How to Set Up a Representative Office in Shanghai China,Recent Updates to setting up a Rep Office in Shanghai

Shanghai is located in the Yangtze River Delta. The municipality sits on the southern edge of the estuary of the Yangtze River in the middle portion of the East China coast. It borders the provinces of Jiangsu and Zhejiang to the north, south and west, and is bounded to the east by the East China Sea.

Shanghai is the commercial and financial center of China, and ranks 5th in the 2018 edition of the Global Financial Centres Index (and third most competitive in Asia after Singapore and Hong Kong) published by the Z/Yen Group and Qatar Financial Centre Authority. It also ranks the most expensive city to live in Mainland China, according to the study of Economist Intelligence Unit in 2017. It was the largest and most prosperous city in East Asia during the 1930s, and rapid re-development began in the 1990s. This is exemplified by the Pudong District, a former swampland reclaimed to serve as a pilot area for integrated economic reforms

There are 16 districts under Shanghai's administration: Songjiang, Changning, Fengxian, Jingan, Jiading, Jinshan, Baoshan, Yangpu, Xuhui, Qingpu, Huangpu, Hongkou, Minhang, Putuo, Pudong New Area, and Chongming.

When investors have plans on establishing representative office in Shanghai, it is better for them to acquire more information in order to run a successful business in Shanghai  China

Shanghai Representative Office Setup-Procedures 

Preparing all the needed documents→ fill out the application form→ sign the agreement with TCBC→ pay for the services→ submit all the needed documents→ name reservation→ apply for the business license and work card→ go to the public security bureau for stamp-make→ apply for Organization Code License & card→ apply for Setup license of the Local & National Taxation Bureau.

An RO has no legal personality, meaning it does not possess the capacity for civil rights and conduct, cannot independently assume civil liability, and is limited in its hiring ability. Chinese staff working for an RO, although not limited in number, must be employed through a human resources agency that will sign a contract with the RO on the one hand and with the Chinese staff on the other in order to ensure social security and housing fund contributions are paid on a regular basis. No more than four foreign employees can be hired per RO. Foreign staff working for ROs should have an employment relationship with the parent company abroad, and any disputes should be settled under the laws of that country

Recent Updates to setting up a Rep Office in Shanghai China,

The new restrictions

The January 2010 notice states that some rep offices have been operating outside of the restrictions—specifically, changing registration items without authorization, submitting false supporting registration documents, and conducting business operations illegally. The notice thus sets out several provisions to strengthen the administration of rep offices.

Registrations, renewals, and changes

A new provision in the notice states that foreign companies applying to establish a rep office in China must have been in existence for at least two years, as evidenced by an apostilled certificate of incorporation. This means that foreign companies must use established vehicles, rather than incorporate new SPVs, to handle their rep office operations. The notice also requires foreign companies to obtain and provide new apostilled certificates of incorporation each time they apply to renew their rep offices’ registration certificates—a potentially onerous process—and requires rep offices to renew their registration certificates every year.

Number of representatives

In addition to stricter registration and renewal requirements, the notice creates new bureaucratic hurdles for rep offices’ operations. Specifically, it limits the number of representatives that a company may appoint to four individuals, including the office’s chief representative. (Previously, there were no explicit limits on the number of representatives that a foreign company could appoint.) Existing rep offices that have more than four representatives may not appoint additional representatives, though the notice does not specify whether such offices must reduce this number to comply with the new rules. One local SAIC official in Beijing indicated that reduction would likely be unnecessary unless a rep office applies to SAIC to make changes to its registered representatives. (In addition to SAIC’s registration requirements, the PRC government has found practical ways to enforce the rule, such as refusing to issue visas or work permits to foreign employees of rep offices that have more than four registered representatives.) The notice also does not specify whether the restrictions would apply to rep offices of companies in industries that require regulatory approval. Local SAIC officials have provided different answers to this question, likely because of the limited number of registration applications that have been received since the notice was issued.

