Representative Offices (ROs) are one of the most popular and low-cost form of foreign presence in China. The RO is an excellent means by which foreign investors can explore the Chinese market and search for business opportunities before they consider committing significant resources and become further involved in the Chinese market. The following cases are ideal situations that may suggest a foreign company to set up an RO in China.

• A foreign company wants to make a direct investment in China. However, it thinks that it to do more market research before it commits on a long-term strategy for entry into the Chinese market.
• A foreign company is searching for Chinese suppliers. By setting up an RO, the foreign company can hire local staffs who would then assist in this search (by going through an authorized human resource agency). This help the foreign company to reach its goal without establishing a full-blown business locally and making expenses related to information technology, expatriate relocation, etc.
  
• A foreign company has an existing market for its products or services already in China, but the Chinese market is not big enough to sustain a full-blown investment in China. Besides, for some kinds of businesses, the RO is the only way to enter the market, e.g. a foreign insurance company must set up an RO for two years before applying to amend its status to a wholly foreign-owned enterprise (WFOE) or joint venture. 
  

Scope of business
The RO has the freedom to carry out the following functions:

• Conduct survey and research for the foreign company in the local market;
• Liaise with local and foreign contacts on behalf of the foreign company;
• Provide data and promotional materials to potential clients or trading partners;
• Act as a coordinator for the foreign company's activities in China;
• Make travel arrangements for foreign company's representatives and potential Chinese clients;
• Other non-direct profit making business activities.
  

The advantages

• ROs are usually cheaper to set up and operate than WFOEs since no capital investment, other than the costs of rental, equipment and staffing are required.
• Set-up costs for an RO are roughly one-tenth that of a WFOE or joint venture.
• Although the Chief Representative of an RO is legally responsible for all aspects of the RO, this person is not required to stay in China.
• ROs are open to almost all industry sectors.
• Generally speaking, ROs are quick, relatively inexpensive and easy to establish.

The disadvantages

• An RO is constrained to the nature of the business activities. Only indirect business activities can be engaged within China. An RO’s function is limited to serving as a business introduction and liaison, engaging in product introductions and promotions, market surveys and research and other specific activities allowed by the rules and regulations governing ROs.
• An RO is not allowed to receive any fee for its services or any profit-making activities (i.e. direct sales, production or manufacturing activities).
• There are also revenue constrains for ROs. It is not allowed to invoice clients directly. Instead, the invoice and payment must be issued and managed by the foreign company. Otherwise, the RO would be considered to be operating outside the scope of its business license and the Chinese government may impose additional taxes on the RO. Thus, when advising the firm’s clients who may have business operations or joint ventures in China, it is very important to understand the client’s billing procedures and possibly seek advice from a tax specialist here in China to reduce the chance of an RO operating outside the scope of its business license and being subject to additional Chinese taxes.
• It is critical to pay attention to the general taxation of an RO. The operation and activities of an RO are usually subject to two types of taxes: enterprise income tax and business tax. Generally speaking, liability for these taxes will occur when the RO acts as an agent of a third party. Furthermore, most of the business activities that an RO is allowed to engage in are qualified for tax exemption and ROs in different industries receive different tax breaks.
• Since an RO usually needs no capital investment, it is not considered to be a separate legal entity. Hence, all contracts or agreements must be signed by the foreign parent company. Besides, an RO will be treated as part of the parent company and it is the parent company that is going to bear all the liabilities of its RO.
• The authorities of the Chief Representative are governed by foreign law. This usually would be the jurisdiction of the foreign parent company’s state of incorporation. Hence, particular attention should be given to the authorities and limitations given to the Chief Representative.
• The parent company will be also subject to the jurisdiction of the Chinese court(s) in the locality where the RO is established and this court would have jurisdiction over all contractual issues.
• It is necessary for ROs to pay value added tax (VAT), consumption tax and custom duties on any domestic purchases or imported equipment. Besides, ROs need to pay stamp duty as well. But when negotiating the office lease for the RO, the landlord should be responsible for paying only property related taxes in connection with the leased office area.
• ROs are not allowed to hire staff directly. Instead, a HR agency, local-government run or a few non-state firms, must be used (an authorized agency). An RO must go through a Chinese version of Manpower in hiring its staff. An RO may independently solicit candidates as well as negotiate directly with a potential candidate referred to it by an authorized agency regarding salary, benefits, etc. But before an RO can hire a candidate, the candidate must be referred to an authorized agency. The authorized agency would then make the official referral to the RO and take a percentage of the employee’s salary every month. Otherwise, an RO may be forced to close.

The process
Step 1: The pre-approval procedure
To establish an RO, a foreign company has to find a Chinese sponsor to help it obtain the requisite approval and registration. This usually can be done through the local Ministry of Commerce (MOFCOM) office, which matches the foreign company to a sponsor with a similar type of business. The sponsor is paid a fee for the services it provides, e.g., alerting the company to relevant deadlines and notifying the company if there are any problems with the application materials. Besides, the foreign company has to enter into a lease for “Grade A” office space prior to obtaining approval for its RO. The signed lease agreement is one of the documents that must be submitted with the foreign company’s application materials.

Step 2: The approval procedure
The company’s application materials are submitted to the appropriate approval and registration bureau. The company’s line of business will dictate which approval authority has jurisdiction over its application. At this stage a certificate of approval would be issued. ROs are usually approved for an initial term of three years, which can be extended.

Step 3: The registration procedure
The foreign company has to complete this step within 30 days after the certificate of approval is issued by the approval authority. The procedure includes submitting an application along with a set of documents to the local branch of the State Administration of Industry and Commerce (SAIC). Then, a certificate of registration/business license is issued, usually takes 30-60 days.

Step 4: The post-establishment procedure
Then, the RO registers with the Public Security Bureau, opens a foreign exchange bank account, registers with the local and state tax bureau and registers with the local customs bureau. Upon completion, the RO may start its business activities.

The documents and information required

• An application letter signed by the Chairman of the Board or the General Manager, describing the company’s business background including history, nature and scope of foreign business, name of its Chairman of the Board, General Manager and directors, its major trading partners in China and business volume. The letter should also contain the proposed name of the representative office (usually in the following format: “Head Office Country + Company Name + Chinese City Name + Representative Office”), the purpose for setting up the RO and its scope of activities, the duration of the office and its chief representative;
• Copy of business license or articles of incorporation of foreign company;
• Power of authority for the Chief Representative;
• The Chief Representative’s resume, copies of identification, passport and photos;
• Board resolution authorizing the establishment of the RO;
• Copy of the lease agreement for the representative office’s premises from an approved unit;
• Original bank reference letter to testify the company’s financial standing. 
  
• It is also recommended showing proof of more than $10,000 (U.S.) paid-in capital and tax registration/certificate.

If the application is approved, an approval permit is normally issued to the representative office within one month after submission of the application. Upon receipt of the approval permit, the representative office has to apply for business registration and complete other post registration formalities (including tax, customs and foreign exchange registration) within a specified period of time, usually 30 days.

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