How to Set Up a Representative Office in China
Rep offices can be the easiest way to establish a China presence
After your first visit to China, you may realize that doing business in China requires a local presence from your firm to facilitate business communications, or you may wish to further assess the size and potential of the China market for your business before investing committed resources.
For many companies entering China, the next step is to consider setting a representative office, which is the fastest and the most economical way to competitively position your firm’s presence in China. But first, you need to understand if a representative office’s structure is the most appropriate for your firm’s China’s market entry strategy.
Why Set Up a Representative Office?
A representative office’s primary functions are to conduct market research and to coordinate the parent firm’s activities in China. This includes serving as a liaison with local contacts, negotiating contracts, providing warranty and after-sales service, and offering import, export and distribution services.
In addition to facilitating your operations, your representative office demonstrates your company's commitment to the market and serves as the face of your company in China, therefore an above average office environment will help create a good impression on potential Chinese partners or clients when they visit your office for discussion.
A representative office in China not only demonstrates your firm’s commitment to stay competitive in China, it also helps to improve communication between partners and in turn building up the much needed “guanxi” (relationship) for more business opportunities and cooperation.
Regardless of the nature of your business and its intended operations in China, the location of your representative office cannot be overlooked in the market entry process. Most representative offices are often located in major cities like Beijing, Shanghai, Guangzhou and Shenzhen, as these cities offer higher agglomeration of the same industry players. However, second or third tier cities should also be considered for an early-mover advantage into the China market.
Restrictions on Representative Offices in China
While having a representative office in China has many benefits, there are some important restrictions on what these offices can be used for. Unlike a corporate structure such as a Wholly Foreign-Owned Enterprise (WFOE) or a joint venture, a representative office is not allowed to conduct profit-making activities such as collecting payments or issuing product or service invoices. Additionally, the representative office can only represent its parent company for its existence in China. Furthermore, recruitment of staff cannot be done directly through your office but has to be accomplished through a local human resource agency.
So, if you are considering establishing a manufacturing or processing facility in China, or even doing direct distribution of imported products, then a wholly foreign owned enterprise (WFOE) will be a better option, but would require a higher capital injection.
A point to note is that, even if you have set a WFOE in a city where your manufacturing facility is based, you may want to consider having a representative office in your target sales cities to facilitate business operation. On the other hand, a good distribution partner with regional coverage can help to rectify this problem.
Steps Required to Register a Representative Office
The time and fees required to set up a can vary according to how the procedures are implemented by the district or city you have chosen for your location, as well as by the familiarity of the individuals implementing the procedures on your behalf with the steps involved. However, in general, setting up a representative office in China involves 4 stages and the entire process can be expected to take 4-5 months to complete.
Stage 1 - Pre-Application
Once you have chosen a city and district for locating your representative office, the next step is to choose an agent to implement the procedures on your behalf. While there are many consulting companies or law firms who can take care of this for you, another option is to approach the local Ministry of Commerce (MOFCOM) for the contacts of a local designated foreign enterprise service company (FESCO) who will be in charge of your representative office application process. You should expect to pay approximately $800 to $1000 to a designated FESCO for assisting you with the administrative procedures as well as paying the various government fees involved.
In addition, a signed lease agreement is a pre-requisite for approval; therefore it is vital to secure a lease for office space before submitting the application. Be sure when negotiating the lease with the landlord that you find out whether the space can be legally rented to foreign companies and used as the legally registered address of a foreign company. This usually means that converted apartments or low-grade office space is not an option.
Stage 2 – MOFCOM Application
Generally your application approval is taken care of directly by MOFCOM, however, in certain sensitive industries, such as banking, insurance, law, accounting and media, you may need to get prior approval from the government authority that has jurisdiction over your industry sector. Once approved, by MOFCOM, your company will be granted a Certificate of Approval certifying your legal presence for the next 3 years.
Stage 3 – Securing a Business License
Once your application is approved, the next stage is applying for your representative office’s business license, which must be completed within 30 days of your approval by MOFCOM. The application – together with the supporting documents – should be submitted to the local State Administration of Industry & Commerce (SAIC). The approval process normally takes about 1-2 months time, after which the license will need to be renewed every year.
Stage 4 - Post Registration Procedures
Once your representative office is approved by the SAIC, there are still a few more steps to ensure compliance with government regulations:
It is expected for your representative office will register with the local police (Public Security Bureau) as well as with the local and national tax bureaus.
You should make financial and corporate seals as it is a practice in China to use them on official documents.
Opening a foreign exchange bank account will help facilitate overseas fund transfers.
While these tips provide a good outline for establishing a representative office, any such transaction requires individualized preparation in order for it to be successful.
Desmond Wang is a consultant at Starmass International. The consulting firm has offices in Beijing and Hong Kong and specializes in helping Southeast Asian, European, and American companies prepare to enter the Chinese market.