Representative Office (RO) and Wholly Foreign Owned Enterprise (WFOE) are the mainstream ways for foreign companies to set up business in mainland China. Many foreign companies making investment in China may have such wonder: what are differences between representative office and wholly foreign owned enterprise? Which one is more suitable for my business setup? In the following exposition, Tannet list some of the differences for your reference.
I. Functions and Roles
RO is the resident representative office of foreign enterprises in China to engage in indirect business activities in Mainland China on behalf of the international enterprises within the business scope allowed. It can only engage in those indirect business activities in China and do operational activities on the business scope on behalf of foreign enterprises, such as contacting, product promotion, market survey, and technology communication.
WFOE refers to the company set up in China with shares entirely owned by foreign investor(s). It is a limited liability company with independent management, accounting and the ability to bear legal responsibility independently. The unique feature of a WFOE is that involvement of a mainland Chinese investor is not required, unlike most other investment vehicles. WFOE are among the most popular corporate models for non-PRC investors due to their versatility and unique advantages.
II. Conditions on Business Establishment
RO can be established only by foreign parent companies that have been established for over 2 years, while there is requirement for a WFOE.
There is no requirement on the registered capital for establishing a RO, while a WFOE need to write down the registered capital on the business license and has 30 years to inject the registered capital. Currently, short-term capital injection is not required in most industries, and the schedule for injecting registered capital may be agreed by the investors.
III. Bank Account Opening
RO can open accounts in banks and accept the payment in foreign currencies. However, the same can only be used for the day-to-day expenses. It is not allowed to open L/C accounts and to accept other more extensive financial services. However, WFOE is entitled to open bank accounts of various types, so long as relevant requirements of the banks can be met. It can also enjoy the services of financing and financial management through various financial institutes.
IV. Calculation of Taxation
According to the Chinese laws and regulations, the calculation of taxation of a RO shall be based on the costs and expenses incurred, that means, the more costs and expenses for a RO, the more taxation shall be paid. Instead, the calculation of taxation of a WFOE shall be based on the revenue and profit they get in China, moreover, the expenses and cost of the WFOE could be deducted from the revenue which can further reduce the profit tax burden of the WFOE.
V. Human Resources Management
RO has no qualification of legal person, so it cannot employ local staff by itself directly, but only through a designated human resource management company. The RO shall pay the service fees to the Human Resource Management Company, which will incur more additional cost for the RO.
While the WFOE can hire local employees directly, and take care of all payroll matters by itself which will save money and reduce profit tax burden since all payroll expense can be deducted from the revenue of the WFOE. In addition, the WFOE will have full management power on all its employees.
Contact Us
If you have further queries, don’t hesitate to contact Tannet anytime, anywhere by simply visiting Tannet’s website english.tannet-group.com, or calling Hong Kong hotline at 852-27826888 or China hotline at 86-755-82143512 or 86-755-82143181 or emailing to tannet-solution@hotmail.com. You are also welcome to visit our office situated in 16/F, Taiyangdao Bldg 2020, Dongmen Rd South, Luohu, Shenzhen, China.
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