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RO vs WFOE (August 06)

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There are two choices for foreign investors to establish a sole independent operation in China – an RO (Representative Office) or a WFOE (Wholly Foreign Owned Enterprise). In terms of practicality, a WFOE enjoys more benefits than an RO. In this newsletter, we will highlight the advantages of using a consulting WFOE (especially one that services its parent entity) over an RO:

Legal Status
An RO is not an independent entity. It is an extension of its parent entity and can subject the parent to liability. The RO does not require registered capital for set-up and will rely on funding from its parent company.

A WFOE is a limited liability company. This is a big advantage as its liability is limited to the amount of registered capital injected into the business. However if more funds are needed, the procedures are more complicated than that of an RO, and the application for additional capital injection has to be verified by the Chinese Institute of Certified Public Accountants (CICPA).

Business Activity
An RO can only conduct liaison and marketing promotion for its parent company. It cannot sign sales and purchase contracts with suppliers or customers.

As a legal entity, a WFOE can issue invoices in its own name and sign contracts with customers and suppliers independently.

Staff Employment
An RO is not allowed to employ staff directly but through an approved third-party intermediary agency. Thus, staff loyalty may not be that strong.

On the other hand, a WFOE is allowed to employ staff directly.

Taxes Incurred
Since an RO is not allowed to invoice suppliers and customers, it has no actual revenue. The calculations of taxes are based on the expenses incurred and regrossed to become the deemed revenue. The tax differences between an RO and WFOE can be seen in the following illustration:

		RO	WFOE
Corporate Taxes		Assume the total expenses of a RO and a WFOE are both RMB 85. The tax costs for them are shown as follows:
	Income	85/ (1 - 15%) = 100	85 * (1+10%) = 93.5
		15% is the business tax rate adopted to regross the RMB 85 expense to a deemed revenue of RMB 100.	A WFOE does consulting for its parent company. A minimum 10% mark-up for profit must be billed back as a fair transfer price.
	Business tax	100 * 5% = 5	93.5 * 5% = 4.69
	Taxable Profit	100 * 10% = 10	93.5 - 85 - 4.69 = 3.81
	Income tax	10 * 15% = 1.5 Income tax rate is 15% for RO in Certain Special Economic Zones 10 * 33% = 3.3 Income tax rate is 33% for RO in other areas	3.81 * 15% = 0.57 Income tax rate is 15% for WFOE in Special Economic Zones, Free Trade Zones, Development Zones 3.81 * 24% = 0.91 Income tax municipal rate 24% 3.81 * 33% = 1.26 Income tax national rate 33%
	Total Tax Costs	5 + 1.5 = 6.5 (Pudong) 5 + 3.3 = 8.3 (other areas)	4.69 + 0.57 = 5.26 (Pudong) 4.69 + 0.91 = 5.60 (municipality) 4.69 + 1.26 = 5.95 (other areas)
Individual income tax		Because an RO’s corporate taxes are normally calculated based on a deemed profit and deemed revenue method, the remuneration for expatriate personnel is treated as payment from China. Therefore, they cannot enjoy the 90/ 183 days tax exemption.	For employees without fixed residence in China, and working accumulatively for no more than 90 days (expatriate personnel from countries with no tax treaties with China) and 183 days (expatriate personnel from countries with tax treaties with China) within 12 months or 365 days, the remuneration paid by overseas employers are exempt from individual income tax.

The above comparison shows that a WFOE in the consulting field (especially one that serves only the parent entity) enjoys more benefits than an RO. However, there are more stages in the set-up of a WFOE and it requires more injection of funds for the capital, etc.

Hence it is important that you consider both short-term and long-term business objectives carefully, in order to select the proper corporate structure.

SBA Stone Forest Corporate Advisory (Shanghai) Co., Ltd. (SBA SF) is an international corporate advisory firm with offices in Shanghai, Beijing, Suzhou and Shenzhen. It is a subsidiary of Chio Lim Stone Forest in Singapore and offers Corporate Services, Payroll & Payroll-related Services, Accounting Services, Tax Compliance Services, Tax Advisory and Business Assurance Services. SBA SF helps foreign investors enter China smoothly and supports their needs relating to on-going accounting, tax and financial advisory matters.

Contact Persons:

Mr. Ching Mia Kuang, Managing Partner		Ms. Wu Di, Marketing Manager
Tel: (86-21) 6270 2215 ext. 128		Tel: (86-10) 8591 1900 ext. 201

Corporate Secretarial Services Department
Ms. Echo Li, Manager
Tel: (86-21) 6270 2215 ext. 709

Accounting Services and Tax Compliance Department
Ms. Jessie Lin, Manager
Tel: (86-21) 6270 2215 ext. 676

Payroll & Payroll-related Services Department
Ms. Jane Shi, Director		Ms, Nancy Shen , Group Supervisor
Tel: (86-21) 6270 2215 ext. 222		Tel: (86-21) 6270 2215 ext. 704

Tax Advisory Department
Ms. Brenda Lee, Manager
Tel: (86-21) 6270 2215 ext. 808

Business Assurance Department
Ms. Laura Xie, Partner
Tel: (86-21) 6270 2215 ext. 686

Legal Status An RO is not an independent entity. It is an extension of its parent entity and can subject the parent to liability. The RO does not require registered capital for set-up and will rely on funding from its parent company.

Business Activity An RO can only conduct liaison and marketing promotion for its parent company. It cannot sign sales and purchase contracts with suppliers or customers.

Staff Employment An RO is not allowed to employ staff directly but through an approved third-party intermediary agency. Thus, staff loyalty may not be that strong.

Taxes Incurred Since an RO is not allowed to invoice suppliers and customers, it has no actual revenue. The calculations of taxes are based on the expenses incurred and regrossed to become the deemed revenue. The tax differences between an RO and WFOE can be seen in the following illustration:

Legal Status
An RO is not an independent entity. It is an extension of its parent entity and can subject the parent to liability. The RO does not require registered capital for set-up and will rely on funding from its parent company.

Business Activity
An RO can only conduct liaison and marketing promotion for its parent company. It cannot sign sales and purchase contracts with suppliers or customers.

Staff Employment
An RO is not allowed to employ staff directly but through an approved third-party intermediary agency. Thus, staff loyalty may not be that strong.

Taxes Incurred
Since an RO is not allowed to invoice suppliers and customers, it has no actual revenue. The calculations of taxes are based on the expenses incurred and regrossed to become the deemed revenue. The tax differences between an RO and WFOE can be seen in the following illustration: