Setting up a Branch Office in China: Differences between WFOE & Branch, Setup Procedures and Compliance Requirements

Once a foreign investor has established a subsidiary in mainland China (WFOE or Joint Venture) it may identify a multitude of business opportunities throughout other business hubs in major Chinese cities other than the place of residence of its subsidiary. Although a Chinese subsidiary can serve customers throughout China it can prove beneficial to establish a legal presence in locations in other cities.

Whereas the foreign shareholder could establish additional subsidiaries with a direct equity relationship with the headquarters, it may prove more efficient to expand the company’s legal presence to other locations in China through a so-called Branch Office.

Opening a branch office offers several benefits, first and foremost it is the only fully compliant solution to expand a company’s presence to another city in China where it intends to hire local Chinese staff. Furthermore, the establishment of a Branch Office of the existing Chinese subsidiary offers a relatively simple and cost-effective method to expand the company’s presence throughout China as compared to establishing an additional Chinese subsidiary, and Branch Offices may be subject to fewer administrative and compliance requirements. Nevertheless, since Branch Offices are an extension of the existing Chinese subsidiary there are several limitations that must be taken into account. Therefore, in this article we elaborate on the procedures required to set up a Branch Office in China as well as its advantages and disadvantages, notably compared to the establishment of a WFOE (which is the most common legal structure for foreign companies to enter the Chinese market).

Definition of a Branch Office and Legal Limitations

According to the Regulations of the People’s Republic of China on Company Registration, a Branch Office is defined as an organization established by a company in China to engage in business operations outside its place of residence and it does not enjoy the status of a separate legal entity. Therefore, a Branch Office is essentially an extension of the parent company, the existing Chinese subsidiary, and as a result the parent company assumes all its liabilities.

An important prerequisite to setup a branch in China as a foreign company is to have an existing subsidiary in China, because a branch is not a separate legal entity as explained above. Furthermore, it is important to note that the business scope of a Branch Office in China is limited by the business scope activities of its parent company, and in addition a branch cannot independently import/export goods and these activities must be performed by the parent company of the branch. On the other side, since a Branch Office is not considered a separate legal entity, they face fewer compliance requirements compared to a WFOE.

Another consequence of the fact that a Branch Office is not a separate legal entity from its parent company is that the official company name of a Branch Office will include the name of its parent. Generally, the official company name of a Brach Office follows the following structure: Full Name of Parent Company + City in Which Branch is Located + 分公司 (the Chinese word for branch).

Difference between an Operational and Non-operational Branch

When establishing a Branch Office, the company must decide between setting up an operational or non-operational branch. A non-operational branch cannot engage directly in commercial- or business transactions (as branches are unable to issue fapiaos) or independently hire employees, and generally performs activities in the field of marketing and maintaining of business relationships. However, a non-operational branch is not required to maintain a separate accounting record nor are they required to perform an annual audit. As a consequence, a non-operational branch only requires a simplified tax registration procedure which means its establishment is less complex compared to an operational branch.

On the other hand, an operational branch is an autonomous office that can independently issue fapiaos and directly hire employees. Therefore, in order to establish an operational branch, the registrations for issuance of VAT fapiao as well as the social security & housing fund registrations must be completed. Due to the additional operational capabilities associated with an operational branch, operational branches must declare taxes on a monthly basis, maintain an independent accounting record and are obliged to complete an annual audit. Furthermore, although not required, it is recommended to open a separate bank account for operational branches, as this will facilitate the payment of salaries, taxes and social security contributions locally.

A Branch vs a WFOE

A foreign company with existing operations in China essentially has two methods compliant with PRC legislation to expand its operations beyond its place of residence.

Firstly, the foreign shareholder can establish another Chinese subsidiary (for more information on establishing a WFOE in China, please refer to our WFOE White Paper here), or the existing Chinese subsidiary can establish a Branch Office. In general, the procedure to establish a WFOEs is more complex compared to the establishment of a Branch Office, as it entails the setup of a new separate legal entity and accordingly must make several structural decisions and prepare more application documents. In the table below we compare the different requirements and benefits of establishing a WFOE versus an operational- and non-operational branch:



As evidenced from the comparison in the above table, we can observe several key differences between establishing of a WFOE vs establishing of a Branch Office in China. Firstly, whereas a WFOE must commit to an amount of Registered Capital (read our full article on Registered Capital here), a Branch Office does not have Registered Capital and thus presents a cost-effective method of expansion. Furthermore, although recommended, it is not a requirement for a Branch Office in China to open a bank account. Moreover, contrary to a WFOE, a Branch Office does not require to register a Legal Representative, Board of Directors, Supervisor or General Manager. Instead, a Branch Office is only required to register a principal or responsible person (in Chinese: 负责人).

