Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence. Establishing Representative Offices

Transcription

1 Corporate Establishment. Accounting. Payroll. Taxation. Audit. Due Diligence Establishing Representative Offices

2 Welcome to Dezan Shira & Associates and to the emerging Asia markets of China, and Vietnam. With 18 years of experience in the region, our firm is one of the very few cross-border practices operating in emerging Asia. The countries we work in are evolving rapidly and so are the legal and tax environments there. As a professional services firm, Dezan Shira & Associates combines both business adviosry and tax disciplines under one roof. Add to this our extensive, local knowledge of each of the markets we operate in, and we are able to provide a uniquely strong platform to help our clients take their businesses forward. Do you want to do business in China? Whether you already have a presence in China or are new to this fascinating market, this guide will be a practical introduction to setting up a representative office, the most affordable China investment available. Our expertise in this area is just one aspect of the specialized business adviosry and tax services that our team of experts on the ground in offices throughout China has to offer. We believe our resources and expertise are unmatched in Asia, and this, coupled with our dedication to client service, is the reason our practice has become the market leader it is today. Welcome to emerging Asia. Welcome to Dezan Shira & Associates. Establishing And Maintaining Representative Offices in China Fast facts Representative offices (ROs) are deal for investors who are taking the first step into China and would like to establish relationships with suppliers or customers, obtain important legal documents for doing business in China and get a sense of the market possibilities here They require a very low initial investment and can be maintained on a minimal budget The scope of legal business activity is narrow for ROs, most notably the ability to invoice locally for products or services. Having the parent company invoice in parent currency is one way to sidestep that problem ROs must use local agencies to hire staff, comply with all tax and audit procedures and carefully gather all necessary documents during the application procedure, or they can be subject to costly fines and delays Introduction The representative office is the least dynamic of the entities for establishing a foreign presence in China. The RO can facilitate market entry and coordinate sourcing activities and marketing, but it is a toothless version of the possible foreign entities that has little control over the movement and sale of goods and services. ROs are the extended arm of overseas parent companies and can only interact with Chinese businesses indirectly; however, less tangibly, they can offer a sense of the domestic market and help determine whether China s 1.3 billion people and its complex business and legal structure are profitably navigable for your company. Do you need to control the process of invoicing locally for services or products? If not, and you simply need a local presence capable only of the following permissible activities, then perhaps the RO is the most useful and inexpensive entity for your purposes. 2 DEZAN SHIRA & ASSOCIATES

3 ROs permissible activities ROs can be used for the following main purposes: Conducing market research and surveys Liaising with local contacts and suppliers Presenting and introducing a product to the China market Exchanging technology ROs can be very helpful in facilitating and establishing trade ties between your parent company overseas and your entities based in China. While ROs may not directly invoice for sales or services in China, they can act as a liaison in matters relating to orders, shipping payments of taxes, repatriation of money from clients and so on. Beyond this, ROs are accessible to a variety of investors because they have no registered capital requirement and have low maintenance. Invoicing in China Except in a select few industries, ROs are not permitted to invoice in renminbi or receive money from anyone but the parent company. Sidestep this restriction by having your overseas parent invoice directly in foreign currency (U.S. dollars, for example) to your China-based customer. If you don t already have an overseas company to do this, it is common to set up a Hong Kong off-the-shelf company to provide this function. Please see below. You should be aware that China-based customers increasingly want to pay their bills in renminbi and you will need to establish a wholly-foreign owned enterprise in order to facilitate this. It is important to note that an RO cannot be directly converted into a WFOE. Instead, the WFOE or trading company you wish to create must be separately established in full compliance with the normal procedures. The downside to this is the sizable registered capital requirement, which is at least a RMB100,000 (where one shareholder is present). Hong Kong companies as holding companies for ROs Setting up Hong Kong companies is quick, easy and inexpensive. We recommend that you purchase an aged, off-the-shelf company that company that has not traded and is at least two years old. Simply change all details to your requirements and set up a bank account in Hong Kong. You can then invoice in China using this company without an office. With about US$8,000 to 10,000 you can set up an office and keep it running. Be aware that withholding tax (usually 20 percent of gross services, though it varies) may apply to any invoices sent to China and factor this into your business plan. Staff and reporting responsibilities ROs must usually be located in Grade A buildings and must hire local staff via a payroll agent such as FESCO. Such agents are responsible for ensuring mandatory welfare payments such as pensions and unemployment funds are paid to local Chinese staff. Such fees plus the agent s mandatory service fee amount to about an additional 50 percent (with some regional variation) on top of the employee s salary. ROs must also register for tax and submit monthly reports (some regional variations here) and annual audits. The registration certificate for an RO is now only valid for one year rather than three years; all existing ROs will have a one-year valid registration license when they renew their current registration certificate. Taxes, tax exemptions, and audits ROs are subject to both business tax and corporate income tax in China, which usually amount to a liability of approximately percent of the total expenses of your RO. This should be calculated, filed and paid on a monthly basis. These are easy to budget for as they are mostly fixed costs, but be sure to work out a sensible tax structure for minimizing them legally. Effective from January 1, 2010, representative offices are no longer exempt from corporate income tax in China. ROs shall now pay corporate income tax on their taxable income, as well as sales tax and VAT. ROs are required to keep proper accounting records to ascertain their actual revenue and profits and file taxes on the same. Representative offices that cannot determine their profits on an actual basis must ascertain their deemed tax value by either using the cost-plus method or the actual revenue deemed profit DEZAN SHIRA & ASSOCIATES 3

