China has issued new regulations that strengthen the registration and tax administration of representative offices (ROs) of foreign enterprises, including additional requirements on their establishment, as well as subsequent supervision, tax collection method and deemed profit rate.
According to KPMG, ROs--which are a main form for foreing enterprises to enter China--play an important role assisting their head offices in market research, business liaison and further investment in China.
KPMG notes that all local offices of the State Administration of Industry and Commerce (SAIC) have been instructed to strictly implement the notarisation and authentication requirements for overseas legal documents, and to strengthen their examination of registration application materials. These requirements include:
- The certification of incorporation of the head office (which should have existed for at least two years) and its bank reference letter should be submitted for the establishment or for the change of the name of an RO;
- The head office's certificate of continuity should be submitted for the renewal of an RO's registration certificate. An RO's registration certificate should be valid for one year.
KPMG says that the new regulation sets a higher threshold for the establishment of a RO, effectively restricting the establishment of ROs by newly set-up foreign companies.
In its tax alert, KPMG reveals that an RO should generally hire no more than four representatives (including a chief representative). Exisiting ROs with more than four representatives can only de-register their existing representatives and are not allowed to appoint new representatives, says KPMG.
KPMG further reveals that any ROs that carry out business activities and charge fees in any forms may be penalised for operating without a license. If an RO is found to carry out illegal activities, such as failing to renew an overdue registration certificate or relocating without approval, the SAIC is empowered to set up a credit trackign system against them and place them under supervision by appropriate categories. Morever, if the entry-exit administrative department of the public security discovers that an RO or its representative has been registered under a false address, has been operating outside its registered location or has failed to complete registration or annual inspection, the relevant authority shall report this to SAIC for further action in line with the regulations.
KPMG adds that the new regulation limits the number of expatriate staff at an RO and further clarifies the requirements on an RO's business activities and registration.
The new regulation clarifies that an RO should file Corporate Income Tax (CIT) based on the income attributable to it and should file Value Added Tax/Business Tax based on its taxable income.
In addition, the new policy abolishes the former regulations that tax ROs in several ways based on their line of business. Unless an RO can provide its complete and accurate financial records, it will be required to account for its CIT liability using the cost-plus method or the actual revenue-based methord. The new regulations also raise the deemed profit rate from its original 10% to no less than 15%.
The new regulation adds that local tax bureaus shall no longer accept any application for CIT exemption from ROs, and shall rectify any tax exemption approvals already granted to ROs. If an RO intends to enjoy tax relief provided by a tax treaty, it should carry out the procedures prescribed by the relevant regulations.
KPMG warns that these tax administration measures are likely to increase the tax burden of some ROs in China.
Impact on Enterprises
"Existing ROs in China should review their operating risks and assess their tax burden in light of the new regulations," writes KPMG's Martin Ng and Juice Huang, adding that ROs with larger business scale, higher operating risks or heavier tax burdens may consider establishing a subsidiary in China for their operations or exploring other tax planning opportunity.