What is a Sales Office?
Utilizing a Professional Employment Organization (PEO) and opening a Sales Office when entering the Chinese market is one of the methods that is gaining more and more popularity from foreign companies. Whether the business is a large enterprise, SME, freelance, or a start-up, the sales office option can be beneficial from various aspects. This of course depends on each company’s needs and future prospects but for the majority of cases, an enormous amount of time and effort can be saved by choosing to open a sales office compared to other options.
A sales office in China is formed by the outsourcing of the legal and administrative management of a foreign company’s representatives to a HR agency (PEO) in China. Furthermore, the main objective of a sales office is settling an enterprise in China via its representative without any financial or legal hurdles. A key factor is that a sales office can only be established by the form of labor dispatch through a PEO.
Sales offices, one of the Chinese business models accepted by the People’s Republic of China has its distinct advantages and disadvantages. It is imperative to keep in mind that one must evaluate their ability to meet corporate goals and financial objectives while minimizing all possible risks.
Most imperatively, the costs of a sales office are also very attractive. There is no minimal capital investment required.
Additionally, no taxation nor administration fee is involved in the registration process, only during the operational process (For example, if the employee is Chinese, income tax and social security fees will occur. Whereas foreign employees will only be subject to income tax). Not to mention, the establishment phase only takes one month which is a less time-consuming solution compared to other alternative solutions.
Despite its advantages, the sales office solution also has its limitations. Primarily, sales offices cannot issue any fapiaos (invoices). They must invoice via a PEO. Furthermore, the firm’s funds kept within China are administrated by the dispatched employee’s administrative partner. Which indicates that all funds and benefits are directly transferred out of China. In addition, companies cannot request credit from banks and also cannot purchase any real estate in China.
How it Works
The sales office’s flexible structure allows a firm to promote itself commercially and restriction-free. There are hundreds of hosting platforms and work stations in every city in China. Although as mentioned previously, one must be sure of one’s special needs and objectives in order to find the right system for the company. It is also important to keep in mind that a foreign company can only open a sales office in China through a PEO.
Due to the fact that foreign investors can’t present the documents themselves, every company wishing to establish a WFOE also has to pass through a PRC agency (local Chinese certified agency) that will conduct the submission process.
In most cases, when a foreign company chooses to use the sales office method, this indicates that the company’s main and prime objective is to enter the Chinese market in a less time consuming and efficient manner.
- The first phase in the process of establishing a sales office is to create a physical representation in China. In order to authorize a sales office in China, the local structure of at least one employee in the mainland is necessary. Under these circumstances, the company has two options; either to delegate a representative from the company’s home country to China, or hire a Chinese employee.
- Then, the foreign company finds a PEO and together, decides what type of rental is best to establish the sales office, the geographical location and the size of the office, etc. (these aspects do not alter the employee’s legal or administrative situation). With the assistance of the PEO, it is the foreign enterprise’s responsibility to install its employees in China in the best conditions in order to facilitate the company’s growth and satisfy the local needs (such as client proximity, suppliers and partners, local team diversification, etc.).
Opening a sales office via labor dispatch can be beneficial for many different industrial sectors but especially for the wine sector. Many successful cases have been witnessed with wineries from France, Spain, Chile, etc. entering the Chinese market via a sales office. In China, the wine industry is rapidly developing every year, especially in wealthy cities such as Beijing, Shanghai, Chongqing, and Shenzhen. This is mainly because of the influences of the western culture and the materialistic mindset of the Chinese people. Many Chinese people think that being able to afford and drink wine gives you a title or status of wealth.
When entering the Chinese market, many foreign wine distilleries do not need to delegate many employees. Usually having one to three representatives in the mainland will allow them to operate and make profit. Thus, opening a sales office via labor dispatch is often most beneficial for companies that can operate even with a small amount of employees. It mainly depends on how many people a company wants to delegate.
The Latest Market Entry Trend
So what has been increasingly seen in China market-entries from foreign companies? Foreign companies are utilizing a sales office via labor dispatch to initially establish themselves in China while simultaneously starting the procedures to establish a WOFE. Considering the fact that a WOFE can take as long as up to 18 months to establish, they are choosing to start off with a sales office while in the meantime going through with the process of applying for a WOFE. By doing so, when the sales office contract expires, the WOFE will be ready. This will allow the transition to go smoothly in a time efficient manner. Moreover, the administrative tasks will be managed by the local partner so the foreign company will not have to deal with any complicated procedures
As the benefits of utilizing a sales office have become more globally known, more and more foreign companies are trying to physically establish themselves in China using this method. However, the downside to this phenomenon is that the increase in sales offices have made the Chinese government more aware, strict, and cautious of the laws and regulations regarding labor dispatch. Therefore, in order to prevent illegal establishment of foreign enterprises, the Chinese Ministry of Human Resources and Social Security has stated that a foreign enterprise cannot have more than 10% of its employees working in China. That is why most foreign companies only choose to send one or two employees to work in the sales office in China.
In conclusion, a company must carefully think through all of its needs and find a solution that best meets its needs when expanding to China. All in all, a sales office via labor dispatch is recommended for companies who are certain that they want to enter the Chinese market and establish a presence for a long-term but only need to delegate a few representatives in order to develop their products, brand-image, and professional network.
For more information or advice on setting up a sales office in China, please contact INS Global Consulting.
See Also: How to start a business in China