Advantages & Disadvantages of Rep. Office

In course of business processing, we often encounter some confused customers:    Which one is better for us, to form a Rep Office or a WOFE ? Which one is more suitable for us ? Which type your customers usually adopted?  In fact, there is no specific answer or model that can be applied.   Investor has to make decisions according to its actual situation, and to understand the relevant laws and regulations in Mainland China so as to invest in Mainland China  market for paved road.

The information below shows you the types and the governed rules and regulations of business activities constrained by Rep Office.   In view of the fact that a Rep Office is merely an office for someone who undergoes various types of market research, information collection in China, it is not an independent legal entity, hence:

  • 1.     It cannot engage in business or commercial activities directly:     the activity of a Rep Office is confined to product promotion or marketing, market research, investigation, liaison and that sort behavior.   It cannot charge fee for its services provided and cannot engage in profit-making activity, i.e. direct marketing or value-added manufacturing (although in some cases, they are exposed to taxation)
  • 2.     It cannot engage in a contract with clients directly or to issue invoice etc.   All these conduct must be processed by the head office and operations.
  • 3.     It cannot hire local citizens directly:   a Rep Office can employ local citizens only by way of referral from authorized personnel agency.   The talented agency receives commission by recommending suitable candidates.   To simplify the recruitment process, Rep Office will recruit the potential candidate directly and thereafter, provides their personal data to the agency for “recommended” back to the Rep Office.   Although this method seems that it does not bring any troubles to the local government, a commission recommended procedures and regulatory must be observed.

With this kind of restriction, why there are so many Rep Offices established?     There is no capital registered requirement for establishing Rep Office, the procedure is simple and the operation cost is relatively low.   That is the reason why some structuralized, sizable and prudence foreign enterprises prefer to establish Rep Office as its first step before kicking off their business in China.

  1. Those who propose to invest in China, no doubt that he or she must conduct a market research before making any decision regarding such a long term investment.   Rep Office is a good bridge.
  2. Foreign Investor who proposes to involve in certain prohibited commercial industry can establish Rep Office at first.   Hoping that the PRC government will honor the commitments in WTO, amending the “PRC Foreign Investment Law” with the direction going for liberalization.   Establishing Rep Office means to enter into the market, access to local contract resources and better understanding of the market.
  3. Some Foreign Investors, though already have simple business dealing in their own country or in China, are lacking of market penetration and resources allocation to adjust its investment plan.   Establishing a Rep Office implies that it provides framework for such corporate planning.   Once the head company obtain greater market share, it can upgrade to a joint venture or WOFE.
  4. Certain industries, i.e. insurance, finance etc, require the foreign enterprises to have its Rep Office in China for making direct investment for at least two years immediately before commencement business.
  5. If the foreign enterprise merely targets to look for suppliers or distribution channels through local citizens, setting up Rep Office can achieve this aim.

All in all, setting up Rep Office enable the escape of legal liability or regulatory governance restriction with cheaper cost but at the same time, it can serve the function as WOFE or Joint Venture.

In China, there is a distinction between a Rep Office and an agency.   To avoid stepping into the trap of taxation, we must act carefully.   Once the Rep Office is regarded as a representative for the Chinese resident enterprise, then its income from all sources in China needs to pay corporate income tax ; or if the office is considered as a permanent establishment in China , the agency of Chinese origin needs to pay corporate income tax.