There are several different mechanisms available to the foreign investor when considering establishing operations in China. If you just need a local presence to manage services or goods being sold by your parent, or wish to co-ordinate sourcing activities or conduct marketing to `get a feel' for the domestic market, then you can establish a Representative Office (RO). So Representative Offices (ROs) are established by foreign companies to engage in business liaison, product promotion, market research, exchange of technology and other permitted activities in China. ROs are not allowed to directly engage in operational activities. The AIC usually specifies in the Business Scope, as shown in the Business License of ROs, that a RO should not engage in direct operational activities. Therefore, ROs are not a form of foreign investment in China. However, some ROs are engaged in operations in a lawful or tacitly permitted way and constitute one of the direct foreign Investment forms in China.
Scope of business
It is of key importance to note that a representative office (RO) is not a separate legal entity. Rather, it is an extension of its parent company. A representative office may only engage in non-profit making activities. It has the freedom to carry out the following functions:
• Conduct research and survey for its parent company in the local market;
• Liaise with local and foreign contacts in China on behalf of the parent;
• Conduct research and provide data and promotional materials to potential clients or trading partners;
• Act as a coordinator for the parent company’s activities in China;
• Make travel arrangements for parent company representatives and potential Chinese clients;
• Other non-direct profit making business activities.
Invoice in China
RO as mentioned have restrictions placed upon them for invoicing, and you are not permitted to invoice in RMB and receive this money via the RO. This is commonly neatly sidestepped by having your overseas parent invoice directly in foreign currency (US$ for example) to your China based customer. If you don't already have a company to do this, it is again common to set up a Hong Kong `shelf' company to provide this function - see details below. Your parent company then invoices the China client. Be aware however that the growing trend is for China based customers to want to pay their bills in RMB - local currency - and that if this is a growing requirement, you will need to consider establishing instead a "Wholly Foreign Owned Enterprise" (WFOE) which permits you to invoice in RMB and receive money locally. These can operate purely as trading companies - the downside - between US$100,000 to US$200,000 is required in registered capital (regional variations) as a commitment in setting this up.
There are three methods to determine the taxable income of a Representative Office (RO): the actual income method, the deemed income method, and the cost-plus method. In the absence of complete and accurate information relating to the RO's PRC-source income, the PRC tax authority normally adopts the cost plus method to ascertain the taxable income for practical reasons.
The procedures for establishing a Representative Office (RO) vary slightly in different areas of China and the procedures also vary in accordance with the places where the foreign companies are located. However, the basic procedures are much the same. The documents required for setting up a Representative Office (RO) are listed below:
1. The "establishment registration application form for resident representative offices of foreign (region) enterprises".
2. The approval document issued by the approval authority.
3. The photocopy of the legal business certificate and the original credit certificate of the foreign enterprise.
4. The appointment document of the (chief) representative of the resident representative office.
5. The articles of association and the member list of the board of director of the foreign (region) enterprise.
6. The articles of association and the member list of the board of director of the foreign (region) enterprise.
7. Other relevant documents and certificates.