May 2010:

China Representative Office Legislation Changes

Last month the State Administration of Industry and Commerce (SAIC) issued new regulations for representative offices (RO) in China, effective immediately. The new policy has an important impact in the following areas:

(1)  Annual re-registration of the RO with the authorities instead of re-registration every 3 years 
(2)  The RO can have a maximum of 4 representatives
(3)  Increased compliance supervision by the authorities 
(4)  Only foreign companies having existed for at least 2 years can establish a RO
(5)  Proof of the parent company's existence has to be submitted annually

In addition, the National Tax Administration also issued new regulations at the end of February, although they have been effective from 1st January 2010 in their Circular 2010/No. 19. 

I. RO can no longer be exempt from Corporate Income Tax (CIT).
II. Accounting records of the RO will be regulated and supervised more thoroughly.
III. The Corporate Income Tax effective rate of RO will increase.

What is behind these regulations?

The regulations are part of a general policy placing greater focus on the quality of foreign companies in China. They are intended to reduce possible misuse of a RO such as crossing the border between representation activities to conduct business activity. At the same time they can be seen as an encouragement to establish a Wholly Foreign Owned Enterprise (WFOE) or a Joint Venture (JV). 

It has been made clear that the Chinese authorities will enforce compliance with the laws and regulations more strictly from now.  As a result, tolerance for de-facto income-generating operations including the provision of services is expected to decrease sharply.

In addition, the regulations also target abuse of the visa regulations by foreigners. 
We see the change as a step in the right direction, but it means that the administrative burden will increase.  
  

What are the implications for your RO?

(1) The Registration Certificate and corresponding registrations only have one-year validity,
down from three years previously. Supporting documents, including proof of the parent company's existence, need to be re-submitted each year. For existing ROs, the current registration certificate will remain valid until expiration. Thereafter the new rules will apply.

(2) A RO can have a maximum of 4 representatives
Foreigners working for a RO have to be registered as representatives and their number is now limited to 4. Existing ROs with more than four representatives may keep the current number of representatives employed, but may not register additional representatives. They also have to limit the number of representatives to four upon extension of their business license. 

Only the RO representatives will be eligible for a working (Z) visa and consequently a residence permit, additional foreign employees will have to obtain an invitation and a business (F) visa for short-term stays (usually 90 days).
Local employees are generally employed through an HR service company such as FESCO or CIIC to work in a RO and they don’t appear to be affected by the new regulations.

(3)  Increased compliance supervision of the RO
The local SAIC authorities will conduct on-site inspections at the ROs registered address within 3 months of establishment. The RO will be penalised if it does not have a physical presence in terms of office space and employees.

A RO shall not change its business address without proper re-registration. It should also not have the registration certificate issued in one district and the tax certificate or other registrations issued in another district. Failure to comply may result in the RO being “blacklisted” and facing difficulties when extending the registration or de-registering the RO with SAIC and other administrations.

(4) The parent company of a RO has to exist for 2 years at the time of the RO establishment
This applies to new ROs. Existing ROs will only be affected in the case of a change of the parent company (such as in the event of a merger or acquisition), which technically constitutes establishing a new RO.    

(5) Proof of the parent company's existence has to be submitted annually
When the registration certificate is renewed or the ROs name is changed, proof of existence of the parent company has to be presented which needs to be legalised.  

I. RO can no longer be exempt from Corporate Income Tax (CIT).
This regulation follows the recent trend tying tax exemptions for ROs to increasingly stricter preconditions. Tax exemptions that were approved so far will not be continued, and ROs exempt from paying CIT will have to prepare for forthcoming tax audits. 

II. Accounting records of the RO will be regulated and supervised more thoroughly.
The National Tax Administration has emphasised the importance of compliance with accounting standards and regular audits and also suggested that it would sanction irregularities more strictly. VAT and Business Tax (on services) applying for ROs will be calculated on actual cost basis and reviewed according to the accounting records. Different tax rates apply for ROs according to their respective function and the risk undertaken, i.e. differentiated by industry and product/service category.

III. The Corporate Income Tax effective rate of RO will increase.
Corporate Income Tax will be calculated either through cost plus method or actual cost method. In both cases a deemed profit rate is used for calculation, which will increase from 10% to at least 15%. This will effectively increase the RO tax burden. Regulations on the exact deemed profit rate level and categorisation will be forthcoming, but appear to fall within the discretionary power of the local tax authority.

How can Fiducia help you? 

1. If you want to continue with the existing RO
Fiducia will handle all certificate and license renewals for you on a yearly basis and in a timely and professional manner with our annual corporate service package. 
Fiducia can take care of the increased administrative burden on a professional basis relieving your staff from the hassle and avoiding possible non-compliance of the sharpened regulations. 
Our Finance and Accounting Department also provides Corporate Services such as monthly accounting and reporting, quarterly controlling services, as well as annual audit preparation. We are happy to discuss an integrated service package taking into account your specific requirements.

2. If you want to 'upgrade' your RO to a WFOE
Fiducia offers to guide and manage the establishment of the Wholly Foreign Owned Enterprise according to your specific business objectives and requirements and consult you on the best structure of the investment.

3. If you want to close your RO
Fiducia offers to facilitate the closing of your Representative Office by handling the de-registration with the various administrative offices, preparation of final accounting documents and arrangement of the closure tax-audit.