A foreign individual or company intending to enter China market might perform business activities in six modes listed below:

1. Foreign representative office; 2. Trading companies in 15 FTZs; 3. Foreign-owned branches; 4. Foreign-owned subsidiaries; 5. Foreign-owned manufacturing Factories; 6. Business company.
Basically, both item 4 and item 5 are legal entities formed under local corporation law, but they are somewhat different. The application procedures of foreign-owned manufacturing factory might be much more complicated than that of item 4, for a factory requiring evaluation of environment protection, inspection of firefighting facilities, customs filing, tax exempt application for machinery, and application for construction of factory buildings, which might take 3 months to 2 years. At present, 70% of the foreign investors choose to set up factories in China. Foreign-owned subsidiaries are generally prevented (such as trading co.). Furthermore, formation of foreign subsidiaries also depends on approval from local authorities. So the foreigners seldom set up subsidiaries. Even fewer foreigners are allowed to set up such branch offices except international bank or insurance companies. Item 2 are trading companies incorporated within bonded areas, and most of them are for processing & trading. Companies who engage in manufacturing or service industry and is planning to expand their business in China should follow principles as follows. Deeper intervention means bigger difficulty in practical operation. Therefore, rep. office is your best choice to fulfill the highest strategic target at the lowest expense; branch office is the second best choice followed by subsidiary; factory is the last choice for your China investment.

Main functions: 1. To sign sales contract; 2. Export/ Import arrangement;
3. To find export/ import intermediary 4. Expansion of all other services

To sign sales contract: A representative office is the extension of parent company in China, and all commercial objectives could be achieved except local commerce and collecting. It could achieve the commercial goals such as: to sign a performance contract for an artist or race driver; to sign a computer program contract entrusted by foreign companies; to sign a purchasing contract for Best Buy, Wal-Mart, HP or K-Mart; to sign a sales contract for 3M, GE, or Simens equipments; to cooperate with a customs broker (called export-import trading company in China). These are the major purposes of a representative office. Cash flow is proceeded by remittance or L/C; value-added tax on import and rebates on export: withholding tax is not levied on performance income or consulting fee.

Export / Import arrangement: Except container shipment, foreign company has to rent a bonded warehouse or supervised warehouse for collecting goods from various suppliers or distributing goods to different buyers in China. Rep. office could issue the invoice/ packing list on behalf of the foreign company.

To find export/ import intermediary: Rep. office may look for suppliers or buyers, manufacturers or sales agent by all means. This is also applicable to the marketing of service industries, such as publishing industry, consulting companies, lawyers, accountants, architects, and film/TV companies.

Expansion of all other services: Just like Taipei Economic & Cultural Office has the same function with embassy, rep. office also has almost the same function with local company. Regardless of the purchase amount ranging from 100,000 to millions of US dollars, the formation or withdrawal may be quite easy for a Reps. office. This is also the standard operation mode adopted by IPO (Int’l Purchasing Office). No matter your offshore company is in China, Japan, USA, Malaysia, Thailand, Vietnam or Taiwan, you may use rep. office to gain all your business objectives. However, a representative office is not allowed to be involved in local transaction, invoicing, or money collecting and payment.

1. All types of companies, factories or organizations are allowed to set up their rep. offices except for individuals.
2. Locations are limited to foreign or commerce buildings.
3. No need for paid-up capital.
4. Parent company’s documents need to be notarized by China Embassy.
5. Resume of the chief representative.
6. A Taiwanese parent company is required to have at least 5 years history, and get the approval of Foreign Trading and Economic Cooperation Institution in Beijing, would take 3~6 months. As it may involve the parent company into liability and sales disputes, over-1-year-history offshore company is strongly recommended to set up rep. office in China.

Except the representative offices of law firms and CPA firms are required to pay the tax based on its account book, rep. office is levied the income tax on its expenses. 10% of the overall expenses will be calculated as net profit, and use this net profit multiplied by 25% (corporate income tax). For example, the overall expenses of Guangzhou representative office in December 2007 is 50,000RMB (approximately US$7,300), and the net profit comes from 10% of 50,000RMB, then 5,000× 25% (income tax) = 1,250RMB (US$167). In other words, the monthly expenses 50,000RMB of the representative office should be taxed 1,250RMB. Foreigners who stay in China over 90 days shall pay personal income tax, which is calculated based on his personal salary at nine-stage progressive tax rate.