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With a quick set-up procedure and low initial costs, many foreign

investors use the Representative Office (RO) to make their first entry

into China. However, as a company’s operations in China develop

and expand, investors often run into the constraints that the RO

structure imposes.

As we shall discuss in more detail throughout this report, a

Representative Office is quick to attract a high tax burden when its

activities in China increase.

In addition, China’s corporate laws demand strict adherence to an

entity’s business scope. By its very nature, the business scope of

the Representative Office is very narrow. Expansion plans may soon

run into legal obstacles. This is because the RO is not intended

to be an investment vehicle, but rather to provide some ancillary

functions in China for foreign companies based abroad. In this way,

the Representative Office acts merely as a cost center.

At this point many investors start looking at the option of setting up

a Wholly Foreign-owned Enterprise (WFOE).

The key difference between these entities is that a WFOE is an

independent legal entity under Chinese law, whereas an RO is seen

as an extension of a foreign company incorporated abroad.

Setting up a WFOE offers investors all the options of a a full-fledged

subsidiary. For a full transition, the investor needs to shut down the RO.

This is because certain costs associated with operating an RO cannot

be eliminated without closing it down, such as office rent and taxes.

Investors should note that one cannot simply stop paying for the

RO’s expenses and walk away. This would result in the investor being

blacklisted and barred from doing business in China. The new WFOE

would then almost certainly be shut down as well.

In this report, we outline what the procedure looks like, and what the

optimal timing would be.

INTRODUCTION

ALBERTO VETTORETTI

Managing Partner

Dezan Shira & Associates

Alberto@dezshira.com