4 method. Under either method, the new tax circular states that the deemed profit margin shall be no less than 15 percent, an increase from the previous deemed profit margin of 10 percent. Audits are conducted annually and need to be submitted by April 30th at the latest. Late payment of RO taxes can result in fines of up to five times the amount due. Additionally, foreign personnel must register for individual income tax. See the tax section of this guide for more on these issues. Application procedures These are somewhat bureaucratic and are a combination of two elements: 1) Documentation requirements Signed and notarized parent company documents Required documents include: Official office lease or purchase contract Certificate of Incorporation and/or Business Registration Certificate of the holding company In addition, you will need to prepare the following on original letterhead, translate into Chinese and submit in duplicate: Letter requesting permission to establish an RO Letter appointing the chief representative, including a signed resume, photo and identification documents Original bank reference in the company s name Landlord s documents Only certain buildings are allowed to house ROs and landlords who rent commercial property to foreigners must get permission to do so via a property rights certificate and duplicated business license chopped by the landlord s company. Your application will fail if he can t provide a copy of this, so make sure he has it before you sign the lease and part with any money. You also need a copy of the lease contract. Chief representative s documents Required documents include: A brief resume A copy of the passport Twelve color passport photos Chinese application documents Basically, these are the application forms that need to be signed and sent to you for completion in Chinese. 2) Application procedure The consolidated documentation is then submitted to several bureaus for registration the local industrial and commercial bureau, the tax bureau, and so on. Be careful that your consultant doesn t just leave the process here. Registrations at the tax bureau, with the PSB for expat staff residence permits and at the immigration bureau for expat staff work permits and visas as well as the opening of the bank account are all important steps. The application process should take three to four weeks. Relocating your representative office If the representative office changes the name of its office, the names or number of its representatives, the scope of its business, its duration or its address, it must tolerate a closing audit and then apply to the local State Administration for Industry and Commerce Bureau for approval by submitting related documents. Common investor mistakes when registering representative offices Commonly missing application documents Premises Make sure your landlord has a certificate granting permission to rent commercial property to foreign entities. This document is required for all RO applications and without it your application cannot proceed. However, this also places the landlord in a higher tax bracket, so many do not want to obtain the required certificate. If you sign a contract and pay a deposit without ensuring the documents are all in place you may lose the deposit as well as time on the application. Grade A building status Most cities require that the office is in a Grade A building. This certificate is issued by the Ministry of Commerce (MOC), and a copy is required as part 4 DEZAN SHIRA & ASSOCIATES

