Often our clients required suggestion on which type of structure between Representative office and Limited Liability Company (either Joint Venture or Wholly Foreign – Invested Enterprise) is more suitable to invest in Chinese market. Of course, the perfect solution does not exist, and the structure shall obviously be suitable for the type of investment. In this brief article, we will therefore limit our analysis to the legal background, the differences and the pros and cons of the two structures, just to provide potential investors with basic instruments to orientate their decisions.

Rappresentative Office

1) Allowed activities: Representative Offices were one of the first type of foreign investment allowed in China. Representative offices shall be used mainly for liaison activities between the foreign headquarter and Chinese business partners/suppliers/clients, and for promote in China the Headquarters’ products or the services. Additional activities allowed include market researches and presentations. The law expressly exclude all commercial and profit making activities.

2) Establishment requirements and procedure: while the regulation on Representative Offices enacted on March 2011 cancelled some of the previous requirements, not only the overall burden for headquarters to establish a Representative Office is actually increased, but also Representative Offices in China shall renew their certificate of establishment each year (and in the renewal procedure all documents related to the headquarter shall be submitted to the authorities again). The establishment procedure is in any case relatively short.

3) Capital Contribution and taxation: while actually Representative Offices do not require capital contribution from the headquarter and cannot carry out commercial and profit – making activities, they shall submit annual reports on business activities and audited financial statements and paying taxed based on deemed profit of their headquarters.

4) Employment: Representative Offices are not legal persons and cannot legally hire employees. While for Chinese employees it is possible to stipulate a service agreements with secondment agencies, that will actually hire the employee and dispatch him/her to the Representative Office, for foreign employee it is usually the headquarter that execute the employment contract and dispatch the employee, that shall serve as either Chief Representative or Representative only. Please be aware that the 2011 law limits the number of Representatives (including the Chief) to 4.

Limited Liability Company 1) Allowed Activities: a limited liability company (“LTD”) can carry out all sort of business and profit generating activities ad specified in their business scope.

2) Establishment requirements and procedures: the establishment of a LTD is in general a lengthy procedure that can take up to three months (or more in case special approvals are required) from the submission of the documents to competent authorities. The LTD’s investor shall prepare a good amount of documents for the incorporation (such as, for example, notarized and legalized copies of its business license translated in Chinese, bank reference letters, LTD’s articles of association, business plan, etc.). Every year the LTD’s are subject to an annual inspection aimed to verify that the company operated in compliance with applicable laws and regulations and abiding to relevant accounting principles.

3) Capital contribution and taxation:  the establishment of a LTD requires payment by its investor of a capital contribution (whose minimum level required by the authorities varies from city to city or even from district to district within the same city) in one lump – sum or by installment in two – years’ time period. The registered capital, contrary to what happen in many foreign jurisdictions, is not a fund that guarantees the LTS’s creditors, but it corresponds to the amount of money needed for the LTD’s operations. Once the registered capital have been spent, the Investor cannot freely re-contribute the same amount, but shall decide among the following options: (i) to increase the registered capital, (ii) to obtain a loan (within certain limits set by the law), or (iii) to liquidate the LTD or start a bankruptcy procedure. Limited Liability Companies in China pay Enterprise Tax on actual profits: the rate is 25%. Such tax is not obviously due in case of losses.

4) Employment: LTD’s can employ both Chinese and foreign nationals directly, and no limits in number are set. LTD’s may also appoint secondment agencies to obtain dispatched: however, draft legislation is under discussion that will limit this option to certain categories of employees only.
As you can see from the above, the two structures serve two different purpose of investments: while the Representative Office, due to its initial low cost and the relatively quick establishment procedure may serve for an investment that shall be in any case managed by the overseas headquarter (in terms of money, time and personnel), the LTD, despite the lengthy establishment procedure and the initial higher costs, being a legal person potentially independent from its investor (after the contribution of the registered capital, no more payments are potentially required), is more suitable for an investment that will be managed in PRC by the LTD’s personnel.

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