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Edited by Vincent Cheung from www.pathtochina.com  

After representative office ( RO) is ultimately the suitable vehicle you choose to establish a presence in China, the primary concern is the taxation  There are three tax bases in

China for representative office : tax exemption, cost-plus, actual income. 

  The first question you are supposed to ask is whether the activities your RO engage in are tax-exempt or taxable. Not surprisingly, most of ROs are required to pay tax in China, that’s why you should have your RO registered in tax bureau during the incorporation of it, do tax filing on a monthly basis, and submit annual audit report.  

What types of Representative Office or Activities Are Tax-exempt?  

The taxability of a RO is decided by the nature of it. Effective in July 2003, Guo Shui Fa (2003) No. 28 has ruled out a lot of tax exemption policies. ROs of foreign governmental agencies, non-profit organizations, and agencies of certain international non-govermental organizations are still not taxable. If tax exemption is necessary to be given to the representative offices set up by above-mentioned organizations, they (or their headquarters and superior departments) should extend an application, and provide a certificate approved by taxation authorities in their home countries to certify their status as representative office. After the examination and verification by the local taxation departments, the application should be submitted to the State Taxation Administration for approval. Representative offices that only engage in the preparatory and supplementary activities, such as gathering information about Chinese market, providing business information and contracts, on the production and sales business for their headquarters, are tax-exempt.  ROs whose parent companies are manufacturers or traders are entitled to tax-exemptionWhen engaging in following activities:  Market research; provisions of business information, liaison, other non-profit-making preparatory services for the manufacture and sales of the parent company’s own products.  

For instance: The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activities of a preparatory or auxiliary character;
The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery.  For financial institutions, non-profit-making preparatory or auxiliary service to customers and money lending from parent company to its customers are tax-exempt.  

Above mentioned ROs need to report to the tax bureau about their annual operation within one month ahead of the end of the year.  

What types of ROs are subject to Cost-plus taxation?

 In the absence of complete and accurate information relating to the RO’s PRC-source income, the PRC tax authority normally adopts the cost plus method to ascertain the taxable income for practical reasons. Usually, 10% of a RO’s expense will be levied. Cost plus base is applicable to following situations:

Following types of ROs are subject to cost-plus taxation.

Because their activities is carried out upon the requirements of their head offices instead of directly concluding contracts or agreements with the served ones, their income from providing services is usually collected by their head offices . For such representative offices, their income shall be determined uniformly in a way of converting the expenses into income, upon which the tax shall be levied.

1. Commodity agent and other trade related activities undertaken by representative offices set up by various trading companies       

In case they are under following situations.

a.The representative offices are not able to provide effective proof- showing materials, such as contracts and agreements, to effectively distinguish those business activities that are subject to tax from those not subject to tax; b. The representative offices often join their headquarters to provide various service to the clients, but are not able to provide proof- showing materials to effectively distinguish the income enjoyed by the offices from that enjoyed by the headquarters;c. There have been other conditions where the representative offices fail to effectively report their income.

2. The undertaking or agent advertising business taken by representative offices set up by advertising companies;3. Service provided to tourists by representative offices set up by tourism companies (such as visa processing, fee payment, air ticket booking, touring guide, food and accommodation);Following Expenses are Subject to Taxation. 1.      wages, salaries, allowances, welfare payments to staff

2.      purchase cost

3.      business trip fare

4.      office rental

5.      equipment rental

6.      transportation fees

7.      entertainment expenses

8.      telecommunication fees  

Following Expenses are Exempted from Taxation. (

(1)advance payment made by the representative office for air tickets when people from parent company are invited to China（2）Advance payments made by the representative office for foods, accommodation, transportation, translation,as well as entertainment expenses when delegation from parent company visits china, excluding the advance payments for business talk, signing of contracts, etc, made by the delegation.   

（3）Advance payments made by representative office for exhibition arrangement, custom duty of samples, transportation fees as well as other relevant fees

(4)Past due fees or penalties imposed on the representative office(

5) Charitable or public monetary donations made by representative office

(6) advertising and exhibition expenses, customs duty and import taxes on imported samples of goods and local delivery expenses (in relation to large exhibitions held in China by the parent company 

(7) rental expenses for meeting venues used by parent company tto hold conferences (not directly related to any discussion or conclusion of any business contracts)(8) compensation made to the parent company’s clients in relation to the parent company’s non-compliance with the contract terms of its goods sold in China

(9) Payments made by representative office for the bid for some specific project in China 

Note that the amount of expense cannot be deducted from the interest the RO earns from deposit in the bank   

What Types of ROs are Subject to Actual Income Taxation

All kinds of service provided by representative offices set up by various consultancy service enterprises, such as trade, law, tax and accounting, are taxed on a actual basis. They are subject to business tax and enterprise income tax.they must set up and improve accounting books , correctly calculate the proceeds and the taxable income.Any of the representative offices that engages in the taxable business may file regular tax returns to the local competent taxation organ on the basis of the business income actually obtained from its business activities (including the income collected by its head office); any office that has no business income in the present year may, within one month after the end of the year, report the information on its annual business operation.

Following activities are taxable

1. Acting as a merchandise trade agent;
2. Consulting services relating to business, legal, tax and accounting matters;
3. Services performed for fellow subsidiaries of the same non-resident holding company;
4. Acting as advertising agents;
5. Providing services relating to visa handling, fee collecting, ticketing, tour operator, and liaison for non-resident tourist companies;
6. Consulting services given on behalf of non-resident financial institutions;
7. Providing services within the business scope of a transport company;
8. Other taxable activities the Representative Office (RO) performs for the clients. 

Following incomes are taxable
(1) the commissions, rebates and service fees received by resident representative offices on behalf of their head offices in respect of the performance of agency assignments outside China for other enterprises and for liaison negotiations and intermediary services within China;(2) remuneration paid by clients according to a fixed scale during a specified or the amount for representative services in respect of the undertaking of market surveys, liaison work, receiving or collecting business information and rendering of consultancy services within China by resident representative offices for their clients (including clients of
their head offices);
(3) commissions, rebates and service fees received by resident representative offices when engaging in business within China as agents for other enterprises or in respect of the performance of liaison, negotiation or intermediary services for economic and trade transactions between other enterprises. 

If the amount of commission is not specified clearly in the contract, and no accurate supporting documents or correct report of the amount of commission income can be provided, the local tax authorities may, by reference to a general level of commission and the amount of business realized from the intermediary services, determine an appropriate amount of commission as the basis on which to calculate and impose taxes.  Due to the fact that the services of those representative offices in China can be regarded as service extension of their head offices overseas, the businesses conducted by the representative offices are actually similar to those handled by WFOE (wholly-owned foreign enterprises). They are specially categorized and are allowed to invoice and pay taxes based on the normal rate of taxation. 

This entry was posted on Saturday, September 29th, 2007 at 8:33 am and is filed under Foreign Representative Office ("RO"), Tax & Accounting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.