Deemed Profit Rate).
CIT exemptions, previously available to some ROs or income generated
from certain types of transactions, are no longer available under the Provisional
Measures.
The representative offices’ income eligible for preferential taxation
treatments under a Sino-foreign double taxation agreement may continue enjoy
such preferential treatments (for this purpose it is necessary submitting an
application in accordance with the Administrative Measures of Enjoying Tax
Treaty Treatments by Non-Tax-Residents).
Penalties
The New Regulations increase the sanctioning power of the SAIC:
Penalties for undertaking illegal operational activities: fines
from 20,000 from 500,000 RMB; confiscation of the illegal income,
tools, equipment, raw materials, products and other assets used

12. Lenge & Partners
Lenge & Partners – www.lengepartners.com
for operational activities. In serious cases, the registration
certificate of the representative office can be revoked.
Penalties for businesses activities permitted but without
being registered: fines from 10,000 to 200,000 RMB.
Penalties for non-profit operations falling outside the
business scope: fines from 5,000 to 100,000 RMB. In serious
cases, the registration certificate of the representative office can
be revoked.
Penalties for delay in submitting the annual report, the
audited financial statements, failure to conclude activities in
the name of the representative office, delay in filings of
changes of registration with the AIC: fines from 10,00 to 30,000
RMB. In serious cases, the registration certificate of the
representative office can be revoked.
Penalties for submitting annual reports that contain false
information or withhold required information: the RO must
revise the reports and pay a fine from 20,000 to 200,000 RMB.
The meaning of “serious” is not defined by the RO’s regulations.
Deregistration of a RO
According to new regulations, a foreign enterprise shall apply to the relevant
registration authorities for deregistration within 60 days from the date of any of the
following circumstances:
the foreign enterprise terminates its RO
the foreign enterprise terminates its business
the RO is required to shut down in accordance with the law
The closing down procedure usually takes from three to six months
(depending on region/city), but it can take over a year in cases of irregularities,
especially accounting, detected by authorities.

13. Lenge & Partners
Lenge & Partners – www.lengepartners.com
However, the procedure can be summarized in the following phases:
1. The foreign enterprise must apply for a tax audit and deregistration
to local tax bureau and SAT. The RO will undergo an audit of taxes
owed for the last three years by a local Chinese CTA firm. Once the
audit is completed, the enterprise should submit to the tax bureau:
- board resolution affixed with the signature and seal of the
chairman of the board of directors
- cancellation application signed by the chief representative of the
RO
- an application form and business registration
- the original tax registration certificates issued by the taxation
authorities
- audit report
- other relevant document
During this phase, the RO may be required to submit additional
documentation, pay penalties, or settle any unpaid taxes with the authorities.
2. The enterprise should close its RO bank account. Unissued checks
and deposit slips will need to be returned to the bank and money in
the account should be transferred out. If the RO intends to transfer
the account to its parent company, it will be required to provide
reasoning for such actions and seek approval from the bank.
3. The enterprise must deregister it RO in China with other government
departments and authorities, including the State
Administration of Foreign Exchange (SAFE), Customs, Quality and
Technical Supervision Bureau, Public Security Bureau and Statistics
Bureau (where applicable) and State Administration of Industry and
Commerce (AIC).
4. AIC deregistration is the last step of the deregistering procedure and
it requires all the above mentioned documents and obligations
completed.

14. Lenge & Partners
Lenge & Partners – www.lengepartners.com
According to the AIC regulations, the cancellation application will be
processed within 10 workdays of receipt of the application. If successful, the
enterprise will get a notice of deregistration and all the registration certificates will
be cancelled, as well as the chief representative’s working card. Announcement
of the RO’s deregistration must be listed in a media outlet designated by the AIC
as the China Industry and Commerce Administration Newspaper.