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A foreign company planning to setup an office or expand their business in China has several options that they may consider for their company structure. This article compares the three types of options to help a foreign company decide the best structure that is most suited to their particular needs.

To be noted, ROs are generally forbidden from engaging in any profit-seeking activities and may only be used to facilitate the activities of the foreign company in China, while branch office is rarely used when foreign investors accessing China market, except in limited cases such as foreign banks, foreign insurance company, foreign oil search company, etc. Rather, branch offices might be set up by Chinese subsidiaries when expanding business across China. For foreign investors planning to conduct business in China, registering and setting up a limited liability company (subsidiary company), either WFOE or JV, is the most obvious option.

Comparison of Three Types of Investment Structure in China

 

China subsidiary

Branch offices

Representative offices

Legal type

  • Separate legal entity
  • Not a separate legal entity but an extension of the company it affiliated
  • Not a separate legal entity but an extension of the parent company

Liabilities

  • Limited liabilities within the registered capital of the subsidiary
  • Liabilities incurred by the branch office extend to company it affiliated
  • Liabilities incurred by the representative office extend to parent company

Entity name

  • Can be the same or different from parent company, but should indicate the form of liability of the business
  • Must be preceded by the name of the business to which it is affiliated, indicate the nationality and form of liability of the business, and suffixed with such words as "branch", "branch (factory)" or "outlet".
  • Must comprise the following components sequentially: nationality of the foreign enterprise, Chinese name of the foreign enterprise, name of the municipality where the representative office is located and the words "representative office"(代表处)

Allowed activities

  • Can be the same or different from parent company
  • Limited to the same business scope as the company it affiliated
  • Limited to non-profit-seeking activities, including:
  • Market research, display, and publicity activities that relate to company products or services
  • Liaison activities that relate to product sales or services and domestic procurement

Validity period

  • The term of operation indicated on the business license
  • The term of operation indicated on the business license
  • The term of existence registered with the Administration of Market Regulation

Taxation

  • Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available 
  • Taxed at corporate income tax (CIT) rate of 25% with access to tax incentives available 
  • Taxed as a permanent establishment in China, which usually amounts to a liability of approximately eight percent of the total expenses of the RO

Annual audit and reporting

  • Yes, during the period between January 1 and June 30
  • Yes, during the period between January 1 and June 30
  • Yes, during the period between March 1 and June 30

Staff hiring

  • No restrictions on hiring local staff; hiring foreign staff based on real needs.
  • No restrictions on hiring local staff; hiring foreign staff based on real needs.
  • Can directly hire up to four foreign nationals as the representatives; cannot directly hire Chinese employees, rather, it is required to employ local staff through a qualified labor dispatch agency.

Pros

  • Greater freedom in business activities than representative offices
  • Simple establishment
  • Easy maintenance
  • Easiest foreign investment structure to set up
  • Paves way for future investment

Cons

  • Registered capital requirement (for select industries)
  • Lengthy establishment process
  • Limited business scope (must be within that of the parent; cannot import or export)
  • Not a legal entity (all liabilities born by the parent company)
  • Cannot invoice locally in RMB
  • Must recruit staff from local agency; no more than four representatives
  • Heavily taxed if expenses are high

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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