Tips on Avoiding Common Representative Office Problems in China
June 5 – The first thing to learn about doing business in China is – be prepared for all the paperwork. Bureaucracy is an art form that China relishes, so foreign investors should do their research and ask credible sources for advice on business policies.
We will outline some of the common mistakes that representative offices make:
It is common for a client to authorize an agent to arrange the opening a bank account, a procedure that on hindsight can easily be done without help.
The agent will usually just open a bank account without asking a client on how to best manage it. Be wary if the agent is a friend of a local employee assisting because a conflict of interest can occur. There are security issues that need to be addressed prior to opening a bank account. These are:
(a) Whether to use chops (company seals) to manage the bank account in addition to signatures (a procedure we recommend to add another layer of security)
(b) Whose signature and chops will be authorized for account management
(c) Whether other persons with differing responsibilities can also manage the account and if so who?
An agent is likely to use the accounting chop and legal representative chop (often a local Chinese national appointed by head office) when opening an account without verifying its security or client specifications. We advise a client against wiring their registered capital into such an account because of cases where money has disappeared or skimmed off.
A representative office is entitled to import a foreign vehicle, duty free. The importation is logged with the tax bureau and the value of the vehicle should appear in the accounts and at annual audit as an asset. If it does not, it can be assumed that the office sold the vehicle for a profit and may be subject to tax for the transaction.
There are many cases of vehicle dealers calling local representative office staff to see if they will be sold the vehicle rights. The going rate for such a transaction could amount to RMB20,000 (US$2,500). The employee then arranges for the office certificate and documents to be chopped, and pockets the money. This results in the representative office license being used to import a vehicle without the client’s knowledge. This becomes a serious problem when the office is audited or closed.
Welfare payments to local employees
It is common for investors to be unaware of the extent of mandatory welfare payments that need to be made to local China staff. These differ from city to city, but always include: pension, medical insurance, unemployment, and housing fund. Maternity and other payments may also be required. Typically, these amount to at least 50 percent of the entire salary. An investor must factor this into the budget and obtain advice on how much needs to be paid.
FESCO and other agents
China has a raft of government agents willing to help you with mandatory welfare payments. The most familiar of them all is FESCO, although other agents also exist. FESCO will charge for their services and it is a requirement to use them when employing staff for representative offices. It is not a requirement to use them for WFOEs or FICE.
FESCO has a tendency to sell additional services that are not mandatory, like insurance, 13 month annual salaries, and special Chinese New Year bonuses.
Non-payment of taxes
It will happen that sometimes a representative office will have overlooked paying some taxes. This situation is aggravated by the fact that the local tax bureau may not bring this to your attention. While this may appear to be good news – in reality it is not.
Representative offices are subject to a business tax of approximately 10 percent of their expenses, which has to be calculated, filed and paid on a monthly basis in addition to an annual audit.
On other occasions, an office can file for and obtain tax exempt status, but this must be approved by the local tax bureau beforehand. 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 add up to a significant amount of money. One case we dealt with involved a well-known international luxury goods brand in Shanghai. The company had not paid tax due on their office three years. With monthly overheads of some US$8,000, the total amount due was US$28,800 with late payment penalties potentially increasing that to US$172,800.
So the implications can be serious. On this case we were able to make a settlement with the tax bureau for the original back tax with just a token amount as a fine. But non-payment of taxes from a representative office is a serious matter and you need to get into compliance from day one.
RO license alteration issues
If the office needs to revise the chief representative, address, or undergoes a change (say an overseas acquisition changes the parent company) then the authorities need to be informed. If not, again there can be penalties levied for non-license compliance issues. Investors should seek advice on how to process these changes. They are inexpensive and straightforward, and non-compliance can result in problems and fines.
For more information on setting up a representative office, click here.
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