5 of the application. Fortunately, most cities now have a large number (and varying qualities) of Grade A buildings, so it is not as much of a choice or cost problem as before. Premises Ownership Certificate This needs to be provided by the landlord and with the company seal. Landlord s Business License This is also required with the company seal. RO Resident s Certificate This is issued by the property management company responsible for the building. Additional Shanghai regulations Shanghai has recently been developing more, and not less, official bureaucracy and administration somewhat out of step with its purported international image. These new regulations have also mainly been issued without prior warning and at great inconvenience to applicants with licenses pending. The main new procedure affects the lease agreement as follows: Notarized lease agreements Shanghai Additionally, Shanghai has fairly recently began requiring all RO applications to have the regional lease record certificate, which has to be obtained from the real estate authority. This document should be notarized as a true copy. An original copy also needs to be provided to the pertinent local Shanghai tax bureau and also the State Administration of Industry and Commerce. Government agents Shanghai Shanghai is also unique in that all applications for business licenses must go through government agents, adding another layer of cost and administration. Applications are effectively taken out of the hands of professional service firms and can be held up if a smaller or cheaper agent is used and then goes on holiday or is just lazy or overworked! Larger professional services firms tend to obtain better results when dealing with Shanghai s government agents due to the volume of business they put through them. Cheaper does not mean better service in Shanghai, or anywhere else in China for that matter. Common RO finance and administration problems RO bank accounts Many clients authorize their agent to open the bank account although in reality, they can do it themselves. However, in order to minimize inconvenience, time and effort, many agents just open the bank account without asking the client s input on how to manage it. There can be a conflict of interest if the agent is a friend of the local employee assisting you, and some security issues should be discussed before opening the bank account: Whether to use chops (company seals) to manage the bank account in addition to signatures as a means of adding an additional layer of security Whose signature and chops will be used for account management Whether other signatories can manage the account with differing responsibilities, and if so, who will that be Many agents will just o p e n t h e a c c o u n t w i t h c h o p s f r o m accounting and the legal representative, who is often a Chinese national appointed by head office, without checking the security preferences of the client s head office. It is quite dangerous for clients to wire their registered capital into an account that they know nothing about, and cases of money disappearing or being skimmed off are unfortunately far too common. Welfare payments to local employees Foreign investors commonly don t realize the extent of mandatory welfare payments that must be made to local staff employed in the China RO. These differ from city to city but always include pension, medical insurance, unemployment and a housing fund. Maternity and other payments may also be required. Typically, these amount to at least 50 percent of the entire salary. You must factor this into your budget and obtain correct advice on what and how much needs to be paid to avoid trouble later on. FESCO and other agents China, rather too handily, has a raft of government agents willing to help you with mandatory welfare payments. The grandfather of them all is FESCO, but other agents, such as China Star, also exist. While often very useful, they do of course charge for their services. It is a legal requirement to use them when employing staff via representative offices (it is not a requirement to use them for WFOEs or FICE). However, in their enthusiasm to generate your revenue, they can have a tendency to sell additional services that are not mandatory, such as insurance DEZAN SHIRA & ASSOCIATES 5

