New China Rep Office Regulations for 2011 1/12/2011

Attention companies and business owners with Rep Offices in China (and those thinking about setting one up)…China’s State Council recently announced the new regulations for their representative office structure. The regulations were put in place to “strengthen” the structure of foreign owned ROs. However, the regulations are tightening down on activities that ROs are allowed do and enforcing more strict penalties. But don’t worry, Rep Offices aren’t for everyone and a lot of companies benefit from converting to a WFOE or FICE  because of the greater flexibility that they offer.

Below is a breakdown of the new regulations for ROs:

Main Points:

• Representative Offices (ROs) will now need to provide audited accounting information twice a year.
• ROs cannot conduct profit activities. Enforcements of this rule will increase with the penalties clearly defined. Possible penalties include fines up to five times the amount owed and possible jail time for amounts above 10,000 RMB.
• The tax structuring has changed:
  – ROs are now liable for deemed profit rates of a variable 15 to 30%  (up from a fixed 10%)
  – ROs cannot apply for tax exemption (could do this occasionally in the past)

Who this affects:

• ROs currently established in China
• Future ROs to be established

When it comes into effect:

• March 1, 2011

Bottom Line- A Rep Office is not for you if your business needs to be able to:

• Directly buy and sell
• Have your own import/export license and
• Legitimately trade in China

If you fall into the above scenario, you will need to convert to a Wholly Foreign Owned Enterprise (WFOE) or Foreign Invested Commercial Enterprise (FICE), depending on what type of business your are running. A great description of what it takes to set up a WFOE and FICE can be found here at our partner site, Understand-China.com.

Converting to a FICE or WFOE will require you to close the RO (if you already have one established) but portions of the closing process can be combined with opening the new structure when properly planned out.