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Representative Offices vs. Foreign Invested Commercial Enterprises in China
Recent changes in China's tax treatment of representative offices in the country have started to push the viability of using ROs as a vehicle of "investment" into China in terms of increasing financial pressure. While often stated as being an "investment" vehicle, alongside wholly foreign-owned enterprises (WFOEs) and foreign-invested commercial enterprises (FICEs), the reality is they have never been considered as a vehicle for foreign investment in the strictest sense. Firstly, there is no capitalization requirement, and therefore no "investment" by the foreign owner, and secondly, because they were not permitted to trade (trading may be allowed for ROs following new regulations issued in February, but this has not been clarified yet).
Instead, ROs have been used over the past 15 to 20 years as a type of "getting to know you" vehicle, whereby foreign companies, perhaps feeling their way in China, can establish a presence to see what the market conditions are like. China used to also be wary of letting foreign companies enter the China market en mass. Early ROs could only be established for example in specific, security controlled Chinese-owned hotels, and were not originally permitted to rent genuine office space. This is why, in many second tier cities and older hotel buildings, you can still see hotel floors devoted to small offices. Representative offices were originally even more confined than they are today.
To read the full version of this article, please purchase the April 2010 issue of China Briefing, which can be found in the Asia Briefing Bookstore. Companies requiring assistance may contact any Dezan Shira & Associates' nine national offices at china@dezshira.com for advice or visit www.dezshira.com.
