Representative Office or WFOE: Differences, Benefits, and Threats
But what are the main differences between these two types of structures? Why choose one over the other? Which is the most suitable for my situation? This guide will answer all your questions and clear up many of your doubts. Keep reading.
Introduction
What is a WFOE?
A WFOE (acronym of Wholly Foreign-Owned Enterprise) is a limited liability company with legal personality, wholly owned by a foreign investor.
WIth a WFOE is possible to directly sell goods and services in China, invoicing customers and receiving revenues in RMB. With this kind of entity is possible to convert the profits in RMB into US dollars to remit them to the Parent Company (PC) outside of China.
A WFOE can be used to protect intellectual know-how and technology of a company, and to fully hire and control human resources, having a great efficiency in operations, management and future development.
What is a Representative Office?
A Representative Office cannot be directly engaged in commercial activities for profit and has been conceived as a liaison entity between the parent company based abroad and the local market.
A RO cannot therefore sell goods or services directly, cannot enter into contracts or business on behalf of the Parent Company, cannot collect money or invoices in China for services or products, cannot purchase property or import production equipment.
What an RO is allowed to do is conduct research for its Parent Company (PC) in the local market, maintain contact with local and foreign contacts in China on behalf of the PC, conduct research and provide data and promotional material to potential customers or partner, and to act as a coordinator for the activities of the PC in China.
Types
Types of WFOE
There are three different types of WFOE: they can be registered as Service WFOE, Trading WFOE or Manufacturing WFOE. Usually the Trading WFOE (also called FICE) and the Manufacturing WFOE are expected to generate the majority of their income from import / export and manufacturing respectively.
Types of Representative Office
There is only one type of Representative Office.
Legal Status
WFOE Legal Status
Full legal personality.
Representative Office Legal Status
No legal personality, no full rights capacity.
Time Required for Setup
TIme Required to Setup a WFOE
Approximately 2 months, after the application and with documents provided in good order.
TIme Required to Setup a Representative Office
Approximately 2 months, after the application and with documents provided in good order.
Ownership
Ownership Structure of a WFOE
The WFOE can have individual or corporate ownership and the owner can be any foreign individual or corporation. The Parent Company does not need to be 2 years old and its obejct matter is mostly irrelevant. Ownership of a WFOE can be transferred with a procedure that takes almost as long as creating a new one.
Ownership Structure of a Representative Office
The Parent Company of a Representative Office must be a foreign company that has existed for more than 2 years and whose object must be a legal activity, preferably generic or related to consultancy services. An RO cannot be transferred, its existence is linked to that of the parent company.
Minimum Required Capital
Minimum Required Capital for a WFOE Registration
It is officially required, but in reality there are no minimum requirements stated. For a Consulting WFOE we suggest funding around 60,000 USD, while for a Trading WFOE might be better go for 100,000 USD. You can choose to pay initially only a part of the capital and then send the rest at a later time.
Minimum Required Capital for a Representative Office Registration
Although officially not required, in reality, you will still have to regularly send money from the Parent Company to finance local operations (rent, salaries, furniture, computers, and so on).
Control from Authorities
Control from Authorities with a WFOE
As WFOE is a “real” company, the authorities will check the compliance with accounting and tax laws more carefully.
Control from Authorities with a Representative Office
Light, because the RO has little or any power in China and the tax treatment is quite straightforward.
Naming
Naming of a WFOE
The WFOE is allowed to have any name, even different from the Parent Company, as long as it is not too generic, restricted, or already in use by other companies.
Naming of a Representative Office
The Representative Office naming follows specific rules and is composed as follows: PC country + PC name + Shanghai Representative Office. For example, if the PC name is XYZ and it is in Cyprus: “Cyprus XYZ Shanghai Representative Office”
Business Scope
Business Scope of a WFOE
Approval for specific business areas must be sought upon registration. After registration is completed, the company must not operate outside of these areas.
Business Scope of a Representative Office
A RO can carry out only Marketing and/or PR activities, and only for the products sold by the Parent company as indicated in its Articles of Association.
Legal Representative
Legal Representative of a WFOE
One legal representative (can be a foreigner).
Legal Representative of a Representative Office
One legal representative (can be a foreigner).
Supervisor
Supervisor of a WFOE
Required (can be a foreigner).
Supervisor of a Representative Office
Not required.
Taxation
Taxation of a WFOE
A WFOE is a commercial company subject to VAT. Additionally, a corporate income tax of 25% also applies, although there are solutions to keep those taxable amounts to a minimum. The WFOE is generally much more tax efficient than the RO.
Taxation of a Representative Office
The RO pays taxes on their own costs and the rate is about 13% of the costs incurred through the entity activities. You can pay some costs directly from your Headquarter, or through us to save on taxes.
Invoicing
Invoicing for a WFOE
The WFOE can issue standard invoices and, after an optional additional procedure, tax invoices as well.
Invoicing for a Representative Office
The RO cannot issue invoices or receipts.
Bank Accounts
Bank Accounts for a WFOE
The WFOE can access and receive money, pay bills, issue cheques, withdraw cash in China, pay and receive payments to and from any country.
Bank Accounts for a Representative Office
The RO can only receive money from the Parent Company and it can only pay its providers, while it is not allowed to receive payments from clients or from any other third party.
Hiring Personnel
Hiring Personnel for a WFOE
A WFOE can hire personnel directly.
Hiring Personnel for a Representative Office
The RO can have up to 4 representatives, but it cannot hire local employees directly and it needs to go through a government-authorized HR agency.
Number of Employees
Number of Employees of a WFOE
A WFOE can hire as many employees as it wants without attracting attention.
Number of Employees of a Representative Office
Officially a RO cannot have more than 4 employees, but usually a higher number is tolerated. However in the case of hiring more than 10 persons, then authorities might get suspicious.
Office Space
Office Space for a WFOE
A 12 months real or serviced office lease is a prerequisite for a WFOE registration.
Office Space for a Representative Office
A 12 months real or serviced office lease is a prerequisite for a Representative Office registration.
Auditing
Auditing of a WFOE
A WFOE does not have to be audited every year.
Auditing of a Representative Office
A Representative Office is required to be audited every year.
Still have some doubts about which corporate structure is suitable for your needs? Would you like further clarification on how to start and grow in the Chinese market? Do not hesitate to contact us at info@chinalyse.com.
