It may happen that due to the company's development abroad or in China, the representative office (RO) structure no longer suits the needs of the investor and must be altered accordingly.

If you wish to sell or import/export, you will need to set up a wholly foreign-owned enterprise (WFOE) or joint venture (JV). You will need to consider whether to keep the RO going, or to close and replace it with a local branch of the WFOE or JV. You can't just change the RO to a WFOE or JV: This is a common misunderstanding. If the RO doesn't suit your needs any more, close it. Closure of the RO can be implemented at the same time as the establishment of the new entity.

Here are a few examples of instances in which an RO may not suit your requirements any longer:

- The holding company has closed down or changed business activities so you may want to wind down the RO activities.

- The RO has not been operating in compliance with its business scope or the local regulations and you may want to restart on a "clean sheet."

- The current location needs upgrading (bigger/smaller office space) or you want to move location, effectively changing the government agency regulating your RO and closing the old office at the same time.

- You need a local renminbi billing entity.

- The current RO business scope does not suit your requirements any longer.

- You need to upgrade your China structure/entity.

Closing down an RO

A closing audit must be performed by the tax bureau before an RO is allowed to complete the closing down procedures. As long as the RO has no overdue taxes or other issues to be reported to the authorities, then the de-registration procedure can begin.

The first step is to obtain an approval certificate from customs together with a declaration on the reasons behind the decision to wind up operations in China (the same written explanations shall be given to all other bureaus involved in the closing procedures). This is required in order to clear up all records at customs involving any office equipment, cars or samples imports.

Subsequently, applications need to be made at the tax bureaus (both local and national) with related papers and the RO closure resolution of the parent company, with director's signature and the parent company's chop. In most cases, the following documents need to be provided: an audit report up to the current month: RO tax returns, ledgers and vouchers, tax registration certificates (original and copy with RO chops). If the RO is not subject to taxation, then a tax-exempt notice from the tax bureau confirming this status has to be presented.

After the RO legal code certificate is cancelled and the checkbook, chops and other related documents are cancelled and given back to the bank, it is possible to close the bank account and withdraw or send back to the holding company the remaining funds.

The final step is obviously the cancellation of the business license. In order to do so, all the previous approval notices from customs and state and local tax bureaus shall be shown to the industrial and commercial bureau together with a board resolution from the holding company.

Normally such applications take around five to 12 weeks.

Setting up a WFOE

Establishing your new entity can be affected at the same time as closing your RO.

Establishing a WFOE in China is a relatively straightforward procedure, consisting of five phases:

Phase 1: Investment planning

Before commencing the registration process it is important to develop an investment plan, taking into consideration issues such as tax management, lease and salary payment.

Phase 2: Pre-registration of the WFOE's name

To proceed with the WFOE setup, you must decide on the naming options of the WFOE (where a minimum of three name options is required). Once the naming options have been considered the WFOE should be pre-registered with the business registration authority. As such, the setup work of the WFOE shall then proceed with this pre-registered name.

Phase 3: Selection of premises and documentation preparation

At this stage, you must decide on the premises for the WFOE. You may need to liaise with the landlord, with or without investment advisory expertise. You will be responsible for providing the documents and qualification certificates required for the purposes of the WFOE's setup procedures. In addition, you must have all documents required for WFOE setup ready at this stage.

Phase 4: Approval and business registration of the WFOE

As a foreign-invested enterprise, a WFOE must obtain an approval certificate from the competent foreign investment administration of the Chinese Government before business registration. Upon receipt of the WFOE's approval certificate, your registration agent can then proceed to handle the business registration of the WFOE. When the business registration authority issues a business license, the WFOE is officially established.

Phase 5: Post-license registration for the WFOE

When the WFOE has been officially established, in other words when it has obtained its business license, post-license registrations must be conducted. These include tax registration, foreign exchange registration and opening bank accounts, to name a few. It is only when the bank account has been opened by the WFOE, following the completion of the capital verification process, that the WFOE can then obtain the final permanent business license.

Setting up a manufacturing WFOE

There are several major, interrelated issues to address if you intend to set up a manufacturing WFOE in China:

- Business scope--What should yours be?

- Registered capital requirements--These may vary depending on the industry and the location. It is also absolutely critical that you do not simply put in the minimum because the regulations say you can. You may find the business is undercapitalized if you do so. This is an operational judgment for you.

Are you manufacturing 100 percent for export, or part for export, part for domestic sales? Where are your clients located? Do they require an official local invoice? Would they require you to sell your goods to Hong Kong or other offshore jurisdictions? These questions have a fundamental impact on how you structure the business.

- Articles of association--These need detailed work by you to ensure you cover all the bases. You are setting up a company with a 10-15 year life span and you need to be sure you know what you are getting into.