The measures on how foreign representative offices files and calculate taxes in China has changed. With the new tax laws in China, there have been some misperceptions that may discourage foreign investors from investing or operating from China.
Are you looking to open a Representative Office in China, but need to know more about the process of registering your rep office for tax?
Here is a quick summary of what changed, explaining the registration process regarding taxation for foreign representative offices setting up in China...
According to provisional measures for Foreign-Enterprise Representative Office Tax Administration, released in February 2010, businesses who has set up a foreign rep office must pay business, income and added taxes tied to the rep office. Rep offices will no longer benefit from EIT exemptions, only if they fall under the protection of relevant agreements they will be eligible for EIT exemptions.
Tax registration procedures for RO
When a rep office can provide the necessary documents and contracts stating the accurate amount of the revenue, the tax officials will allow the use of that amount of taxable revenue.
There are three main formulas used to calculate the tax liability:
1. Actual amount method
When the rep office’s records for expenditures and revenue are complete and up to date, the actual amount method is compared to the EIT law’s tax standard.
2. Actual revenue deemed profit method
This method applies to rep offices if they have kept complete records of its revenue but not its expenditures, the tax rate is multiplied by the amount of reported revenue and a profit rate that can not be any less than 15 percent.
3. Cost plus method
The third method is only used when the rep office has not kept complete records of its revenue but the expenditure records are complete. When the cost-plus method is used the tax authority will generate revenue using the following calculation:
Revenue = expenditures / [1 – deemed profit rate – tax rate].
The rep office new tax law raised the minimum tax rates from 10 to 15 percent. With the new set minimum amount being higher it will encourage and be in the rep office’s interest to keep records of both their expenditures and revenue up to date and accurate. This will allow the rep office to qualify for the Actual amount method and keep tax to a minimum.
Is it still worth setting up an RO?
If your business is mainly interested in promoting its overseas products and services, networking within China, or if your company is a foreign non-profit organization, then setting up a rep office may be the perfect option for you!
"Hongda can set your RO up in just around 2 weeks"
Some companies may be interested in revenue-generating activities directly, for this they a WFOE is needed. On some instances foreign businesses may be interested in more than one of these investment vehicles and can then benefit from opening numerous of them, for example having a WFOE setup combined with rep offices could just be what your business requires.
Are you interested in setting up a representative office? Why, or why not?
Please let us know if you have any questions about ROs by leaving a comment below, we'll be happy to answer them.