China Changes Rules of Registration and Taxation of Representative Offices of Foreign Companies in China
Since 1980s, Foreign investors used to choose to set up Representative Offices (“ROs”) in China to assess the market opportunity before setting up of Foreign Invested Enterprises (“FIEs”). The advantage of ROs consists in simple registration procedure, no requirement of registered capital, no strict accounting requirement and relatively low tax burden.
However, ROs also has its disadvantage, that is, on one hand, the Administration for Industry and Commerce (“AIC”) does not allow ROs to carry out business or receive income in China; on the other hand, the tax authority deems that ROs in China contribute values to the income of their overseas head offices, and shall pay taxes in China.
Recently, new rules have been issued by the authorities in China to impose more strict requirements on the administration of registration and taxation of Ros, the first ones with immediate enforcement and the second ones with retroactive effect from January 1st 2010.
Notice of the State Administration for Industry and Commerce and the Ministry of Public Security on Further Strengthening the Administration of Registration of Permanent Representative Offices of Foreign Enterprises issued on 4 January 2010 (“Notice”)
New requirements on registration of ROs:
1. When applying for establishment or change of name, a RO shall submit to the competent AIC the bank credibility letter and the registration certificate of its overseas head office proving the existence of the overseas head office for at least 2 years, both of which shall be legalized by the Embassy of China after being notarized by a notary public of the country/region where the head office is located.
– The requirement of the existence of the overseas head office for at least 2 years is a new change.
– The requirement of notarization and legalization of the bank credibility letter is a new change.
2. When applying for renewal of the RO, it shall submit to the competent AIC the document proving the existence of its overseas head office issued by the relevant authority of the country/region where the head office is located.
– Generally, such document proving the existence of the overseas head office shall be the valid registration certificate of the overseas head office.
– According to the oral reply of Shanghai AIC, such document should be notarized and legalized, too.
3. The valid term of the registration certificate of RO granted by the AIC at the time of establishment or renewal of the RO shall be 1 year only instead of 3 years.
– The RO which already obtained a registration certificate with valid term of more than 1 year is not mandatorily required to shorten the valid term. However, if such RO applies to change the registration or to renew the registration certificate, the valid term of the new registration certificate will be changed to 1 year only.
– It means that the RO shall be renewed once a year by submitting the notarized and legalized valid registration certificate of its overseas head office.
4. The number of the representatives in a RO shall not exceed 4 people (including the chief representative).
– The RO which already has more than 4 representatives is not mandatorily required to reduce the number of representatives. However, such RO is not allowed to add new representative.
– The Notice does not mention the nationality of the representatives. According to the oral reply of Shanghai AIC, the restriction on the number of representatives applies to both foreign representatives and Chinese representatives.
– At current stage, there is no restriction on the number of Chinese employees in a RO.
5. The competent AIC shall carry out on-site check within 3 months after issuance of the registration certificate of RO.
– The main purpose of on-site check is to prevent “fake” registered address, i.e. the RO is not actually located at its registered address. However, the AIC may also examine the operation of the RO. If the RO is found to carry out business operation and receive any kind of turnover, it will be punished based on the regulation of business operation without a license. If the situation is serious, even the public security organ may be involved.
Provisional Measures for Taxation of Permanent Representative Offices of Foreign Enterprises issued by the State Administration of Taxation (“SAT”) on 20 February 2010 (“Measures”)
New requirements on taxation of ROs:
1. The ROs as mentioned in the Measures refer to the permanent representative bodies of foreign enterprises (including of Hong Kong, Macao and Taiwan enterprises) and other organizations which, upon registration with the AIC or approval from relevant departments, set up in the territory of China.
– The Measures apply not only to ROs of foreign enterprises, but also to ROs of foreign government, international organization, non-profit institution and non-governmental organization.
– The local tax authority no longer accepts the RO’s application for exemption from Corporate Income Tax (“CIT”) under the old rules. If a RO believe that it is eligible for exemption from CIT pursuant to a relevant tax treaty or tax arrangement, it may apply to the tax authority for the exemption in accordance with the Administration Measures on the Application for Preferential Treatment under a Tax Treaty by Nonresidents (Guoshuifa  No. 124).
According to Article 5 of the agreement between the government of the people’s republic of china and the government of the french republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, “permanent establishment” shall be deemed not to include:
– the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
– the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
– the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
– the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or ofcollecting information, for the enterprise;
– the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.
Therefore, if a rep office does not constitute a permanent establishment, it may apply to the tax authority for exemption of CIT.
Please note that the tax treaty only applies to exemption of CIT.
2. ROs shall keep accounts based on legal and valid vouchers, conduct accounting, accurately calculate its taxable income and income tax payable following the principle of functions performed matching risks borne, declare truthfully to the governing tax authorities and make payment of CIT and business tax (“BT”) within 15 days as of the end of the quarter, and pay the value added tax (“VAT”) within the time limit as stipulated in the Provisional Regulations of the PRC on Value Added Tax and its implementation rules.
– Before the implementation of these new Measures, the tax authority used to adopt a method of taxation for a RO according to its line of business. For example, a RO of a foreign law firm shall accurately calculate its taxable income and income tax and pay tax based on actual income and profit, while a RO of a foreign trading company shall pay tax by the method of converting expenditures into income. However, the new Measures now require all of the ROs, if possible, to accurately calculate its taxable income and income tax and pay tax based on actual basis regardless of its line of business.
– All of the RO shall declare to the tax authority within 15 days as of the end of the quarter even if the RO does not have any income in such quarter.
– The new Measures also stipulate that ROs shall be subject to VAT. However, it is not clear how to pay the VAT by the ROs because in theory the ROs are not qualified to sell goods and issue VAT invoice.
3. For ROs that cannot accurately account their incomes or costs due to unsound accounting books as well as that fail to make declaration truthfully, the tax authority is empowered to take one of the following two methods to calculate their income tax payable: i) converting expenditures to income, and ii) determining the amount of income tax payable based on the total incomes.
– The following table illustrates the applicability and CIT treatment under the three different taxation methods for ROs.
(see the table enclosed)
– The new Measures also increase the deemed profit rate from its original 10% to no less than 15% now.
Comparison of the old rules and the new rules
(see the table enclosed)
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