Tax Considerations for Legal Representative Offices in China

Posted by Reading Time: 7 minutes

By Dezan Shira & Associates
Editors: Lorena Miera and Thibaut Minot


In Part 1, we explored establishment and operational issues of an LRO.

The legal representative office (LRO) is one of the handful of special representative offices with unique characteristics in China. These special ROs are usually established in China’s restricted industries, within which foreign investors are not allowed to set up a wholly foreign-owned enterprise (WFOE) and sometimes not even a Sino-foreign joint venture (JV), as is the case of the legal services industry.

Effectively, the LRO structure allows foreign law firms to perform their legal services in China while the parent company overseas assumes civil liabilities for the activities of its LRO in China. Key differences set the LRO structure apart from traditional ROs, differences that range from the traditional RO registration process to the entity’s business scope, and from the different accounting and tax practices they must follow to the funding mechanisms available to grow their operations.

Traditional RO and LRO taxation

The restrictive business scope of traditional ROs does not allow them to issue invoices or collect revenue. The operations of a traditional RO are solely supported by the parent company overseas, which remits cash to the RO on an ongoing basis to cover expenses. As such, the traditional RO does not have access to as many funding options as a profit-generating business, which can collect revenue by means of invoicing customers but also related-party entities in the same group.

This implies that managing the accounting functions of a traditional RO is relatively straightforward; the accountant keeps a record of expenditure on an expense report, used to justify the corporate income tax (CIT) and value added tax (VAT) amounts filed at the end of the quarter. Since ROs do not collect income themselves, an RO’s CIT liability is assessed according to a ‘deemed profit’ tax calculation method, and an RO is effectively taxed on its expenses.

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However, the LRO, like other revenue-generating ROs, is a hybrid structure with unique accounting and tax filing properties. An LRO would typically be registered with the tax bureau as a profit-making business able to raise invoices and generate revenue, unless the investor requests the tax bureau to treat and tax the LRO as a traditional RO. This means that LROs can utilize a broader set of funding strategies when compared to traditional ROs, and their operations can be funded by means of invoicing local customers as well as the parent company overseas.

The LRO is also able to receive money to fund operations by means of a simple wire transfer from the parent into the LRO’s bank account, just like a traditional RO. Meanwhile, a revenue-generating LRO would be expected to calculate and declare its CIT liabilities based on reported profit – very similar to a normal profit-making business like a WFOE. CIT would be levied on the LRO’s actual profit, which implies that should the LRO incur costs while generating little revenue in China, its CIT liabilities could effectively be limited.

Implications for funding

The fact that an LRO is typically taxed on reported profit means that it is important to understand what should be recognized as revenue of the LRO in China, and therefore taxable. Income collected from customers locally would qualify, of course, but also potentially revenue resulting from inter-company agreements signed with the parent overseas, depending on the services being rendered by the LRO in the context of the agreement.

On the other hand, the wiring of money by the parent into the LRO’s China bank account is not considered as revenue and is not a directly taxable transaction. Consequently, although attractive from the tax optimization standpoint, relying on this latter funding mechanism as a substitute to revenue generation could have the adverse effect of eventually raising the attention of the tax bureau should the LRO fail to pay CIT quarter after quarter. Moreover, such a situation might incite the tax bureau to start taxing the LRO on deemed profit instead of actual profit. Bearing in mind that it would not necessarily be prudent for an LRO to repeatedly report losses, nor would it be to shift a detrimentally large amount of profit onshore, the key could be for the LRO to utilize a mix of taxable and nontaxable funding strategies to manage its tax bill.

Meanwhile, the banking restrictions associated with making cross-border transactions in and out of China can impact the value and frequency of the wire transfers from the parent to the LRO. Supporting documents would need to be provided to the bank for transfers of a value in excess of US$50,000, which could jeopardize-or at the very least-delay the execution of large payments. It is important to factor this threshold in the capital injection plan. Banks’ requirements with respect to the facilitation of cross-border transactions fluctuate constantly, according to the nationwide directives of the State Administration of Foreign Exchange (SAFE), which affect their policies. As such, it is important to verify the current requirements with the specific bank before a transaction is organized.

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Taxing LRO Representatives

As full-time staff, the LRO would be expected to withhold and file individual income tax (IIT) monthly on behalf of its representatives. This would further imply that the LRO would be paying a salary to the representatives monthly, which would need to be appropriate for their position and profession to avoid raising objections from the tax bureau.

Meanwhile, according to official guidelines, LRO chief representatives are expected to declare their global income in China. Should a representative choose to only declare his or her China-sourced salary to the local tax authorities while some income is also received overseas, there is always a chance that this may be challenged during a future tax audit.

The taxation of global income might be particularly problematic, for instance, if a China based representative is entitled to receive equity distributions in their home country on top of the salary paid in China. In this scenario, the income from shares received overseas would need to be declared in China and would likely be subject to IIT alongside the salary paid locally.

In addition, the revenue generated abroad in the context of work performed by the LRO representatives may be subject to CIT in China, meaning that there is some risk that the service fees paid by customers to the parent abroad could be regarded as LRO revenue and therefore taxable, if a representative was involved in selling or delivery the service.

Strategic takeaways

Because of the nature of the LRO’s hybrid structure, the bookkeeping and tax filing functions that are normally straightforward for the traditional RO are comparatively more complicated. With its unique tax and accounting situation, combined with the relative scarcity of the structure, LROs are one of the most difficult types of ROs to set up, and it is not uncommon to see even the local authorities unsure of what guidelines apply to the LRO. Because an LRO’s tax obligations can be unclear, foreign investors setting up an LRO in China are strongly advised to seek professional guidance to assist with the daily management of accounting and tax functions and ensure compliance with local tax authorities.


China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEANIndiaIndonesiaRussia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at or visit us at

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