As a foreigner or a foreign company, china offers a number of business setups/entities and the three most common ones are:-
(1) Representative Office (Rep Office)
(2) Wholly-owned Foreign Enterprise (WOFE)
(3) Joint Venture (JV)
The simplest is the Rep Office and it can setup in 4 – 6 weeks. Many businesses first setup a Rep Office and then upgrade it to a WOFE after a couple of years of operation.
We will talk about our experiences of setting up and running a Rep Office in China and aim to give an objective perspective of the advantages and disadvantages and most of all what you need to be aware of before making any decision
Lets start with the positives which are the there are a lot of very talented people here who are willing to work hard and to hire somebody with the same skill set in a industrialised country it would cost you 3 times more and the resource-base is very large. Industries such as technology, IT support, design, administration and other service industries are all prospering here.
However, you must be aware that there are a lot of hidden costs that we were not aware of before we started and it is very aggravating when the accountant calls up from time to time to tell you of certain charges that were not made known to you from the onset. Expect random charges of small amounts always.
For a Rep office, you need to budget for the following – these are the minimum basic costs:-
Rent an office space – RMB 30,000 (2 months deposit + 1 month advance) assuming that office rent is RMB 10,000 / month
Estage Agent Fees – RMB 5,000
Legal Cost – RMB 10,000
Job Ad Costs – RMB 5,000
Equipment + Furniture + Fittings – It is generally slightly cheaper for furniture and equipment
You need to find a location that allows you to register as commercial address; it is no longer possible to use a designated residential address for commercial-purposes now. It used to be but not anymore.
And you will need to produce a fair amount of documentation for the setup of the rep office and don’t be surprised when you are asked to produce more documentation even if you have tendered everything on the list that your accountant gave you.
Accountant – RMB 400
Office Rental – RMB 10,000
Cleaner – RMB 500 (twice weekly cleaning)
Broadband – RMB 400
Office Management Fees – RMB 400
Water + Electricity – RMB 500
Hiring Staff Costs
If a person is making RMB 5,000 a month – you will end up paying about RMB 8-9,000 month and here is how it works.
RMB 5,000 – Base Salary
Housing Fund – RMB 400
Insurance and Tax – RMB 1500
FESCO Fees – RMB 300
Total Payable – RMB7,200 / month
Foreign companies have to hire staff through a hiring agent that charges RMB 300 or so per staff hired and you must remit salary payments to this company every month for the payment of staff.
For severance pay, for each year that they work in your enterprise, the severance is an additional month. Hence if a staff works for 5 years and you fire him/her – then you are liable to pay a severance pay of 5 months.
In addition, for a rep office you will be taxed a percentage on your monthly expenses – which is absolutely ridiculous because you are taxed on tax paid.
So, if your total overhead for 1 month is RMB 100,000 then the government will multiply that amount by 1.15 – assuming that you are making 15% profit based on your expenses and calculate 8% tax based on that.
For monthly overhead of RMB 100,000, you will be taxed 8% of RMB 115,000 which is RMB 9,200 a month and this amount will be directly deducted from your bank account every quarter. And no, you will not receive any receipts or notification; you will simply notice that money has disappeared from your bank account.
Every year your accountant will charge you RMB 1,500 for tax report preparation and there will be other social insurance report charges of about that amount that you will need to pay. We were charged again for another RMB 1,800 + RMB 500 to the government for some sort of license agreeement renewal a couple of months later.
The critical mass for setting up an operation I believe is if you have a team of about 10 or more and then all of the costs become proportionally more digestible.
Hope this helps you to better understand what is involved with setting up an office / business here in China. Please write comments below and we’ll try to field any questions you have.