The Differences between a Representative Offices and a Sales Offices in China
When a foreign company is contemplating to enter the Chinese market and expand its business, there are a number of solutions available. Some of the most common solutions include Sales Offices, WOFEs (Wholly Owned Foreign Enterprise), Representative Offices, and Joint Ventures. Since each and every company has its own objectives, interests, and needs, it is imperative to determine which form of establishment best suits them. Two forms of establishment that are quite sought-after are ROs (Representative Offices) and SOs (Sales Offices via labor dispatch). These two solutions may be slightly vague as to how they differentiate them from one another. Thus hopefully through this article, firms will be able to have a better understanding of the differences between representative offices and sales offices.
So What are the Differences between a Representative Office and a Sales Office in China?
The Representative Office in China (also sometimes known as a Liaison Office) is a separate legal entity that represents a foreign company in China (Hongda). This solution is considered an inexpensive and easy method to create a legal entity. However, it is often not recommended due to the fact that there are many operational limitations. This form of implementation allows foreign companies to perform marketing and research activities in order to see if China is a viable option.
Nonetheless, further advantages a representative office has include:
- Study the market in another territory while promoting the foreign company
- Create a contact network, gather information and develop advertisement
- Rent commercial and residential premises
- Engage in other activities that are not intended to generate profit
When having a RO, firms cannot sign contracts or bill customers. Due to the limited operational range, the average duration of a representative office is usually 2 years. As for taxation, ROs are subject to a number of different taxes depending on factors such as the business plan, location, etc.
The effective tax rate is equivalent to 11% of the company’s spending in general. Furthermore, the representative office must be at least two years old as a company and the representative office certificate will last for as long as the foreign parent company exists. Apart from the fact that firms cannot participate in profit-making activities and is therefore limited to secondary business activities, firms can also not take part in any contracts with customers involved in China, may not trade or do business with external entities, and an office space must be rented before starting the setup process.
Another factor that can be difficult is that when a firm wants to change its establishment to a WOFE from a Representative Office. The firm cannot simply submit its request to the Chinese government and pay the conversion fee. Rather, the firm must go through the hassle of shutting down the representative office and go through the whole process of forming a WOFE from scratch, which can take up to 6-18 months.
A Sales Office via labor dispatch 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. Establishing a SO requires the employee’s his or her physical presence in the mainland. By doing so, the foreign company utilizes the PEO’s legal structure in order to commercially operate in China without any restrictions. The client enterprise does not necessarily need to have a direct employment relationship with the dispatched employees. However, the client enterprise will use the dispatched employees for work based on a service contract with the PEO.
Establishing a SO can allow firms to operate and promote their services with flexibility and no restrictions. Also, since a local HR agency will handle all of the legal and administrative procedures, the client enterprise and dispatched employees can focus 100 percent of their time and energy towards their business and other affairs.
For instance, a foreign company carefully considers its needs and objectives and comes to the conclusion that establishing a SO through the form of labor dispatch is the best way of establishment in China. In most cases, this indicates that usually the company’s main and prime objective is to penetrate the Chinese market in the less time consuming, efficient manner. In order to establish a SO in China the local structure of at least one employee in mainland China is necessary. Under these circumstances, the company has two options; either to delegate a representative from the home country of the company to China, or hire a Chinese employee.
A scenario that is seen quite frequently is companies choosing to dispatch a multilingual Chinese employee who has experience living in the home country of the company, to work in the SO. For example, many French and Spanish clients at INS Consulting choose this method. This is because dispatching an employee who is familiar with the local customs and business etiquette enhances the efficiency by making it easier to communicate thoroughly with clients, suppliers, distributors, and partners both in China and abroad. In most cases, this increases the probability of the company growing and developing with minimum hardships.
Furthermore, the advantages of choosing a SO is the flexibility, operational costs, and availability that comes along with it. First of all, a firm will have the freedom of choice regarding company activities, clients, partners, and suppliers. The costs of a sales office is also very attractive. There is no minimal capital investment required except for a deposit in the beginning. Additionally, no taxation nor administration fee is involved in the registration process, only during the operational process (e.g. if the employee is Chinese, Income tax and social security fees will occur). 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 SO solution also has its limitations. Firstly, all payment procedures and transactions are supervised by a local invoicing/payment partner.
Secondly, 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.
The benefits of utilizing a RO and SO via labor dispatch have become more known throughout the world, more and more companies are trying to establish themselves in China using these methods. The increase in ROs and SOs have made the Chinese government more strict and cautious of the laws and regulations regarding labor dispatch. In order to prevent illegal establishment of foreign enterprises, the Chinese Ministry of Human Resources and Social Security has stated that an 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 ROs or SOs in China.
In conclusion, it is hard to say which solution is better or worse. Rather, a company must carefully think through its needs and find a solution that best meets its needs when expanding to China. All in all, a representative office is recommended for companies that want to research the Chinese market beforehand. Whereas, 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.