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Representative office VS Consulting WFOE, Which one is better ?
Many foreign investors come to ask how to set up a foreign representative office in China, they think the representative office is in line with their current business plan.
Actually in our customer groups, a large number of foreign representative offices were closed from Y2013 and replaced by consulting WFOE (Wholly Foreign-Owned Enterprise) from early Y2014.
China released Amended Company Law in Jan 2014. It cancelled the requirement on minimum registered capital and changed it to registered capital subscribed system.
Under the registered capital subscribed system, pay the registered capital is actually very simple, you can decide when to pay and how much each time. Normally government will accept you to pay it within 30 years after business license released.
As before, only Representative Office don’t need registered capital. Now all is same from Jan 2014.
Representative Office lost its advantages finally.
Here is the summary for Representative office :
1. Representative Office is not an independent entity in China, which can only support on marketing, sales business and related supporting activities for its overseas mother company.
2. Its overseas mother company must be established more than 2 years;
3. Representative Office doesn’t have business license, but have only Registration Certificate.
4. Representative Office cannot hire Chinese employee directly but have to hire through local HR Company;
It can hire maximum 4 foreign employees including chief representative.
5. Physical office is required for registration purpose;
6. It cannot issue fapiao / invoice，no any sales revenue in China.
7. Need pay tax based on its expenses.
8. Representative Office need to do annual reporting, whose Mother Company’s certificate of incorporation and related registration docs need to be authenticated at China embassy.
Must do it every year, that's also your additional cost.
Here is the advantages of Consulting WFOE:
From y2014, more and more Rep offices closed and replaced by consulting WFOE in China,
Consulting WFOE is become more and more popular by foreign investors.
1. Consulting WFOE is easier for registration with lower requirement, faster processes. It's allowed to be registered with legal virtual address, no capital pressure because of registered capital subscribed system.
2. It could use electronic invoices for bookkeeping.
3. It’s more convenient for business operations because of wider business scope, not only covered all the functions of Representative office, but also can do consulting service legally for customers.
4. China government keeps releasing many preferential tax policy to lower taxes, lightening the burden on enterprises these years.
So it should be clear for you now ,consulting WFOE is much better than Representative Office from Y2014.
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What tax types a WFOE need to pay?
1) VAT= Value-Added Tax
For smaller tax payer, the VAT=( revenue/(1+3%)×3% ;
For general tax payer, the VAT=( revenue/(1+3%)×6%/ 13%- input VAT
VAT 6% is for service and VAT 13% is for trading.
But the VAT tax rate is different for different company types , the main tax rate is 3%，6%，9%，13%. The current preferential tax policy for smaller tax payer is, you can enjoy VAT tax exemption if monthly revenue less than RMB 100,000 and less than RMB 300,000/quarter.
2) Company surtaxes
The surtaxes mainly includes urban construction tax, national education tax, and local education tax.
3) Enterprise Income Tax =Profit tax
The payable Enterprise Income Tax =annual profit X 25%
China government released preferential tax policy from Y2019 till Y2021, we summarized as below:
a) If Annual profit less than RMB 1 million, the enterprise just pay 5% profit tax according to current preferential policy;
b) If Annual profit more than RMB 1 million and less than RMB 3 million, the enterprise profit tax is 10%;
c) If Annual profit more than RMB 3 million, the enterprise profit tax is normal 25% of your total profit, cannot enjoy above preferential tax policy.
4) Stamp Duty
The payable stamp duty = revenue x0.03%
Stamp duty is a very important regulatory tax. The tax rate of stamp duty follows the principle of light tax burden and joint burden. So the tax rate is lower to 0.03%.
For example:
The stamp duty for business license is only RMB 5
The stamp duty for house lease contract is only 0.1% of total contract value;
Business contracts including Purchase and sales contracts, technology contracts just need to pay 0.03%. Even though, China government always release short-term relief policies to further reduce the burden on enterprises.
5) Exporting Tax Refund
If you do exporting business from China to outside of China, then basically you can enjoy tax refund after exported. The tax refund rates are from 0% to 13% specified based on HS Code of your products. The exporting tax refund will not be returned automatically but need to be applied by exporter through fixed procedures.
Below key information is very important:
A. Exporter must have Exporting Tax Refund Certificate;
B. All exported goods must have input VAT fapiao/ invoice from suppliers, and all the basic information must be matched.
C. All the products were exported through China customs legally with all necessary documents.
D. Other requirements from tax bureau.
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When should a new WFOE declare tax after established?
The newly established company shall start accounting and tax works within 15 days after business license released. If the company do not declare taxes to the tax authority over 3 months, then tax authority has right to cancel your tax certificate according to the tax management rules.
Even you don’t have business at first few months and just declare taxes as ZERO, but you must do it in time, that’s the rules.
Legal Support from State Taxation Administration:
http://www.chinatax.gov.cn/n810341/n810755/c3357578/content.html
Article 22: Taxpayers engaged in production or business operation shall, within 15 days from the date of receipt of the business license or occurrence of tax obligation, set up accounting books in accordance with the relevant provisions of the State. The accounting books mentioned in the preceding paragraph refer to general ledger, subsidiary ledger, journal and other auxiliary account books. General ledger, journal shall adopt the form of this.
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What types of WFOEs can be established?
The enterprises can be classified into domestic company and foreign company/ WFOE according to the nationality of their shareholders.
According to the different forms of shareholder liability, the enterprises can be classified into limited company, partnership, foreign representative office, etc.
According to the business scope or business purpose, WFOE can be classified into
●Consulting WFOE (all services & consulting business)
●Technology WFOE (Design, multi-medias, IT, networks etc.)
●Trade WFOE (import and export of some products or even local trade only)
●F&B WFOF (Restaurant, bar, coffee shop, drink shop, snack shop etc.)
●Manufacturing WFOE
All China companies have clear business scope and must operate their business based on approved business scope. Basically, the business scope will decide the WFOE type, requirement, procedure and lead time. So, if you want to setup your company in China, please do self-evaluate what business you’d like to do firstly.
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The New Requirements on Company Name Registration
The company name shall be declared by the applicant independently
This new rule takes effective from March 1st, 2021.
Name registration process is:
1. Prepare your own available company names (or incorporate your existing business name) in Chinese;
2. Declare our favorite name make through name declaration system;
3. Checking, comparing and filtering the feasibility of your reported company name, finally submit the name that meet the requirements of these Provisions.
4. Waiting for final approval from system.
5. If this company name was finally approved, it’s valid only 2 months from the approval date.
The official company name consists of the administrative division name, brand name, industry or business characteristics, and organizational form, such as
Shanghai + XX + Industry + Co., Ltd.
The key words in a company name shall be composed of two or more Chinese characters.
An company name with the Chinese words "China", "Zhong Hua ", "Zhong Yang ", "Quan Guo", "National" or "State" shall be subject to strict examination and verification in accordance with the relevant provisions, and shall be submitted to the State Council for final approval.
In the same enterprise registration authority, the key words of a company name proposed by the applicant shall not be the same as the name of the following companies in the same industry or non-use industry, or with different description of business characteristics.
(1) The name of the company that has been registered or is in the period of retention, except those that have investment relations;
(2) The name of the companies whose registration has been cancelled or changed for less than one year, except the name of the transferee enterprise or has investment relations;
(3) The company with revocation of licence or whose registration of alteration has been cancelled for less than one year, except those that have investment relations.
