This guide is mainly applicable to set-up a Representative Office (RO) in Shenzhen, other regions in PRC can request for different procedures and payment system.
THE CONCEPT OF RO
A representative office (RO) is an institute setup in PRC, representing parent company for liaison with PRC counterparts. A RO is not considered to be a separate legal entity. It cannot engage directly in business operation. However, its parent company can enter into contracts with its supplier/customers in PRC in its own name, but not under the name of RO. A representative office is popular for those who are entering PRC at the test period of their business / investment.
NAME OF RO
The PRC government has a standard format of name for anyone who wants to setup a RO in PRC; the format is: country (area) + “parent company name” + Shenzhen Representative Office
The RO enjoys a great popularity among foreign investors because of its easy setup and management. Unlike foreign investment enterprises, representative offices are not required to meet stringent requirements for items such as capital injection and various tax returns.
FUNCTIONS OF A RO
The functions of a RO are as follows:
- Conduct market research, sourcing, project investigation, quality control for parent company, liaison with customers and suppliers
- Unable to enter into purchase/sales contracts and receive payment for services, issue invoices.
- Able to open corporate bank accounts and employ staff for above-mentioned purposes.
- Able to apply for work permit / residence permit.
- Also subject to tax liability
Although a RO is unable to conduct sales transactions, it is also subject to taxes stated below:
1. Individual Income Tax
Individual Income Tax rates from 5% to 45% based on salary income exceeding more than RMB2000 for local employee and RMB 4800 for overseas employee. All the RO staff is subject to IIT if his income exceeds the limit. IIT is calculated according to such a formula: IIT= (income- limit)×rate.
2. Business Tax
Business tax based on monthly business operational expense, the estimated rate is 5% based on your expenses. It is calculated according to the formula like this: BT= expenses/ (1-15%) ×5%.
3. Enterprise Income Tax
EIT stands for enterprise income tax which is based on quarterly business operational expenses, the rate is 25%. It is calculated according to the formula: EIT = expenses/ (1-15%) ×10%×25%.