Setting up a Representative Office in China

Vincent Li3/9/2012

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.

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

Why RO?

• Sourcing is a strategic part of our operation• We need a legal structure in China• Types of legal structures in China

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

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

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

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

Where

Qingdao

Guangzhou

Fuzhou

Shanghai

Mandatory social insurance

RMBSalary cap ?

Retirement 8% 1008 20% 2521 8% 935 22% 2571 8% 800 18% 1800Medical 2% 255 10% 1260 2% 234 12% 1403 2% 200 8% 800Unemployment 0.2% 25 1% 126 1% 117 2% 234 1% 100 2% 200Maternity 0% 0 0.8% 101 0% 0 0.5% 58.4 0% 0 0.7% 70Injury 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

Employer10000

Beijing12603

Shanghai11688

Fuzhou

Employee Employer Employee Employer Employee

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)

When

• Timeline?• What is next step?