PathToChina.com

http://www.flaminghoops.com/

Can you explain the difference between a “Representative Office” and a “Wholly Owned Entity” in Shenzhen/China, especially as it relates to hiring people and getting visas for a foreigner and his family?

Certainly.  With either a Representative Office (”Rep Office”) or a Wholly Foreign Owned Entity (”WFOE”) hiring local staff and visa considerations for foreigners are easily resolved.Representative Office hiring local staff and visa considerations for foreignersa)  Staff: If a Rep Office is the chosen vehicle, you shall be permitted to hire as many local staff as you wish.   However, all your staff must be registered with FESCO, which is a local Government employment agency.  Only a Rep Office must comply with this odd provision, which requires that a Rep Office pay up to about 1000 RMB per month, per person that is hired.  There is no real value recieved for the employer in this situation.  It’s just one of those China things’ you have to do.  But you can hire them, employee them legally, etc.  So, that’s not a problem — just a cost issue — because of taxes.  See the discussion below about a cost comparison between a Rep Office and WFOE.

b)  Foreigner Visas:  While a Rep Office is not considered a ‘Chinese Company’ which means that it does not have legal person status and thus can not sign contracts inside of China — the Rep Office does in fact allow the owners, and family, the right to have permanent resident visas.  These are renewable each year.   These are applied into your passport and allow free entry and exit of

China.  You will also have an employment permit allowing you to work for the Rep Office, but no other company  Finally, if you want to employ other foreigners at the office you may, after you register them at the Labor Bureau.
  WFOE hiring local staff and visa considerations for foreigners
 
  a)  Staff:  Similar to a Rep Office, a WFOE can hire any number of Chinese Nationals desired.  They are merely registered along with your other corporate filings at the Labor Bureau, Tax office and a few other locations.  Costs for employees are lower than with a Rep Office though, because with a WFOE you may hire people directly, instead of having to use the FESCO bureau.   With 5-10 employees that is going to save you between 5,000 and 10,000 RMB per month, more or less, not including the tax considerations.
  b)  Foreigner Visas:  For foreigner visa purposes, there is virtually no difference between the Rep Office and the WFOE.  Thus, there are no issues with getting an entire family the annually renewable “Permanent Residence Visas” applied your passport, plus the work permits, etc.
  Running a Hong Kong Company from China:  A Rep Office vs WFOE
  While it is possible to run a

Hong Kong company, via online banking and other technological means, from either type of Chinese entity selected, there are substantial differences between the way the Rep Office and the WFOE can carry on daily operations and what the cost and tax issues are.
  A Rep Office allows you to have an office, live in

China, have signs, business cards, international phone lines, satellite television in your home, hire local staff and other basis things.   However, you can not engage in business in RMB currency, you can not buy or sell products in the name of the Rep Office, and can not engage in the trade of goods or services in the name of the Rep Office.  In fact, technically a Rep Office can not even sign contracts in

China  — for it is supposed to be coordinating the buying of goods on behalf of it’s foreign parent only.  Thus, under law the Rep Office is supposed to be run as a ‘cost center’ only.   Now, of course it is done all the time that Rep Offices sign contracts and business can be conducted more or less normally, but you will not be able to pay in RMB, you will not be able to take possession of goods inside China, you will not be able to negotiate VAT rebates as part of your price discussions and other similar limitations.   Also, every contract that the Rep Office signs or negotiates in

China must, by definition, have the foreign company name on the letterhead at all times.
  A WFOE is a Chinese company and can therefore do anything.  Meaning it is merely a Chinese Corporation under the Chinese Corporations Code laws in China with a few special considerations as a means of

China promoting foreign investment.   Those benefits or special things are:  

