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5 benefits of setting up a Representative Office in China
The Chinese authorities aim to make it as easy as possible for foreign companies to start a business in the country. This is the guiding idea behind the wide range of options available in China’s free trade zones, representative offices and mainland businesses.
If you are interested in the Chinese market but aren’t necessarily ready to take the plunge and launch a fully-fledged company there, opening a representative office might just be the way to go. Representative offices allow a foreign company to establish a presence in China while retaining complete ownership of the business from abroad. This makes them an appealing option for companies that want to ‘test the waters’. And there’s plenty of foreign firms who’ve gone down this route. So, what exactly is a China representative office, and what are the benefits of setting one up?
What is a representative office in China?
One can define a representative office as, “the local representation of a company or establishment that is registered elsewhere in the world. Under China law, a representative office is an extension of its parent company, and the parent company therefore remains responsible for any liabilities of the representative office.
A representative office is therefore a useful tool for businesses of any size to establish themselves in the country while maintaining overall control of the business. You are not required to hand over any ownership, and the structure allows for a fast and simple way of establishing a presence in the country. For businesses who are not yet sure they want to commit to a fully-fledged company in China, or who want to ‘try before they buy’, representatives offices are an excellent option.
Here are the five main reasons you should consider launching a China representative office:
- Take advantage of the China’s no upfront unpaid share capital: It is possible to set up a representative office in China without the need for share capital. Capital from the parent company will be transferred over (as often as needed) to pay for all local costs – remembering that the Representative Office is a pure cost-center. How these transactions occur can be a tricky area, but a company formation specialist can advise you on the requirements.
- Enter the Greater China region from a stable base, like Shanghai: Economies in the Greater China region, with their young demographics, are expected to grow rapidly in the coming decades. Shanghai is the perfect base for entering this region – it is a stable, developed city which is located right at the heart of this dynamic region.
- A strategic global location: It is often said that a third of the world’s population lives within China – meaning many of your clients and suppliers are in China. In this way, a base in China provides a central location from which to expand internationally with the Asian region
- Easy administrative processes and auditing: Setting up a representative office in China is usually fast and efficient, and you can expect to open your premises within a few short weeks. You will need to set up a separate finance function within your representative office as you will be required to submit audited accounts in China. This means that all money that passes between the parent and representative office is legally tracked, offering you a watertight audit trail and a good controlling system.
- Low-cost entry into a new market:
- Finally, opening a representative office in China is a cost-effective means of entering the country. You simply need to pay the standard fees, applications and deposits that any business would need to pay. This all makes it significantly more cost-effective to establish a presence in China.
Why set up a representative office in China?
For one, it can be a very cost-effective way of breaking into the local market. There is no share capital requirement to open a representative office. And since operations are usually smaller – as most of the business’ resources remain with the parent company – running costs are often lower as well. You can maintain 100% ownership of your company since it is treated as an extension of the parent. Essentially, representative offices act as a powerful marketing and promotional tool for your existing business, allowing you to get a foothold in the ever-growing Chinese market while you expand your business at home – all at a low cost and with favorable tax conditions.
Criteria to establish a Representative Office:
- The parent company must have existed for at least two years to be eligible to establish the RO in China;
- RO’s may not hire local employees directly and must rely on a government-authorized employment agency – called a Labor Dispatch agency;
- A RO is limited to employing four foreign employees;
- There is no investment requirement because RO’s are not designated as legal entities;
- The registration process takes approximately six to eight weeks to complete depending on location
The right structure for your business
China aims to make it as easy as possible for foreign businesses to establish themselves in the country. And, representative offices represent an especially straightforward and simple way to do it. So, are you ready to branch out into China as a representative office?
DISCLAIMER:All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.