Why choose ODM Buying Office?
The ODM Group understands that many foreign companies which are interested in the investment to mainland China
And want to set up their business in China are often faced with
such a question - to set a foreign representative office (Rep. office)
or a wholly foreign owned enterprise (WFOE)? Which way is suitable for
the status quo of the company?
These two kinds of establishment are both organizational structures of commercial organization established by foreign companies in China, with the differences as follows:
1. Different Functions and Roles
The biggest difference of the two kinds
of organizational structures lies in the functions, which lead to
different liabilities and roles.
Generally speaking, a Representitive Office (RO) representative office act as the spearhead of foreign enterprises in China, exists for the liaison and market promotion, with main functions of operation natures of liaison, preparation and assistance in mainland China in assisting the parent companies.
A Representitive Office (RO) itself has no qualification of a legal
entity, with incomplete economic functions to engage in the commercial
activities with common significance. A representative office cannot
directly sign contracts with suppliers or customers in its own name and
is not entitled to apply for the independent license of import/export,
to apply for the qualification of a general taxpayer, to employ staff
independently and to open an L/C account in banks. The expenditure of
the representative offices must be from the remittance of the parent
company overseas. It's not possible for A Rep. Office to issue invoices
(Fapiao) to its clients.Generally speaking, a Representitive Office (RO) representative office act as the spearhead of foreign enterprises in China, exists for the liaison and market promotion, with main functions of operation natures of liaison, preparation and assistance in mainland China in assisting the parent companies.
In the case of the a Representitive Office (RO) of the commercial companies, representative offices are often establish under the following circumstances:
A. In the initial stage for a foreign company to invest in China, there is not much market information available. By establishing a representative office with fewer employees (generally no more than a staff of 10 employees), initial market situations can be obtained, commercial opportunities developed, company image set up and contact with cooperation partners established.A Wholly Foreign Owned Enterprise (WFOE) can be described with much more simple words, that is, with complete functions of a company, entitled to perform all duties of a common company, including signing contracts, employing staff, applying for the license of import and export, issuing various invoices, opening various accountants and engaging in financing etc. independently, on which it would be unnecessary for us to go into more details.
B. In the case that initial contact has been established with domestic enterprises, but the domestic suppliers can directly contact the foreign parent companies, including the signing of contract and delivery of goods in an industry, a representative office is more preferable for the supervision and day-to-day liaison.
From the perspective of the dynamic functions of a company, a wholly foreign owned enterprise (WFOE) is far more advantageous than a representative office in its applicability, flexibility and expandability and the customers are expected to choose the organizational structure based on their actual situations.
2. Different Attitudes of Government
The entry permit and supervision of the government on the 2 organizational structures are different, generally loose for representative offices and strict on wholly foreign owned enterprises, which can be clearly seen from the industrial entry permit, taxation arrangement and approval of establishment etc.
3. Difference in Tax Policy
There exists a big difference between the tax policies for a Representitive Office (RO) and for a wholly foreign owned enterprise as follows:
The representative offices can be divided into 3 categories:
A Representitive Office (RO) established by for foreign law firms,
auditors, financial companies etc. in China. Owing to the fact that the
services of such representative agencies in China can be regarded as
service extension of their parent companies overseas, the business
engaged in by the A Representitive Office (RO) are not so different with
those handled by WFOE.
These Rep. Offices belong to a special category, which are allowed
to purchase invoices and pay taxes based on the normal rate of taxation.
A Representitive Office (RO) established by foreign company in the
fields of services, trade and agent business (belonging to the
representative offices in common sense)
The official definition of them is as follows: The foreign
permanently-based representative offices act as go-betweens for the
customers of their parent companies in the services of introduction and
agent business or provide their parent companies and subsidiaries with
services (except for the companies which directly commit the
permanently-based representative offices), which cannot supply accurate
data and vouchers such as contracts and agreements to make correct
declarations on the income or permanently-based representative office
which cannot supply sufficient certifying documents to prove where they
handle their own products or handle products for others. The estimated rate of tax is approximately 10% of the expenditures.
A Representitive Office (RO) of foreign governments or non-profitable international organizations in China or those which can present certifying documents to show that they handle their own products instead of products of other companies.
After going through the tax exemption verification by the tax authorities, such representative offices are entitled to apply for tax exemption.
Tax of wholly foreign owned enterprise is identical to that of the
ordinary companies, to be levied based on the current tax policies of
China, usually subject to a business tax of 5% of the incremental income
or a VAT of 17%, income tax of 33% or 15%, as well as other taxes.
4. Difference in Employment
The representative offices are not entitled to employ the staff directly, which must be processed through a third-party intermediate agencies with relevant qualifications. The wholly foreign owned enterprises in China are allowed to employ their staff directly and pay the salary for the employees.
5. Difference in Financial Services
The representative offices may open account in bank and accept the payment in foreign currencies. However, it can only be used for the day-to-day expenses. They are not allowed to open L/C accounts in banks and to accept other more extensive financial services.
6. Difference in Conditions for Establishment
It is required for the establishment of The ODM Group (RO):
Business license of their parent company as well as the certificated by the Chinese consulate;
In Shanghai, it is required that the foreign representative office must lease an office building particularly for the foreigners as their registered addresses, say Grade A building with the certification issued by Shanghai Foreign Economic Relation & Trade Commission, while there is no such a requirement for WFOE.
In Shanghai, it is required that the foreign representative office must lease an office building particularly for the foreigners as their registered addresses, say Grade A building with the certification issued by Shanghai Foreign Economic Relation & Trade Commission, while there is no such a requirement for WFOE.
There is no requirement on the register capital for the establishment of a Rep. office while WFOE are required to inject the registered capitals in conformity with the investment scales.