Spot checks

The notice states that local SAIC branches will perform spot checks on rep offices within three months after the registration certificates are issued. Rep offices found engaging in direct operations may be subject to administrative fines, and those discovered to have moved without updating their registered addresses or operating without valid registration certificates may be subject to increased scrutiny by the authorities.

Is a rep office still worth it?

Though rep offices have no capitalization requirements, some foreign investors have long debated whether opening a rep office was worth the time and effort due to the limited scope of its permitted business activities. Given the recent tighter restrictions on rep offices, more companies may begin their China operations with a WFOE, which can conduct revenue-generating activities directly. Furthermore, increased localization of approval procedures and decreased capital requirements have made establishing a WFOE less onerous.

Setting up a rep office may thus be the best choice for a foreign company that is mainly interested in promoting its overseas products and services and establishing networking relationships between Chinese businesses and their overseas operations. In addition, for some entities—such as foreign law firms and certain nonprofit organizations—a rep office may be the only option for conducting their China operations.

Many foreign companies are finding that the question is not simply whether they should set up a WFOE or a rep office, but rather how they can best take advantage of the vehicles available for foreign investment through a multifaceted approach. Because various investment vehicles and industries are subject to different regulations and authorities, a foreign company may find it advantageous to set up multiple rep offices, WFOEs, and Sino-foreign JVs. The different permitted business scopes of these various investment structures may allow companies to conduct more business in China. The correct approach for investing in China largely depends on the particular industry and the specific goals of the company.

Recent Updates to Representative Office Tax Law

The PRC government earlier this year issued new measures that promise significant changes to how foreign representative (rep) offices calculate and file taxes in China. The changes bring China’s law on rep office taxes in line with the 2007 PRC Enterprise Income Tax (EIT) Law and may subject rep offices to new tax requirements and potentially higher tax burdens.

According to the Provisional Measures for Foreign-Enterprise Representative Office Tax Administration, which were released by the PRC State Administration of Taxation in February 2010 and took effect retroactively from January 1, 2010, foreign rep offices must now declare and pay income, business, and value-added taxes on income attributable to the rep office. Previously, rep offices could negotiate EIT exemptions with local tax bureaus on the basis that their rep office activities did not generate revenue. Under the new measures, local tax bureaus can no longer accept new rep office applications for EIT exemptions and must re-evaluate the applications of rep offices that enjoy existing exemptions. Only rep offices that have protection under a relevant double tax agreement may be considered for EIT exemptions.

The measures also clarified tax registration procedures for rep office staff and offered three formulas to calculate tax liability, depending on how complete the rep office’s financial records are:
◾Actual amount method Used when the rep office has kept complete records of its expenditures and revenue, this method is comparable to the tax calculation standard laid out in the EIT Law. (Though rep offices typically do not engage in traditional profit-making activities, income has been assessed—and tax levied—based on the services they provide.)
◾Actual-revenue-deemed-profit method The tax authority will use this method when the rep office has kept complete records of its revenue but not its expenditures. The reported revenue is multiplied by the tax rate and a “deemed profit rate,” which can be no less than 15 percent.
◾Cost-plus method This method is used when the rep office has kept complete records of its expenditures but not its revenue. In this case, the tax authority will generate a figure to indicate revenue: Revenue = expenditures / [1 – deemed profit rate – tax rate].

This figure will then be multiplied by the determined profit rate and tax rate to calculate tax liability.

The cost-plus and actual revenue-deemed-profit methods empower local bureaus to determine the formula that rep offices must use to calculate their income tax liabilities, using the all-important deemed profit rate. The new measures increased the minimum rate from the previous 10 percent to 15 percent. Because 15 percent is a base rate, however, local tax bureaus may have the discretion to apply a deemed profit rate that is even higher. The new rules thus create a strong incentive for rep offices to keep accurate records of their revenue and expenditures to avoid using the deemed-amount method to calculate tax liabilities.

  

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