A representative office (RO) is not an independent legal entity but an extension of the parent entity. Therefore, it must confine its activities to promotion or acting as a liaison and coordination office on behalf of its parent company. Generally, an RO is not allowed to carry out trade and businesses activities or sign sales contracts with customers. The parent entity will fund its operations and appoint a Chief Representative. One exception is the ROs of law firms which are allowed to conduct sales upon approval from the relevant authorities.
2. Accounting and Tax Requirements for Representative Offices
(1) Keeping of Accounting Books, Records & Supporting Documents
All accounting vouchers, ledgers as well as financial statements should be prepared and maintained under PRC GAAP (Generally Accepted Accounting Principles). Source documents, Journal Vouchers (JVs) and ledgers should be in Chinese and Standard China Chart of Accounts (COA) should be adopted.
All JVs in the prescribed format should be filed and bound according to China’s standard accounting practice.
The bank book, cheque records and bank reconciliation should be maintained as part of the accounting records.
Financial Statement Format/Content
The Expenditure Statement (ES) is a required statutory filing for ROs.
The monthly ES has to summarise all expenses incurred.
The ES is listed by nature of the expenses and according to China COA.
The ES should contain the ROs stamp before submission to the Tax Bureau.
The ES is submitted to the Tax Bureau on a quarterly basis although accounts have to be maintained monthly.
Reconciliation with HQ
If the parent company is required to prepare the balance sheet and profit/loss statements for the RO under IFRS to consolidate inter-company accounts, such HQ reporting statements should be prepared and reconciled to the ES.
(2) Corporate Taxes Compliance
The RO is subject to Enterprise Income Tax (EIT) and Business Tax (BT) Liability.
There are three tax bases applied to different ROs.
The tax is calculated based on the deemed income.
Deemed income = operating expenses / (1-deemed profit rate-BT rate)
Deemed Profit Rate is 15% and BT Rate is 5%.
The net impact is about 10% of the operating expenses.
Under this method, the fixed asset costs incurred are to be expensed off and not depreciated.
Based on Income
Some ROs can apply to be taxed based on sales revenue generated. The RO should provide all information and supporting documents relating to the sales generated. A full set of accounts has to be maintained.
Adoption of tax based on income has to be approved by the tax authority.
Tax exemption status is assessed and granted by the tax authority.
It is mainly granted to a RO whose parent entity is a manufacturing entity, or a non-profit organisation or is in the advanced technology industry.
Quarterly submission and payment are to be made within 10 days after the end of each quarter.
An annual return is to be submitted together with the audited accounts within 4 months after the end of the tax year. Final settlement of tax shall be made within 5 months after the end of the tax year.
(3) Individual Income Tax Compliance
The RO is the withholding tax agent responsible for calculating, withholding and submitting individual income tax (IIT) for both local Chinese employees and expatriates.
IIT is assessed on a monthly basis and shall be remitted within 7 days after the end of each month.
The personal tax deduction relief for a local staff is RMB 1,600.
The personal tax deduction relief for an expatriate is RMB 4,800.
According to China tax laws, expatriate IIT is dependent on the period that he/she stays in China and the tax treaty between his/her home country and China, amongst other conditions. An expatriate who is acting as the Chief Representative will be taxed on all his/her China-sourced income regardless of the period he/she has been staying in China. Certain schemes may apply to Chief Representatives whose duties cover other countries in addition to China, subject to approval from the tax authority.
There are altogether 9 levels of progressive tax rates in China’s IIT.
(4) Social Insurance for Local Staff
The main types of social security in China are Pension Insurance, Medical Insurance, Unemployment Insurance, Maternity Insurance, Work-related Injury Insurance and Housing Fund. They are contributed by both employees and employers.
The rate and policy for each kind of insurance vary from city to city, and are regulated by the local governments.
A RO is liable for the employer’s contributions for local staff.
(5) Cash Management
A RO should have a basic RMB account to make payments to suppliers, reimburse staff claims, pay salaries and taxes, etc.
The opening of a bank account requires a Board Resolution from its parent entity, as the RO is an extension of its parent entity. However, some banks may be more relaxed in this respect.
Authorised stamps/seals, such as the financial seal and the representative’s seal or signatory must be applied onto payment documents (e.g. cheques) to take effect.
The financial seal and other signatory seals should be carved in advance and kept in safe custody. (Our company can act as signatory and custodian.)
A RO can have a foreign currency account if needed. However, the usage of this account will be very limited.
Currency conversion procedures need to be carried out to convert foreign exchange to RMB. The RO has to carry out foreign exchange reporting under foreign exchange regulations in China.
(6) Annual Tax Assessment
According to PRC regulations, a RO is required to carry out an Annual Tax Assessment/Clearance. In this exercise, the RO’s audited statements and Annual Return should be submitted to the tax authority for review and filing.