REPRESENTATIVE OFFICE

A representative office in China is an office set up by a foreign company usually for the purpose of discovering and getting a feel for the Chinese market, and building and maintaining relationships with potential and actual business partners.

A representative office is the quickest, easiest and cheapest type of foreign investment structure to establish, and requires no capital commitment except for registration and operational expenses. However, it is limited by law to performing only certain, non-transactional activities related to the company’s products or services, including market research, product sampling, and liaising with overseas headquarters. It is prohibited from engaging in profit-making activities such as selling and receiving fees for goods and services (although there are some exceptions, such as legal services), and it cannot issue local invoices in RMB and execute legally binding contracts.

A representative office must also use a local government authorized employment agency (e.g., Foreign Enterprise Service Company or “FESCO”) to recruit employees, and is limited to hiring no more than four foreign representatives. Furthermore, it is not considered an entity with separate legal personality, meaning that the parent company must bear ultimate responsibility for its debts, liabilities and obligations. Finally, although a representative office cannot directly generate profit itself, government authorities generally regard the representative office as generating income indirectly for the parent company. Therefore, most representative offices are taxed on a deemed profit basis with reference to a certain percentage of total expenses.

A representative office is suitable for foreign companies that are looking to have a basic presence in China while not making profits within its jurisdiction. However, as China has gained tremendous economic importance, we see this structure as becoming less and less relevant, and, unless there is a good reason, usually advise to opt for setting up a Wholly Foreign Owned Enterprise (WFOE) instead.