Here we identify some of the common mistakes we are asked regularly to resolve when clients have either been badly advised, or simply were not aware of the full application and structural procedures when making an investment in China.

Common Representative Office (RO) Finance and Administration Problems

RO bank accounts:

Many clients authorize their agent to deal with the bank account opening, although in reality they can do this themselves. However, in order to avoid any inconvenience and minimize the time and effort spent on the account opening procedure, the agent just simply opens the bank account without asking the clients how to manage the account. If the agent is a friend of the local employee assisting you, there can be a conflict of interest, as there are security issues that need to be discussed before opening the bank account, such as:

(a) Whether to use chops (company seals) to manage the bank account in addition to signatures?

(b) Whose signature and chops will be used for account management?

(c) Whether other signatories can manage the account with differing responsibilities, and if so who?

RO car importation

Every RO is entitled to import a foreign vehicle, duty free. The importation is logged with the tax bureau and the value of the vehicle should appear in the accounts and at annual audit as an asset. If it is not, the assumption can be that the office sold the vehicle for a profit and is subject to tax on this transaction. There are many cases of vehicle dealers calling local staff in ROs to see if they will “sell” the rights-the going rate being about 20,000 yuan to them. The employee then arranges for the RO certificate and documents to be chopped, pockets the money, and the RO license is then used, unwittingly by the foreign investor, to import a vehicle. Serious problems occur when the office is subjected to a scrutinized audit or closed.

Welfare payments to local employees

It is common for foreign investors not to realize the extent of mandatory welfare payments that need to be made to local staff in China as employees of the RO. These differ from city to city, but always include: pension, medical insurance, unemployment and housing fund. Maternity and other payments may also be required. Typically, these amount to at least 50 percent of the entire salary. You must factor this into your budget and obtain correct advice on what and how much needs to be paid to avoid trouble later on.

FESCO and other agents

China has many government agents willing to help you with mandatory welfare payments. Top of the list is the FESCO--Beijing Foreign Enterprise Service Group Co. Ltd. While often very useful, they do of course charge for their service and it is also a legal requirement to use them when employing staff via ROs. However, in their enthusiasm to generate your revenue, they can have a tendency to sell on to you additional services that are not mandatory, such as insurance schemes, 13-month annual salaries and special Chinese New Year bonuses. You need to be aware what is real and required, and what is not.

Non-payment of taxes

Sometimes ROs may not have paid the pertinent taxes. This can be compounded by inefficiencies at the local tax bureau not flagging this up and contacting you. While this may appear to be good news-in reality it is not. ROs are subject to business tax of approximately 10 percent of their expenses, which has to be calculated, filed and paid on a monthly basis. An annual audit is also required.

On rare occasions, an RO can file for and obtain “tax exempt” status, but this must be agreed with and approved by the local tax bureau beforehand.

If taxes have not been paid, the tax bureau has the right to levy up to five times the total amount due plus of course the original amount. This can add up to a significant amount of money. Non-payment of taxes from an RO is a serious matter and you need to get into compliance from day one.

RO license alteration issues

There are additional, and frequently common issues concerning renewal of licenses, and changes to licenses. If you need to change the Chief Representative, your address, or if your company undergoes a change (say an overseas acquisition changes the parent company) then the Chinese authorities need to be informed. If not, again there can be penalties levied for non-license compliance issues. Seek advice if you are not sure how to process these changes. They are inexpensive and relatively straightforward to make, but non-compliance can result in problems and fines.