Taxation for China Representative Offices

Taxation for China Representative Offices

Taxation for China Representative Offices means that once the once the Representative Office is officially registered, it's required to maintain properly accounting records in accordance with accounting standards in China and report taxes in both monthly (for business tax) and quarterly (income tax) basis. The late submissions will face penalty and surcharges.

Taxation for China Representative Offices – The Issues

The application by a foreign company to set up a representative office in China is a bureaucratic process.  After obtaining their business licenses, representative offices must go through registration formalities with the local bureau of quality and technical supervision, local tax bureau, local statistics bureau, etc.  At that time, the tax reporting method (e.g. the cost-plus method) should be negotiated.

PRC tax returns and payments are required quarterly (for income tax) and monthly or quarterly (for business tax).  Late filings are subject to penalties and surcharges.  Inconsistency between the operating expenses reported and the representative office's permitted scope of activities or its individual income tax reporting can lead to penalties and surcharges on a tax audit.

A representative office must fulfill three types of taxes: Business tax, Income tax and Additional tax.

Taxation for China Representative Offices – The Business Tax (BT)

In principle, the business tax is based on the turnover, but this does not affect the representation office because the latter does not realize sales on its behalf. So the expenses are taken into account in calculating the amount of the tax. It is recognized by convention that the turnover is equal to spending totals/85%, multiplied by the 5% corporate tax rate that is applied in China. Note that the calculation mode of the Business Tax can vary depending on the field.

Taxation for China Representative Offices –Tax on Income

Income tax is calculated on gross profit, but for the same reasons that the business tax, it is recognized by convention that the result is equal to total expenditure * 10%, which is applied the conventional rate of 25% in China of the income tax (tax on profits). Note that in the calculation of the income tax, the foreign company does not receive tax relief as opposed to the foreign employee.

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