Under Chinese law, Representative Offices may not engage in direct business activities and therefore should not directly generate profits. Permitted activities include establishing and arranging contacts, rendering advice, preparation of market studies, general collection of information and liaising with authorities and business partners. Representative Offices may not bill clients or sign contracts. In other words, they may promote, but they must not sell.
One can argue that such activities do not directly generate income and therefore representative offices should not have to pay income tax. However, the tax bureau takes a different view. It levies business tax and foreign enterprise income tax on representative offices. There are various ways of calculating income tax for representative offices. Typically, it is based on the office's turnover. Income tax is paid at a rate of a little less than ten percent of the office's overhead. In some cases the representative office can obtain an exemption if the representative office can prove that the parent company is a manufacturing company and is using the representative office for purchases in China.
It should be noted, however, that it is advisable to seek professional advice before opening a representative office in order to ensure that its activities fall within the permitted scope and that all tax benefits are applied.
