As China continues to become strategically important, many companies may consider establishing some kind of legal entity in China. Depending on your organization's overall strategy and budget, Representative Office might be a good choice for you. Hopefully this presentation will give you some guidance toward your success in China.

1. Setting up a Representative
Office in China
Vincent Li
3/9/2012

2. Purpose and relevance
• Purpose: Introduce key issues about setting up
a RO in China.
• Relevance:
– Sourcing is a strategic part of McConkey’s business
– We need to understand the complicity and
potential risks about doing business in China so
we can make informed decisions.

3. Agenda
• Why do we need to set up a RO?
• Functions and activities of a RO
• HR and management issue
• Tax and accounting issue
• Other risks and how to mitigate them
• Where do we want to set up a RO?
• When do we want to set up a RO?
• Budget

4. Why RO?
• Sourcing is a strategic part of our operation
• We need a legal structure in China
• Types of legal structures in China

5. Functions and activities of a RO
• ROs cannot engage in any profit activities
• ROs can be involved in
– Market research, display and publicity activities
that relate to company products or services.
– Liaison activities (vendor relations, QC, order
processing)
• ROs will be subject to penalties of RMB50K-
500K for each profit activity

6. HR Issues
• ROs are prohibited from hiring Chinese
employees, whether directly or indirectly
through other organizations, and must entrust
FESCO (or alike) to do this.
• FESCO will handle labor contract and salary
and other benefits required by the
government
• HR risks

7. Tax and accounting
• Corporate Income Tax (CIT), Business Tax (BT) and
VAT
• Taxable activities vs. tax-exempt activities
• If the RO only performs tax-exempt activities on
behalf of its head office, neither of these taxes
will be imposed.
• Annual audit requirement
• Foreign currency and bank account
• Seek professional consultant for advice

8. Potential Risks
• HR risks
– Labor law
– Talent acquisition and retention
– Employee termination
• Compliance risks
• Fixed overhead vs. sales growth
• How to mitigate
– Educate ourselves and stay informed
– Seek professional advice

9. Where
Qingdao
Guangzhou
Fuzhou
Shanghai

10. Mandatory social insurance
RMB
Salary cap ?
Retirement 8% 1008 20% 2521 8% 935 22% 2571 8% 800 18% 1800
Medical 2% 255 10% 1260 2% 234 12% 1403 2% 200 8% 800
Unemployment 0.2% 25 1% 126 1% 117 2% 234 1% 100 2% 200
Maternity 0% 0 0.8% 101 0% 0 0.5% 58.4 0% 0 0.7% 70
Injury 0% 0 1% 126 0% 0 0.5% 58.4 0% 0 0.5% 50
Total 10% 1288 33% 4134 11% 1286 37% 4325 11% 1100 29% 2920
Employer
10000
Beijing
12603
Shanghai
11688
Fuzhou
Employee Employer Employee Employer Employee

11. Budget
• Initial set up cost
– Fuzhou: RMB40,000 (USD6,400)
– Shanghai: RMB50,000 (USD8,000)
• Recurring costs
– RMB64,000/month (USD10,000)
– Regional difference could be significant.
• Other fees
– Travel expense
– Professional services (accounting and taxation)

13. When
• Timeline?
• What is next step?