 1)  A Chinese person can not have a WFOE,
  2)  A WFOE is profits tax free for the first two years of operation and
  3)  And pays only 7,5% profits tax for the next three years, (Thereafter a WFOE pays standard profits tax, as all Chinese Corps will of 15%, in Shenzhen, and 30% outside of Shenzhen) 
  4) A WFOE can get both import and export licenses — which other Chinese companies can not,
  5)  A WFOE can import about one 40ft container of personal articles for the owners duty free, which can include vehicles, household articles, etc,
  6) A WFOE engaged in manufacturing can import all it’s component parts and materials duty free, so long as the production is exported later,
  7)  Also, newer pieces of the WFOE law allow a WFOE to be a wholesale exporter, retailer, auctioneer or commodities broker as well.  Meaning you can buy wholesale from all your suppliers and export.  The benefit to this is that it can put the bulk of your profit in Hong Kong outside the jurisdiction of Mainland

China taxation.  Then, because Hong Kong is tax free, if we set up your operations and cash flow correctly, you can legally avoid much Mainland and

Hong Kong taxation.
  8)  And, as a WFOE is allowed to export on it’s own licenses, there is no need to engage in the typical

China practice of paying 1.5 % to 4% of all invoiced costs in order to ship by ‘borrowing’ export licenses from others.
  9)  And finally, a WFOE can have multi-currency and foreign currency bank accounts in the PRC. No other type of Chinese entity gets this.  Also, the books, records and accounting standards of any WFOE can be in any language and format you choose, so long as your Government filings are in Chinese.  This is also a unique characteristic of a WFOE.Rep Office vs WFOE Tax Considerations:
  By this point in this writing you may have presumed we advise a WFOE over a Rep Office under normal circumstances.  Here we shall lay out the applicable tax provisions that are the primary basis for such a choice.As noted a WFOE pays taxes on profits only after two years and thereafter only at a half tax rate for the next three years.  But also, because of some special twists and turns of Chinese tax law, there is also a way for a WFOE to remain tax free for much longer. The corporations code specifically permits a Chinese company of any kind, including a WFOE, for it is merely a variety or type of Chinese corporation — to operate tax free during any period where it does not show a profit.
  Meaning, you can start a WFOE with a lower level of investment and rather than post your ‘profits’ as profits on your books, you can use those same funds to expand the operation in China — which legally forestalls and delays even the beginning of the two year tax free period.  How? 
  Well, according to the operating principles of the Tax Authority here, the two-year tax free period can be postponed until such time as the WFOE actually starts to make a profit.  We have one company that we started that is in the 4th year of expansion and is still in the period even before their two-year tax period starts.  Only after they can no longer absorb their ‘profits’ into more expansion will their tax-free 2-year period start. 
  Compare this with a Rep Office, which by law in China has to run more or less as a ‘cost center’ or sales or promotion office of the foreign parent, here in your case.So, what does a Rep Office pay in taxes?  Well, here’s how it works.  A Rep Office pays taxes on expenses. Meaning, you pay yourself a salary and that of your workers, right?  Then you and your workers pay payroll and salaries tax and social insurance taxes on that salary, right? All of these funds come out of your Rep Office company account, right?  Well, then the Rep Office, which pays taxes on all expenses — then pays taxes again on those same funds already spent — for they were expenses that the Rep Office paid and passed through it’s business account.So, what are the taxes of a Rep Office?  Well, the answer is that a Rep Office pays taxes at a rate of about 10.5% of every dollar that passes through it’s bank account.  So, the more it costs to run your operation the more you pay in taxes.  If you have a nice office, it’s costs you twice.  Once because you rented it and paid rent and management fees, then another 10.5% because the Rep Office paid rent from your Rep Office bank account.  Can you just pay your rent in cash, thus avoiding this tax?  No, for you must file quarterly and annual reports with a Rep Office to prove you are in compliance with all local laws and regulations. 

Provided by www.PathToChina.com 

“Path To China” is an International Business Consulting Firm that provides foreign investors with business registration service in China. For business advisory service , please contact Vincent by vincent@pathtochina.com.     

This entry was posted on Sunday, September 16th, 2007 at 3:50 pm and is filed under Foreign Representative Office ("RO"), Wholly Foreign-Owned Enterprises ("WFOE"). 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.