6 schemes, 13 month annual salaries, and special Chinese New Year bonuses and so on. You need to be aware of what is real and required, and what just lines someone else s pocket at your expense. Non-payment of taxes Su p p o s e a n RO d o e s n t pay the pertinent taxes due to confusion about local regulations, and inefficiencies at the tax bureau compound the problem by not flagging it and informing the company. This may seem to be good news, but in reality it isn t. Representative offices are subject to business tax of approximately percent of their expenses, which has to be calculated, filed and paid on a monthly basis. An annual audit is also required. On rare occasions, an RO can file for and obtain tax exempt status, but this must be approved by the local tax bureau beforehand. If taxes have not been paid, the tax bureau can fine you up to five times the total amount due plus the original amount. This can add up to a significant amount of money. Non-payment of taxes by ROs is a serious matter and you need to get into compliance from day one. If not, a day of reckoning will arrive, and if you wish to stay in China, the tax bill will need to be met. If you have tax non-compliance issues please, contact us for assistance. RO license alteration issues Penalties can be levied for license non-compliance issues if you don t renew and update licenses properly. If you need to change the chief representative, the address or any other details (say an overseas acquisition changes the parent company), then the Chinese authorities must be informed. Seek advice if you are not sure how to process these changes. They are inexpensive and relatively straightforward to make, but non-compliance can result in problems and fines. Taxes for ROs One very common mistake is to assume that ROs pay no tax because they cannot trade and thus have no income. But actually they must register with both state and local tax bureaus and are subject to business and foreign enterprise taxes if they are deemed to have received taxable income in the form of remittances from their home company to pay Chinese operational costs. In other words, the money spent on running the RO is deemed taxable, usually at a rate of percent. An RO chief representative is subject to individual income tax from the first day work commences. The chief representative s income tax will be calculated differently depending on the calculation method used to determine the RO s taxable revenue (see below). If the RO s taxable revenue is determined using the cost plus or deemed profit methods, the chief representative s IIT will be levied on the income derived from his or her work in China irrespective of whether it is paid inside or outside of China. Chief representatives of actual revenue tax calculating ROs determine their IIT in the same fashion as any expatriate in China. Additionally, employees of an RO, and everywhere else for that matter, with an annual income over RMB120,000 must self-report their income tax within three months of the end of the tax year. The tax bureau has the right to adjust the computation method in case of a mistake by the investor. There are three types of tax calculation methods for representative offices. Actual method the few ROs engaged in business advisory, legal, tax, accounting or other types of consultancy services would use the actual method to file tax returns. This means they need to set up their own accounting system to record revenues and expenses. Cost-plus method this is currently the most common method for RO tax filing. ROs engaged in trading, agency services, advertising, tourism and other types of related services shall apply the cost-plus method. Under this, the revenues are determined on a cost-plus basis and the expenses of running the RO are used in the tax calculation.the most common expenses faced by the RO are often rent, administrative costs and salaries. Deemed profit method this tax-calculation method requires special application as it essentially grants ROs tax-exempt status. ROs utilizing the deemed profit method shall pay taxes according to actual invoice generated revenue only, not including funds received from the parent company or head quarters for operating costs, etc. The tax bureau further defines which activities are taxable and which are not. Representative office annual audits Representative offices must face an audit each fiscal calendar year in China, and there are slightly different ways of preparing for this. The information below is limited to ROs that are expenses-based taxpayers, as most are. 6 DEZAN SHIRA & ASSOCIATES

7 Representative Office Negotiate lease with office landlord A Register lease with estate centre Appoint chief representative B Apply online to the State Administration of Industry and Commerce Chief representative signs the application form C D The RO now legally exists E SAIC issues registration certificate Public Security Bureau makes chops H Register with the State Adminstration of Foreign Exchange F Technical Supervision Bureau registers Enterprise Code Register with customs J G Register with local and national tax bureaus Complete statistics registration K I Open foreign exchange settlement bank account Procedures for Chief Representative's permits A B C Health check with designated hospital Work permit from SAIC, alien employment permit/certificate from Labor Bureau Residence permit from Public Security Bureau Open RMB bank account Get health check report Get work permit L * Please note variations may occur regionally and in specific industries that require additional licensing * Notes - there are some regional variations to this process 1. Shenzhen - SAFE registration/approval not required 2. Guangzhou - lease agreement does not need to be notarized; customs registration usually not required; foreign exchange account not required 3. Beijing - only commercial buildings can be used as registration address; some minor differences to registration of leasing agreement DEZAN SHIRA & ASSOCIATES 7

