Let’s go back to the beginning of the 1980s, at that time, China just started the reform and opening-up. To protect the domestic enterprises, in business fields, the China government put many restrictions on foreign investment for the incorporation of their entities. The most important restriction was a very high registered capital was required for the enterprises with foreign investors, which should be deposited into a Chinese bank account before the incorporation of foreign own enterprises.
However, on the other hand, foreign investors didn’t want to throw their money into China at the very beginning, if they didn’t know China market, commercial environments, and partners very well.
To solve this problem, representative offices of oversea companies were allowed to be set up in China for foreign investors. For a rep office, the registered capital is not required, so foreign investors would not spend a lot of money for their business adventure at the beginning in China. However, the functions of a rep office are very limited:
- It is allowed to open a bank account, to receive overseas payment, to cover the running cost of the rep office;
- Foreign investors can send some person work in China, to make marketing research, search for business opportunities, maintain relationships in China.
- Since a rep office is not an independent legal entity, it can not do any other business in China, for example, sign contracts with suppliers, acquire shares of other enterprises, etc. Even to hire Chinese people, a rep office must let an HR agent hire Chines people firstly, then send that Chinese people work for the rep office.
If set up a rep office at that time, foreign investors have the chance to go into China, to do the preparation or marketing research for their business, at the same time, China government also can protect its domestic enterprises. Both sides were satisfied.
As time goes on, more and more restrictions on foreign investments are canceled in China. Currently, there are only a few industrial fields that have restrictions. You can find the negative list for foreign investment in China . Now the minimum of the registered capital of a company can be as lower as CNY1, and also the investors don’t need to deposit it into a bank immediately, The registerd capital is not a barrier for company formation in China anymore. So it’s not difficult to set up a sub-company, and the cost is also affordable. The functions of a sub-company can fully cover what a rep office has, and most important, it’s can be extended or changed in the future.
In the same condition, the cost of running a sub-company is much lower than a rep office. So now in China, more and more rep offices are shut down, or turn into sub-companies by foreign investors. As we know, only the HR agents will still suggest foreign investors set up rep offices in China, since they want to charge the service fee for these complicated third part HR relationships.
Here we give you some comparison between sub-company and rep office in China:
Tax burdens:
- The tax rate of a rep office is fixed on its cost by tax officers, usually, it will be about 5% of the cost of running the rep office in China.
- The tax rate of a sub-company is based on its revenue and net profit. If the foreign investor just wants the sub-company to have the same functions as a rep office, then the tax burdens of a sub-company can be as low as 1% of its cost.
Functions:
- As we said before, the function of a rep office is so limited. If want to do some business within China when foreign investors find business opportunities, they need to set up another company, at the same time shut down the rep office.
- A sub-company is an independent legal entity in China. It can do business in China directly, hire people in China directly. It also can change its business scopes to change its business industry if in need. For example, a foreigner set up a sub-company to export goods out of China at first, and years later, he wants to sell foods in China, then he can add foods items into the business scope of his sub-company easily.
Cost for the annual check:
- Every entity needs to submit an annual check report to the Administration Of Industry and Commerce (AIC).
For the rep office, the documents in need are very strict, and the cost is very high:
- Every year, the parent company needs to provide proof of its existence which must be legalized by China consulate. Usually, the people in the parent company need 1-2 months to finish these documents, find a law firm or notary office to get a notarization letter of the business certificate and business file of the parent company firstly, then need to Ministry of Foreign Affairs to legalize the letter get from the first step and then go to China consulate for the legalization.
- An auditing report of the rep office from a CPA firm is also in need. and it will spend a lot of money.
- For a sub-company, normally we can finish all the works for the annual check within 1 or 2 days at a very reasonable price.
So we strongly suggest our clients, set up a sub-company, instead of a rep office in China.