WFOE, representative office, or no entity at all?

A WFOE can trade, invoice and hire, and carries full accounting, tax and audit obligations. A representative office cannot trade at all (Order 584, Article 13), cannot employ Chinese staff directly, and pays corporate income tax on a deemed profit of at least 15%. No entity is the right answer more often than people expect.

Three structures get compared here, and the middle one is chosen far more often than it should be. A representative office looks like a cheap way to have a presence in China. What it actually is, in the words of the regulation that creates it, is a non-profit office with no legal personality, and the list of things it may do is closed.

	No entity	Representative office	WFOE
Can invoice Chinese customers in RMB	No	No. It may not engage in profit-making activity at all (Article 13)	Yes
Can sign commercial contracts	Its foreign parent can, from abroad	No. Its permitted activities are market research, display, promotion and liaison (Article 14)	Yes
Can hold local inventory in own name	No	No	Yes
Can employ staff directly	No	No. Staff are engaged through an authorised foreign affairs service unit, which is the employer	Yes
What the parent must show to set it up	Nothing	Proof of domicile and of lawful business existence of more than 2 years (Article 23)	Proof the investor exists, notarised and apostilled
Tax when it earns nothing	None in China	Corporate income tax on a deemed profit, computed from its spending, at a rate of not less than 15% (Article 8)	Filings continue, but nil returns are nil
Ongoing obligations	None in China	Annual filings and tax on the deemed basis	Bookkeeping, monthly and quarterly returns, annual report, audit
Exit	Stop, and owe nothing	Months	Commonly 9 to 12 months, driven by tax clearance
Suits	Testing demand, selling through a distributor, cross-border e-commerce	Liaison and market study, and nothing else	Sustained local operations

What a representative office may actually do

Four things, and the list in Article 14 is exhaustive: market research, display and promotional activity connected with the foreign enterprise’s products or services, and liaison connected with that enterprise’s product sales, service provision, domestic procurement and domestic investment.^⁠[1] Read it closely and the limits are obvious. Liaison about sales is permitted; making the sale is not. Everything a business normally wants an office for, signing, invoicing, taking payment, holding stock, sits outside the list, and Article 13 puts it beyond doubt by prohibiting profit-making activity outright.

The penalty is not nominal. A representative office that trades faces an order to correct, confiscation of the illegal gains and of the tools, equipment, materials and goods used, and a fine of RMB 50,000 to 500,000, with its registration certificate revoked in serious cases.^⁠[1] It is also not a structure you can grow into: there is no route by which a representative office becomes a company. You would register a company alongside it and then close it.

It cannot be the employer

This is the practical consequence people discover last. A representative office engages staff through a local foreign affairs service unit rather than hiring them itself, under Article 11 of the 1980 State Council interim provisions, which Order 584 did not repeal.^⁠[3] Local rules reinforce it from both directions: in Beijing a representative office must not recruit Chinese employees privately or through any other organisation or individual, and a Chinese citizen must not apply to one except through the service unit.^⁠[4]

So the service unit signs the employment contract and seconds the person to you. There is no employment relationship between your office and the person doing the work, a service fee sits on top of the salary, and the arrangement you would normally use to hold a key employee, an incentive tied to the entity they work for, is not available. For a liaison function that is tolerable. For a team you intend to build, it is the wrong structure.

It pays tax whether or not it earns anything

A representative office has no revenue of its own, so its tax is assessed on a deemed basis. Where it can produce accurate records of its expenditure but not of its income or costs, income is converted from what it spends; where it can show income but not costs, taxable income is a deemed proportion of that income.^⁠[2] The deemed profit rate is not less than 15%, and the wording is a floor rather than a rate, so the tax authority may set it higher.^⁠[2]

The cost-plus method is the one that surprises people: the more the office spends on rent, salaries and travel, the more profit it is deemed to have made, and the more tax it pays. An office that exists to spend money on behalf of a parent is taxed as though spending were earning. A representative office that can keep proper books, and can compute its taxable income accurately, may file on an actual basis instead, on notification to its tax authority.^⁠[2]

The exit cost nobody prices in

Registering a Chinese company is much easier to do than to undo. Deregistration requires tax clearance for every year the company existed and commonly runs the better part of a year, which is our own experience rather than a published standard: no instrument states a timescale, only minimum periods for the individual steps. The steps themselves, and the simplified route, are in how to close a company in China.

Walking away is worse than closing, and the reason has changed recently enough that most English-language material still describes the old version. Missing the annual report window puts the company on the abnormal operations list. Since the disclosure regulation was revised on 10 March 2024, missing it for two consecutive years without putting it right, while being unreachable at the registered address, means the business licence is revoked.^⁠[5]

Revocation is where it reaches the individual. A person who was legal representative of a company whose licence was revoked for illegality, and who bears personal responsibility for it, may not be the legal representative of another company or non-company enterprise legal person for three years from the revocation,^⁠[6] and may not be a director, supervisor or senior manager of any company for three years on the same test.^⁠[7] A separate and harsher bar, with no personal-responsibility test, catches the legal representative and the responsible person of a company placed on the serious dishonesty list for concealing or falsifying the information it published.^⁠[5]

The other forms a foreign investor can use

These three are the routes most foreign businesses weigh, but they are not the only forms. The Foreign Investment Law groups every enterprise in China that is wholly or partly foreign-invested under one term and gives it the same treatment as a domestic company except in the sectors named on the foreign investment negative list.^⁠[8]

Form	What it is
WFOE(外商独资企业)	A Chinese limited liability company whose capital comes entirely from foreign investors. A legal person in its own right
Sino-foreign joint venture(中外合资经营企业)	A company owned by foreign and Chinese parties together, in agreed shares. Still required in the few sectors where the negative list caps foreign ownership or requires Chinese control
Foreign-invested partnership(外商投资合伙企业)	A partnership set up by foreign investors, alone or with Chinese partners. Not available for a sector in which the negative list sets an equity requirement
Representative office(代表处)	A liaison presence of a foreign company. No legal personality, and it may not trade
Branch of a foreign company(外国公司分支机构)	Provided for in the Company Law, not a separate legal person, and in practice confined to a few regulated sectors

Which one, in practice

Start from what the business has to do rather than from what looks established. If you need to invoice in RMB, hold stock in your own name or employ people directly, the answer is a company and the only question is when. If you need presence rather than transactions, a representative office does liaison lawfully and does nothing else. If you need neither yet, selling through a distributor or a cross-border channel keeps the option open, and the decision improves with every month of market knowledge you gain before taking it. Which triggers actually force an entity is set out in do I need a Chinese company to sell in China.

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