China Branch Offices and RO-WFOE ‘Conversions’
Jun. 18 – Foreign investors with an existing China WFOE that are looking to establish a presence in another destination, be it expansion or relocation, may wish to consider establishing a branch office.
A branch office is essentially an office of a WFOE located somewhere other than the WFOE’s main office location. Branches are easier to set up and maintain, but are limited in many ways, such as not being able to expand beyond their parent WFOE’s business scope.
Many WFOEs use branch offices to expand their geographic presence. For example, major retail stores in China are generally branches of foreign-invested commercial enterprises (FICE). Branch offices are also appealing if a company needs to hire local employees in the destination city (and therefore submit IIT and social insurance payments on their behalf).
For investors who find relocation to be too much of a hassle, who are unable to relocate for government approval reasons, or who are simply interested in expansion, opening a branch office is also an alternative to WFOE relocation.
In addition, we also discuss another popular expansion option, “converting” a representative office (RO) to a WFOE.
However, ROs have their negatives, including a limited business scope, no ability to issue fapiao and limited hiring ability; local employees can only be hired through government HR agencies (FESCO) and no more than four foreign employees can be hired.
The process of establishing a branch office is essentially an abbreviated WFOE setup. Establishing a branch does not require approval from the Ministry of Commerce, rather, the branch can be directly registered with the Administration of Industry and Commerce.
A branch is not necessarily required to set up bank accounts (it can use the parent WFOE’s bank account) and, while a new branch must be registered with the local tax bureau, only branches that wish to invoice (i.e. operational branches) must declare, on a monthly basis, taxable items from locally-produced invoices. This makes branch office maintenance for non-operational branches minimal. Furthermore, only operational branches also need to have their own accounting systems and undergo local annual audit.
The full branch setup process takes two-three months at minimum. A branch has no registered capital requirement; rather the WFOE’s registered capital is used to support the branch. However, increasing registered capital requires approval from the Ministry of Commerce and then renewal of the WFOE’s business license. This process alone may take up to two-three months, thereby significantly lengthening the time required to set up a branch office.
The RO Regulations promulgated in 2010 increased the deemed profit margin from 10 percent to 15 percent, and reiterated that an RO is prohibited from undertaking “profit-making activities.”
As a reminder, an RO is only permitted to engage in the following activities:
- Market surveys, product or service displays, and promotional activities related to the products or services of its head office
- Liaison activities in connection with product sales, the provision of services, domestic procurement, or domestic investment by its head office
While these regulations have not been implemented and enforced in quite the way that many people expected, they nonetheless spurred many foreign investors to convert their ROs to WFOEs. In, fact the concept of “converting” an RO does not exist; rather, deregistering an RO and establishing a new WFOE are two separate procedures that can be done in any sequence. As an RO is not a legal personality, the term “deregistration” is used instead of “liquidation,” though the process is in many ways a liquidation.
RO deregistration can take six months to more than two years, depending largely on the period of time required for deregistration at the tax bureau. The new WFOE can be established while the RO deregistration process is underway.
RO deregistration begins at the tax bureau (for which the RO must conduct an audit and clear tax liabilities) and proceeds to all other relevant authorities, which may vary by region. The other half of this process involves establishing a new WFOE from scratch which can takes three-five months. This involves applying for a business license and then registering with all government bureaus and opening bank accounts.
We cover the WFOE establishment process in the latest issue of China Briefing Magazine, titled “Relocating or Expanding Your China Business.”
Material for this article was taken from the June issue of China Briefing Magazine, titled “Relocating or Expanding your China Business,” which is temporarily available this month as a complimentary download on the Asia Briefing Bookstore. This issue deals with mergers of companies that subsequently result in all or part of their operations having to be relocated within China. It also covers the establishment of branch and other offices, in addition to the liquidation issues that can occur when restructuring a business in China.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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