China: Change a Representative Office into a WFOE?

Last Updated: 28 January 2013
Article by Maarten Roos and Kathleen Cao
Most Read Contributor in China, November 2017

Comparing Investment Structures: Representative Office on the way out?

Since new regulations on representative offices came into effect in March 2011, cities such as Shanghai and Beijing have seen many such offices being replaced by wholly-owned subsidiaries in consultancy or trading. This trend is in part a direct result of the tightening of the supervision on activities that employees of the representative office may engage in. Rep. offices are only permitted to engage in non-operational activities such as marketing and liaison only, with the penalties on operating beyond this approved business scope greater than ever.

An even more important consideration has been the increased legal and practical disadvantages, administrative burden and fiscal cost of continuing to operate a rep. office.

At the same time, alternative structures are now easier to establish and simple to operate. Sourcing companies for example often only need their Chinese staff to engage in liaison and quality control - activities that are perfectly suitable for a consultancy WFOE (wholly foreign-owned enterprise). Those businesses that are trying to expand on the Chinese market could benefit from replacing their rep. office structure with a trading WFOE.

Representative Office vs. WFOE: Legal Considerations

The main benefits of the rep. office have always been that they are easy to establish and especially, that they are convenient to finance: an investor does not need to commit a fixed amount of capital, but can remit funds regularly based on the need to cover salaries and expenses in China.

On the other hand, the establishment of the WFOE has also become much more straightforward, and is now only slightly more complicated than setting up a rep. office. Moreover, while an investment (in the form of registered capital) must still be made, the requirements on this amount capital have gradually diminished over the years. By law, the minimum registered capital of a single-shareholder is now CNY 100,000; industry regulations, local rules or practices may still require a higher amount, but this is generally negotiable and will depend on the scale of the expected business. In practice, the amount and timing of the investment rarely form a major obstacle to foreign investors.

At the same time, the legal benefits of the WFOE are considerable. Perhaps most important is that the WFOE is a limited liability company, which means that the investor's liability is limited to the amount of registered capital to be contributed. This contrasts to the rep. office, where the investor remains fully responsible for the office's debts, a liability which could even impact the freedom of movement in China of the investor's authorized representatives. Other notable benefits of the WFOE are:

  • Chinese employees can be hired directly (Rep. office: Chinese employees must be hired through an employment agent;
  • There is no quota on the hiring of foreigners (Rep. office: maximum number of foreigners is four);
  • WFOE's foreign legal representative does not have to file for taxes in China (Rep. office: the foreign chief representative must always file taxes); and
  • Annual audit includes only the WFOE's accounts (Rep. office: annual audit includes proof that the investor continues to exist, through notarized / legalized documentation).

Representative Office vs. WFOE: Fiscal (tax) considerations

The rep. office does not have any operational income - it is directly financed by its investor. However the value created by the rep. office is still subject to taxes in China. With tax exemptions now rare, most rep. offices are taxed on total amount of expenses.

The most important taxes are business tax at 5% (depending on the location), and corporate income tax at 25% (to keep things simple, we do not include additional minor taxes in our calculations below). Since the rep. office has no income, business tax is levied on total cost and corporate income tax is calculated based on a deemed income over that cost, which since 2011 is at least 15%.

With no deductions of expenses, a quick calculation shows that if deemed income is 15% (which is the minimum), then average due taxes are approximately 11-12% of total expenses:

Case Example 1:
Representative Office with budget of USD 1 million

Deemed income = Expense / (1- deemed profit rate 15% - business tax rate 5%)
Income tax = Deemed income x deemed profit rate x income tax rate 25%
Business tax = Deemed income x business tax rate

If the expense of the office is USD 1 million, the calculation will be
Deemed income = USD 1,000,000 / (1-15%-5%) = USD 1,250,000
Income tax = USD 1,250,000 x 15% x 25% = USD 46,875
Business tax = USD 1,250,000 x 5% = USD 68,750

Total main taxes = USD 46,875 + USD 68,750 = USD 115,625
Average tax rate on total expenses: USD 115,625 / USD 1,000,000 = 11.56%.

A straight tax comparison for the rep. office and the WFOE that shows the tax savings if the former is liquidated and the latter takes over the business, is not easy to make. The WFOE's tax situation is more complex, and due taxes depend on a number of factors including:

  • Activities (e.g. trading or consultancy)
  • Location (Shanghai charges value-added tax (VAT) instead of business tax):
  • Scale (if VAT applies, whether the company is a small-scale tax payer or a general tax payer);
  • Expenses in China that bring input VAT.

Another major factor is the budget of the WFOE compared to its income; in contrast to rep. offices, the WFOE's corporate income tax is levied on actual profit rather than deemed profit. Consider for example that many consultancy WFOE's provide marketing, liaison and quality control services directly to their investor or affiliate, and issue the corresponding service invoice at a cost-plus basis. Chinese law does not determine a minimum of this "plus", and so the lower the margin, the lower the tax burden. In any case, the tax burden of a WFOE is very likely to be lower than that of a rep. office. The following example is illustrative (and for reference only):

Case Example 2: WFOE with budget of USD 500,000


  1. WFOE is small-scale taxpayer (i.e. VAT is 3%)
  2. profit rate is 5%

Profit = 5% x USD 500,000 = USD 25,000
Income tax = USD 25,000 x 25% = USD 6,250
VAT = (USD 500,000 + USD 25,000) x 3% = USD 15,750

Total main taxes = USD 6,250 + USD 15,750 = USD 22,000
Average tax rate on total expenses: USD 22,000 / USD 500,000 = 4.4%

Case Example 3: WFOE with budget of USD 1 million

  1. WFOE is a general VAT taxpayer
  2. profit rate is 5%
  3. WFOE has USD 100,000 input VAT

Profit = 5% x USD 1,000,000 = USD 50,000
Income tax = USD 50,000 x 25% = USD 12,500
VAT = (USD 1,000,000 + USD 50,000 - 100,000) x 6% = USD 57,000

Total main taxes = USD 12,500 + USD 57,000 = USD 69,500
Average tax rate on total expenses: USD 69,500 / USD 1,000,000 = 6.95%

The exact calculation will differ according to the actual circumstances. If the WFOE is general taxpayer, for example, it may have more input VAT (e.g. services or goods purchased in China; VAT already paid can be deducted from due VAT), or it could be VAT exempt.

Conclusion: The end of Representative Offices nearing?

Some foreign investors continue to prefer the rep. office structure for convenience, and because they are used to it. They may also not want to make the one-time cost of establishing a new WFOE, transferring employees and assets, and then liquidating the rep. office. It looks however as if it is just a matter of time before wrap up. The Chinese government has clearly set the trend, and most foreign investors are expected to follow.

Many companies find the opportunity to introduce limited liabilities, install better corporate governance systems and at the same time save taxes, sufficiently attractive to invest now in establishing a consultancy WFOE, and then liquidate the representative office. Those businesses that are also interested in the domestic market have an additional incentive to change their structure without delay.

Besides a one-time cost, one challenge of the restructuring remains that investors need to determine in advance the investment they will need in China, and when their business can become profitable. In this dynamic but complex business environment, planning ahead may not be such a bad thing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Maarten Roos
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions