Understanding “Representative Office” and “Wholly Foreign Owned Company” - Which is the Right Form for You?

A “Representative Office” (RO), as it name suggests, is the China representative of the foreign company.   It is not an independent entity; instead, it is considered to be part of the foreign company.  On the other hand, a “wholly foreign owned company” (WFOE) is a limited liability company organized under the laws of China and is a legal entity separate from its parent company back home. 

One of the most common questions that we receive is: why do we need to set up a WFOE, when setting up a RO is faster, cheaper and easier? So let’s compare these two to see what the differences are:

RO may seem attractive for its relatively cheap and simple setup and low cost of on-going operations. However, one should not overlook its limitations, especially the limits on the scope of activities.  Below are a few examples where a RO is considered by the government authority as engaged in illegal for-profit activities:

• RO receives payments from customers in China;
• RO enters into purchase agreements in its own name;
• RO invoices Chinese customers; or
• RO provides post-sale services to Chinese customers.

A RO engaged in profit-making activities is subject to fine up to RMB500,000 and all property connected with such profit-making activities may be confiscated.  In the worst situation, the RO may be ordered to shut down. 

RO may be the right form, on the other hand, when the business objective is to promote brand and build a presence in China.  RO may also be the perfect solution to doing quality control and sourcing in China. 

In short, a foreign company should choose the RO or WFOE based on its business needs or objectives, rather than the cost of forming and running it. 

Posted by: Pei Zhang

Categories: China Desk