On the other hand, Branch Offices will experience several limitations compared to a WFOE. Among others, Branch Offices cannot engage in certain activities such as the import and export of goods and a Branch Office is limited in its business scope by the business scope of its parent company.

It is crucial to note however that Branch Offices present a solution to a key compliance issue for WFOEs, namely the hiring of local staff (and subsequent contribution to the social securities, which in China are administered at the local level) in a city other than the place of residence of the parent company.

Procedures to Establish a Branch in China

As aforementioned, setting up a Branch Office is less complex compared to the establishment of a WFOE, which firstly becomes evident as there is no requirement to provide legalized documents from the shareholder since the parent company of a Branch Office is an existing Chinese legal entity. As such, the company documents which are required for the establishment of a Branch Office are the following:
 
  • Business license of existing Chinese subsidiary;
  • Articles of association of existing Chinese subsidiary;
  • Lease agreement;
  • Identification document of the principal (负责人);
  • Identification document of the financial contact person.
Upon collection of all abovementioned documents, the application process can be started online through the Government’s Registration Service System for a pre-approval. Upon receipt of the pre-approval, the company will have to prepare and sign all relevant application documents for the setup of a Branch Office and submit them via formal application with the local Administration for Market Regulation (AMR, also formerly known as the AIC). After the AMR approves the submitted application documents, the branch business license is issued. Based on our experience it can take 1-2 months from the moment of pre-application until obtention of the branch business license (incl. preparation and signing of relevant documents). Upon issuance of the business license, the Branch Office officially exists.

Subsequently for non-operational branches, only a general tax registration with the tax bureau must be completed. However, for a branch office to become fully operational, it will be required to complete as well the fapiao registration and the registration for the social security and housing fund. After which operational branches may elect as well to open a bank account. These additional procedures can take up 1-2 months. In summary, setting up a non-operational branch will approximately take 1-2 months, whereas setting up an operational branch can take 2-4 months.

Branch Office Compliance Requirements

In terms of taxation, Branch Offices are subject to the same Corporate Income Tax (CIT) as their parent company. If the Branch Office does not maintain a separate accounting record, all tax declarations are submitted by the parent company on a consolidated basis. If the Branch Office does maintain an independent accounting record, the Branch Office will file taxes with the local tax authorities accordingly.

It is important to take into account how the Corporate Income Tax filing for a Branch Office in China must be completed. When a Branch Office has been set up and issues invoices from the branch company to the client (i.e. an operational Branch), the Branch Office would have to pre-pay the first year on quarterly basis Corporate Income Tax (when having tax assessable income) to the Tax Authority in the respective local district. However, in practice this can be difficult since companies will be dealing with two different Tax Authorities in China which are normally hesitant to lose tax revenue. Essentially, the result is a complication of the Annual CIT filing, where in case of more than two branch offices the percentage of CIT paid by each Branch Office respectively shall be calculated according to the ratio determined by Tax Authorities based on revenues, salaries and assets of Branch Office.

Moreover, operational branches are required to conduct an annual audit, as they maintain an accounting record independent of their parent company. However, since Branch Office operations are generally less complex compared to that of a WFOE, it is expected that the annual audit proceedings should be less complicated as well. Non-operational branches, who do not maintain a separate accounting record, are not required to perform an annual audit of its finances as these are included in the accounting of the parent company.

Furthermore, according to the Article 72 on Labor Law within China, the employer and employee must pay social security contributions when directly hiring local staff. Consistent with the Law of the People's Republic of China on Social Insurance and the Provisional Regulations on Housing Fund, the employer should complete the registration of employees with the company’s Social Security- and Housing Fund registration within 30 days of onboarding of staff.

Conclusion

In conclusion, Branch Offices are not a separate legal entity and essentially are an expansion of their parent company in China. The setup of a Branch Office offers several advantages compared to the establishment of an additional Chinese subsidiary, where the procedures and compliances requirements are less complex which makes this method of expansion more cost-effective. Additionally, and crucially, it is the only fully compliant solution to expand a company’s presence to another city in China outside its original place of residence if it intends to hire local Chinese staff.

It should further be noted that two types of Branch Offices exist: operational- and non-operational branches. Here an operational branch can engage in more activities independent from its parent company, and a non-operational branch remains partially dependent on its parent company. As a result, operational branches face somewhat more compliance requirements compared to their non-operational counterparts, which is important for foreign investors to take into account.

We have successfully supported numerous foreign businesses to establish a Chinese subsidiary or Branch Offices throughout all regions of China and provided advice on all matters regarding this subject. If you would like to enter the Chinese market or want to understand the establishment of a Branch Office can support the expansions or your business in China, please visit our Corporate Services page or contact us at info@msadvisory.com.

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