8 Cash are the bank statements and bank reconciliations correct? Foreign currency issues bearing in mind China s recent US$/RMB revaluation, is the transaction rate entered correctly? Fixed assets has FA purchasing been recorded into expenses? If not, has it been approved by the tax authority? Have FA disposal gains and losses been recorded into expenses? Funds from the parent company are these consistent with the parent company s records? Interest income and expenses have they been identified in the expense reports correctly? Expatriate individual income tax have high-level managers such as the chief representative calculated IIT and correctly assessed the pertinent rate? Has IIT withholding by RO been completed properly? Audit fees have the audit fees been accrued and separately entered? Are they listed in the expense report? Rental expenses have the rental expenses been accrued and separately entered? Are they listed in the expense report? Employer contributions to overseas social security plans if the employees are involved in the overseas social security plans, has this payment been included in the expense report? Expenses paid on behalf of the head office the expenses may need to be recorded into the expense report. This matter needs confirming with your local tax authority BT and CIT payments these tax payments should be excluded from the expense report Stamp duty is the RO subject to stamp duty? Unofficial invoices does the RO receive the unofficial invoices? If so, this can be subject to tax penalties. Business licenses and related administrative matters the annual renewal of all of your licenses such as registration certificate, tax licenses and so on. Registered local employees with FESCO and valid work permits for expatriate staff has all this been completed in accordance with the pertinent regulations? Your annual audit plan should be inclusive but not limited to these considerations. Please contact us if you are interested in setting up a wholly foreign-owned enterprise at following info@dezshira.com Alternatively, call any of our offices at the numbers listed on the back of this brochure. 8 DEZAN SHIRA & ASSOCIATES

9 Dezan Shira & Associates Asia Regional Offices China Beijing Sabrina Zhang Regional Partner Suite 701, East Tower Twin Towers, B-12 Jianguomenwai Avenue Beijing, Ningbo Lily Wang Manager Room 505 Shiji Jinmao Mansion 158 Baizhang Dong Lu Ningbo, Hangzhou Peter Thomsen Senior Associate Suite 1001 Xuefeng Mansion 346 Qingtai Lu Hanghzou, Delhi Chris Devonshire-Ellis Senior Partner Level 15 Eros Corporate Towers Nehru Place New Delhi, Bangalore Level 9, Raheja Towers Mahatma Gandi Road Bangalore, Vietnam Hanoi Hoang Thu Huyen Country Manager Room 1028, Pacific Place Bldg 83B Ly Thuong Kiet St. Hoan Kiem District Hanoi Vietnam Dalian Adam Livermore Senior Associate dalian@dezshira.com Dalian Ascendas IT Park Room 304, 1 Hui Xian Yuan Dalian HTIZ Dalian P.R. China Guangzhou Rosario DiMaggio Senior Associate guangzhou@dezshira.com Unit 1005, 10/F Tower B Center Plaza 161 Linhexi Lu Guangzhou, Zhongshan Lisa Qian Manager zhongshan@dezshira.com Room 513, West Wing Yi Hua Commercial Center Section 3, Zhongshan Lu Zhongshan, Mumbai Vikas Srivastava Legal Associate mumbai@dezshira.com Suite 303 B wing Leo Bldg 24th Rd., Khar (w) Bandra Mumbai, Kolkata kolkata@dezshira.com Level 6, Constantia Dr. U. N. Brahmachari Marg Kolkata, Ho Chi Minh City vietnam@dezshira.com /F Saigon Tower 29 Le Duan St. District 1 Ho Chi Minh City Vietnam Shanghai Olaf Griese Regional Manager shanghai@dezshira.com Suite Tian An Centre 338 Nanjing Xi Lu Shanghai, Shenzhen Alberto Vettoretti Managing Partner shenzhen@dezshira.com Suite 6309 Diwang Commercial Bldg 5002 Shennan Dong Lu Shenzhen, Hong Kong Hong Kong Joe Sze Manager hongkong@dezshira.com /F, Wharf T&T Centre Harbour City 7 Canton Road Tsimshatsui, Kowloon Hong Kong Chennai chennai@dezshira.com Regus CitiCentre, Level 6 10/11 Dr. Radhakrishnan Salai Chennai, For region specific inquires please call any of our listed offices or contact: info@dezshira.com