Representative Office (“RO”)
Foreign companies, particularly those in the trade agency and service industries, often choose an RO to carry on liaison and marketing activities in China. Although ROs allow foreign investors to enter the Chinese market with little initial investment, they are prohibited from direct profit-making activities.
In general, an RO of a foreign company may engage only in indirect business activities in China, including acting as a liaison with clients and the head office; introducing the products of the head office; conducting market research; and collecting information. Thus, an RO of a foreign company may not sign and conclude contracts with Chinese customers directly and is prohibited from engaging in any “direct business operations” (with certain exceptions, such as the RO of a law firm).
ROs generally are taxed at the same rate as domestic companies. If an RO is able to provide a complete accounting record, the RO is required to accurately calculate and pay tax on its taxable turnover and profits ("actual amount method"), based on a principle that reflects the actual functions performed by the RO and the risks borne. If an RO is unable to provide a complete accounting record or if it cannot calculate its income and expenses with reasonable certainty, the tax authorities reserve the right to use "deemed amount methods" to determine taxable turnover and profits. Practically speaking, ROs in only a limited number of industries (i.e. law firms) are taxed under the actual amount method, with others taxed on a deemed basis in accordance with the RO's expenses or revenue, depending on the industry.
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