Lehman Tax & Accounting - China Tax Insights (Online Edition)

There are several reasons a foreign investor may wish to close down a representative office ("RO"). The foreign investor might wish to expand their China operations by establishing a new entity such as a Wholly Foreign-Owned Enterprise, or in the opposite, terminate its business operation in China. If the parent company of the representative office declares bankruptcy, it is legally mandated that the representative office be deregistered. Alternatively, the foreign investor may simply wish to allow the representative office to expire when it reaches the normal three year expiration period.

Full deregistration of the representative office requires the approval of the State Administration for Industry and Commerce, tax authorities, Customs bureau, Quality Control bureau, the bank, as well as other bureaus, certifying that all deregistration procedures have been completed and the representative office's liabilities have been cleared. Any outstanding liabilities of the representative office will be borne by its parent company (ie the foreign enterprise). Completion of the deregistration process normally requires three to six months depending on the completeness of the required documents submitted.

The most complicated and time-consuming process is to obtain a Notice of Tax Certificate Deregistration from the tax bureaus. This process can be made even more complicated because some local tax bureaus may have exempted some representative offices from tax filing when these representative offices were set up in China. However, year later during the tax deregistration process, the national and local tax bureaus will take a second look at the tax filings of the representative office and may make a determination that rep office has not properly filed its tax returns and has not fully paid its tax liabilities from prior year. This situation could arise from a number of reasons, including different legal interpretation of the relevant laws and regulations by different tax officers, changes of the standard practices of the local tax bureaus over the years, or intentional misrepresentation by the local government to the foreign investor in order to induce investment in a given locality. Also, all statuary documents in setting up the representative office must be submitted to the relevant authorities before the representative office is allowed to complete the deregistration procedures. It is common to find that required documents, such as licenses and registration certificates cannot be located and are missing. It is therefore recommended that the representative office conduct a full self-review before proceeding with the deregistration process in order to identify and rectify any irregularities prior to the deregistration process.

The below summarizes the major legal and tax issues which might arise in the deregistration of a representative office in China:

1) Certificates issued by the tax authorities, Customs office and banks which certify that taxes, debts and other related matters have been cleared should be obtained before officially approval is granted for deregistration of the representative office.

2) The representative office should apply for the deregistration of the tax certificates with the original local tax authorities prior to the cancellation of registration in the State Administration for Industry and Commerce or other relevant authorities.

3) All the tax documents and payments before proceeding the deregistration process of the representative office should be submitted to the tax authorities.

4) A chief representative's Individual Income Tax has to be withheld and settled before he/she departs from China.