When foreign company wants to set up a business office in China, they may choose to open a Representative Office or set up Wholly Foreign Owned Entity (WFOE). A Rep Office “represent” in China the foreign company back home. Rep Offices are not a separate legal entity; they are the China representative of the foreign company which does not have the status of a body corporate. As a result, they are not allowed to make profit by themselves.

Under Chinese laws and regulations, Rep Offices are pretty much limited to engaging in the following:
Conducting market research
Promoting their foreign company owner
Coordinating their foreign company owner’s activities in China
Other activities that do not and are not intended to generate a profit

They cannot sign contracts or bill customers. However, in practice, some of them may actually conduct profit making activities, and the money they earned will have to go to the foreign company back home instead of the Rep Offices.
 

Advantages of opening of a Rep Office in China:
1.It is faster to open a Rep Office than setting up a WFOE;
2.The cost is usually lower than setting up a WFOE;
3.The documents required is easier than forming a WFOE.

Disadvantages of opening of a Rep Office in China
1.A Rep Office is not allowed to conduct profit making business.
2.If you want to change the business model and want to “switching” from a Rep Office to a WFOE, you will find it could be a more complex procedure. You have close the Rep Office and establish a new WFOE. The cost and time could be far more than directly set up a WFOE.
3.A Rep Office is not permitted to directly hire Chinese nationals. It has to be done through a Chinese employment agency such as FESCO.
 

By the way, although Rep Offices are not permitted to earn income in China, they are nevertheless subject to taxation. The tax is based on the GROSS EXPENSES of the Rep Office. If the Rep Office is large and has a number of employees, this tax can be quite high.

By Beijing Lawyers