A Chinese Representative Office (RO) may be the easiest and the cheapest way
to establish your firm’s presence in China. However there are some traps
which you should be aware of before and after the RO’s set up.
Firstly, non-payment of taxes is a serious matter in China. A RO may
overlook in paying the relevant taxes and the tax bureau deemed the tax
payment responsibility as the RO’s and will not provide notification. All
ROs are generally subjected to Foreign Enterprise Income tax (FEIT) and
Business Tax (BT).
One of the most common tax assessment what we called the cost-plus-basis in
which the total tax burden is charged approximately at 5-10% of the RO’s
operating expense on a quarterly basis. It should be noted that the filing
should be filed within 15 days after each quarter. If taxes have not been
paid, then the tax bureau has the right to levy up to five times the total
amount due plus the original amount. This can be a substantial amount of
money if it has been overlooked over a long period of time.
Secondly, all ROs are permitted to import foreign made vehicle at a duty
free rate which will be recorded the tax bureau. This should be recorded as
an asset in the accounts and at the annual audit. If not done, the tax
bureau will assume that the RO had sold the vehicle for a profit and
subsequently taxed it for the transaction. There are instances where
employees may secretly arrange with vehicle dealers to sell off the vehicle
rights by arranging the relevant documents to be chopped and in turn making
a profit of 20,000RMB. As such, when it comes to auditing or office closure,
this can become a big problem.
Lastly, making sure your business is economically viable in China. Though
one of the main roles of the RO is to conduct market research, However if
you found your business not viable, closing down the representative office
is difficult as compared to setting up one. Furthermore, some potential
partners may encourage you to look at the long term potential of the market
and sacrifice your profits in the early stage. This may snow balled your
operating expenses, resulting in higher losses.
In any case, a good market analysis of the Chinese market, which can include
your competitors, target markets and support services should be done before
any plans for setting up a RO. In addition, you may want to source for a
Chinese market research firm to give you a better understanding of your
product/service’s viability.
