Representative offices (ROs) are normally set up in China under three circumstances:
- A foreign company sets up an RO to promote its products and services overseas and establish networking relationships with Chinese businesses.
- Law firms — An RO is the only business entity form in which a law firm is allowed to adopt in China
- Non-profit organisations — An RO is the only business entity form in which a non-profit organisation is allowed to adopt in China
According to current laws, circulars and regulations for ROs, there are three methods to calculate tax liabilities (“RO Taxation Method”), depending on how capable the RO is in maintaining its financial records as explained below:
- Actual Basis Method
This method is adopted when the RO is capable of establishing accounting books in accordance with relevant laws and regulations, keeping those records based on legitimate and valid vouchers and accurately reporting its revenue, expenses and costs.
- Taxable Income Made On Total Income Method
This method is applicable when the RO is able to accurately report its revenues but not its expenses and costs. Taxable income is calculated as follows:
Taxable Income = Actual Revenue x Deemed Profit Rate (No less than 15%)
- Converting Appropriation Expenditures Into Income Method
It is applicable for ROs that are able to accurately report their expenditures but unable to accurately report their income. Taxable income is calculated as follows:
Step 1: Deemed Revenue = Current Appropriation Expenditure / (1 – Deemed Profit Rate)
Step 2: Taxable Income = Deemed Revenue x Deemed Profit Rate (No less than 15%)
According to the Caishui [2016] No. 36 circular, value-added tax (“VAT”) has replaced the business tax (“BT”) in all sectors — including real estate & construction, financial services & insurance, lifestyle and other services — with effect from 1 May 2016.
The table below compares the tax burdens under the previous BT and new VAT regimes.
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