After reforming and opening up for over 20 years, China has become an attractive international business destination. Nowadays, China is one of the world's most promising international direct investment countries and an important driving force for economic development. The PRC government also advocates the use of foreign capital participation in restructuring the state-owned economy, attracting multinational investment, fostering the ownership advantages of domestic enterprises and accelerating the implementation of "going out" to promote the development of the Western region.
According to the China laws and regulations, currently the most common types of foreign investment enterprises in Mainland China are: Foreign (Regional) Enterprises and Resident Representative Offices of Foreign-owned Enterprises, Joint / Cooperative Enterprises.
Why choose to establish a representative office in China?
Generally, foreign investors in China will establish a Registered Representative ("Rep Office") as a first step to enter into the Mainland market and establish a better understanding of the operation of the local market as well as to explore future business and investment opportunities.
Most of the offices are limited to engage in non-direct business activities, such as contact with suppliers and customers, product promotion, market research, etc.
Rep Office cannot hire local employees under its own name. Neither can they import or export goods directly, nor can they issue invoice accordingly.
Nevertheless, most of the offices will be treated as engaging in taxable behaviors which requires the China section to pay profits tax. For office - the rate of net profit margin is at least 15% .
Changes to rep office registration and regulations
In addition, provisions have been tightened recently. There are more stringent compliance requirements. For example, each Rep Office is allowed only a limited number of foreign representatives (including Hong Kong and Macau) and the requirement to establish a sound accounts system and which must be retained locally. Rep Offices are also required to submit an annual audited accounts. In some areas, the offices are required to register as a VAT ("VAT") taxpayers, in addition to the monthly business tax returns, they are required to submit monthly VAT foreign tax returns.
Registering a representative office in China, must be dealt with carefully to avoid falling into tax trap: Once it was regarded as representative for the Chinese resident enterprise, the agency's income that all sources from China needs to be subjected to corporate income tax; or if the office is considered as a permanent establishment in China, the agency of this Chinese origin will need to pay corporate income tax.