WFOE vs Representative Office: Which One Fits Your Entry Strategy?

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Hongda has seen many foreign investors preparing to land in China and debating between two entity types: a WFOE (Wholly Foreign-Owned Enterprise) or a Representative Office (RO). To help decision-makers choose the right structure, we’ve consolidated our past articles into this single guide that explains the core differences and when each option makes sense.

Section 1: What is a WFOE? 

A WFOE is a limited liability company registered in China, 100% owned by foreign shareholders, with full legal person status. It can sign contracts, issue VAT invoices, receive revenue in RMB/foreign currency, hire local and foreign staff directly, and pay taxes in line with its approved business scope. Common variants include Consulting WFOE, Manufacturing WFOE, and Trading/Commercial WFOE.

Key business characteristics of a WFOE

• Operational & revenue-generating: Create a complete local loop—contracting → VAT invoicing → collection (RMB/FX) → tax compliance.
• Full control with limited liability: 100% foreign ownership; brand and operations decisions remain under your control.
• Localized people/finance/ops: Directly hire staff, enroll in social insurance and housing fund, and open RMB and foreign currency bank accounts. No statutory headcount cap—scale as needed.
• Tax & invoicing toolset: Access to input VAT deduction and, where eligible, export VAT refunds—much broader than an RO.

Section 2: What is a Representative Office?

A Representative Office is a non-profit liaison office of an overseas company in China without independent legal person status. It may conduct market research, business liaison, brand and supply-chain/quality management, but cannot engage in profit-making activities, cannot sign contracts, cannot issue VAT invoices or receive operating income, and cannot import/export or run warehousing/distribution.

Key characteristics of a RO

• No “business scope” filing, but activities are limited to non-profit functions: you may carry out liaison/research/quality & brand management within the legal non-profit boundary; quoting, contracting or collecting payments is prohibited.
• Low-barrier, fast setup: no registered capital; simpler process—ideal “beachhead” for quick market presence. Foreign representatives (including the chief rep) are typically limited to up to 4; local staff must be hired via licensed staffing/dispatch agencies (e.g., FESCO or Hongda Business Services).
• Non-profit positioning: focused on liaison and management, not direct revenue.
• Expense-based taxation: most jurisdictions apply an expense-based/‘deemed profit’ methodology; tax filings are required even with zero revenue. The effective burden depends on local parameters and your cost structure—it is not automatically lower than a WFOE.

Section 3: When is a WFOE mandatory? When is an RO better?

You can ONLY choose to register a WFOE if you will:

• Generate revenue in China, sign contracts, and issue VAT invoices;
• Engage in import/export, local distribution or e-commerce;
• Hire staff directly and run your own HR/payroll.

Alternatively, you can choose an RO if you will:

• Operate without revenue for now-focusing on research, liaison, supplier/quality management;
• Need a fast, low-capital presence for customer visits, supplier management, and brand activities;
• Have a parent company with ≥ 2 years of operating history and accept staffing/dispatch employment for local hires.

Section 4: Can an RO be converted into a WFOE? (with case study)

Strictly speaking, an RO cannot directly change its entity type to become a WFOE; what you need to do is register a WFOE and transfer your employees to the new WFOE. Strictly speaking, an RO cannot be directly “converted” into a WFOE. The compliant approach is to establish a new WFOE and migrate personnel and business over; after a smooth transition is completed, then proceed to deregister the RO.

We will use the following case study to show how you can operate.

Background 1: A U.S. company (for example, ABC Company) has launched a new product and wants to promote it in China. ABC Company first needs to conduct supply chain research within China, fully develop the market, and connect with end customers. Because this product is relatively niche, ABC Company believes that in the short term, there will be no purchases by customers.

Analysis: Since ABC Company will only carry out non-profit activities such as market research and customer visits in China, in this situation setting up a Representative Office is the optimal choice for ABC Company. Therefore, ABC Company established a Representative Office in Shanghai to conduct market development activities. At this time, ABC Company carried out the following actions:

1. Establish the ABC Company Shanghai Representative Office;
2. Handle work permits and residence permits for the foreign chief representative and representatives (up to 4 people);
3. Open a bank account;
4. Hire PRC national employees through a labor dispatch agency;

Background 2: After a period of development, ABC Company successfully opened the China market and was about to carry out product sales. Since a Representative Office cannot engage in profit-making activities, the Representative Office cannot conduct product sales.

Analysis: Because revenue-generating sales activities will occur, ABC Company established a separate WFOE in Shanghai. It then needs to:

1. Apply to the Administration for Market Regulation to set up the WFOE and open bank accounts;
2. Deregister the Representative Office and notify the labor dispatch agency to terminate the employees’ employment relationships;
3. After the employment relationships are terminated, use the WFOE to sign labor contracts with the original employees and independently withhold and pay individual income tax and social insurance;

Through the above process, ABC Company fully enjoyed, during the market research stage, the advantages of the Representative Office’s simple setup and relatively lighter tax burden, and before profit-making activities actually arose, established a WFOE to directly employ the original employees and at the same time lawfully carry out profit-making activities.

Conclusion

Choosing between a WFOE and an RO hinges on three realities: Will you generate revenue in China? Will you hire directly? Will you need to sign contracts and issue VAT invoices? If yes, go WFOE. If you’re in a low-cap, non-revenue liaison/research phase, an RO gets you on the ground faster. You can contact Hongda for further assistance to establish your business presence here! In either case, map out scope → tax & invoicing → HR & visas → banking & funds flow from day one; when commercial triggers appear, execute a planned RO→WFOE transition to keep your China entry smooth, fast, and compliant.

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