A China rep office is an excellent first port of call for companies who are doing business in China as it gives you a concrete presence there allowing your parent company to deal with local suppliers and customers, conduct market research, and have staff based in China.
However, a representative office has both benefits and limitations, and it's the latter that may cause you to look into how to set up a WFOE in China.
In order to understand whether your company needs to convert from a rep office to a WFOE we need to look at some of the features of each, and the process involved.
Keep reading as we take a look in more detail...
Have We Outgrown Our China Rep Office?
We have already looked in detail at representative offices in China here > What Is A Representative Office In China?
In a nutshell, a China rep office will offer foreign businesses a direct route into Mainland China in the following ways:
- Your company will have an actual office address in China
- Only taxed on running expenses
- Can hire local and foreign staff through a government agency, such as FESCO
- Open in only 2 weeks
- Can conduct market research in China
- Will have staff on the ground who can meet suppliers, customers, and conduct QC
- Can conduct marketing and promotions in China
- Can share technology and ideas with other organisations in China
Although all of these functions are useful, you'll notice that there are a few glaring omissions from activities that a normal company can conduct.
This is because a rep office is not a normal company in China. It is merely a branch office of the foreign parent company.
In fact, a rep office does not allow:
- Making sales
- Issuing invoices
- Signing contracts
- Storage of products and goods
- Remittance of profits out of China
- Use of a virtual address as the office address
So basically, a rep office can only support your parent company's business in China, but may not conduct actual business itself.
You may well have outgrown your rep office if you need to conduct any of the above within Mainland China. If that is the case then you may need to open a WFOE.
WFOE Tax Benefits Over A Rep Office
Since a rep office is not a legal entity in China, being a branch of a foreign organisation, there are tax implications which may cause you to consider a WFOE instead too.
Essentially there is a flat rate of around 12% tax on expenses for a rep office.
This means that regardless how much money you spend on upkeep for the rep office and its staff and activities, there is no tax relief whatsoever and it will only become more expensive to run.
However, as a 'real' company in China, the WFOE, may deduct expenses from revenue, and may reduce tax by implementing a service agreement between itself and its foreign HQ in order to benefit from a 10% of actual profit rate in this case.
Finally, depending on the WFOE's scope of business, it may well be liable for tax breaks, such as VAT exemption between 2014-2018 for logistics WFOEs, whereas a rep office will never receive these.
Certain industries may also be eligible for reductions in CIT (corporate income tax) which can affect both company and staff members, for instance service WFOEs incorporated in the QianHai zone of Shenzhen.
How To Set Up A WFOE In China If I Already Have A Rep Office?
The good news is that it is possible to convert a rep office into a WFOE.
The bad news is that, like most China company registration processes, it is complex and bureaucratic and will likely require expert assistance.
The actual process is that you must apply to register a WFOE in the same way as if you were a foreign company setting up in China for the first time, and you must also deregister your rep office.
Read this blog to gain an understanding into how a WFOE is set up > How To Register A WFOE In China: A Brief Overview
Success is gained when the two processes overlap in such a way that you're able to transfer your staff from the existing rep office to the new WFOE without any hassle. For instance, the WFOE must have bank account and capital in place to immediately be able to pay staff.
Since the rep office may only employ people through FESCO, a government accredited 3rd party labour agency, you will need to transfer the employees by:
- Notifying FESCO that you are going to terminate the employment of all employees due to the deregistration of the rep office
- Employees will start work at WFOE immediately as soon as their employment through FESCO is confirmed to be ended
- New employment contracts between staff and WFOE should be signed within 30 days
- WFOE needs to set up 2 social welfare accounts for staff members: The corporate social insurance account & corporate housing fund account, both of which must be attached to individual accounts of each member of staff
- WFOE must hold the personnel files of each member of staff (formerly handled by FESCO)
So there you have it.
You can indeed switch from rep office to WFOE, but to avoid falling foul of labour laws the WFOE must be in place first in order that it can immediately re-hire the staff whose contracts are dissolved by the deregistration of the rep office.
Have you been through the process of converting a China rep office into a WFOE?
What were the greatest challenges, and what was trouble-free?
Which tips would you offer for companies interested in doing this?
What benefits do you have now that the rep office couldn't give you, and how have they affected your doing business in China?
Let us know by leaving a comment please.