The difference between WFOE and RO

In this article, we try to describe the difference between WFOE (Wholly Foreign Owned Enterprise) and RO (Representative Office) in terms of allowable activities, establishment procedure, capital requirement, employment and tax.

Allowable Activities:

A.  WFOE: a WFOE is often incorporated as a limited liability company with legal person status. WFOE has full corporate capacity to conduct all the business activities according to its business scope, such as signing contracts, issuing invoices, opening and managing bank accounts in China.

B.  RO: a RO is considered as an extension of its investing foreign companyin China, rather than an independent entity. RO shall engage in non-profit making activities in China, and are permitted to conduct the following activities: (i) market research and survey (ii) products and services exhibition for foreign head office and (iii) liaison activities for the investing foreign company. RO is not permitted to issue invoices, sign contracts and receive payments from customers.

Establishment Procedure:

A.  WFOE: WFOE establishment requires more application documents and needs to go through more governmental agencies. It will take about 2-3 months for the WFOE to be fully operational.

B.  RO: RO establishment requires less application documents and is subject to approval by the local Administration for Industry and Commerce only.Typically, a RO can be established and start operations within 1 month from submission of application.

Capital Requirement:

A.  WFOE: WFOE may require to inject a certain amount of registered capital,but there is no requirement on the minimum amount of registered capital and the prescribed time to inject the capital except for certain industries.

B.  RO: RO has no registered capital requirement; the investing foreign company may remit operating funds to RO to the extent necessary for its daily expenditure.

Employment:

A.  WFOE: WFOE is allowed to employ their staff directly in accordance with the applicable labor laws.

B.  RO: the RO is also not entitled to employ the staff of Chinese nationality directly. It must engage a qualified human resources agency (FESCO) to hire local staff and then such agency will second the local staff to the RO.

Tax:

A.  WFOE: WFOE will compute itsrevenue, cost or expenses and file taxes based on actual profits accurately computed based on their books and records. Corporate Income Tax (CIT) at a rate of 25% and Value-Added Tax (VAT) for general taxpayers at arate of 17% for sales of goods and 6% on services while small taxpayers at arate of 3% for both sales of goods and services.

B.  RO: in circumstances where the RO cannot correctly compute its revenue, cost, or expenses, or cannot file tax returns using the actual profit-based method dueto insufficient books and records, the tax authority may determine the taxableincome of the RO using the actual revenue and deemed profit method. The CIT rate is at 25% and VAT at 3% or 6% based on whether the annual deemed revenueis over 5 million RMB or not.

Conclusion- why it is better using the WFOE:

Whether registering as a WFOE is better or not willall depend on the current objectives of the foreign enterprise such as the business scope, number of employees, amount of taxes, future objectives, etc. A WFOE is more suitable for that investor who is confident about the Chinese market and is keen to keep a long-term presence in China. A WFOE as described above will be more flexible in terms of business operations, employment, funds repatriation and also more tax effective.