A Branch office or a Representative office in 2023
Since 2003, Healy Consultants Group assists multi-national Clients’ register business entities in every country on the planet. While the common LLC is the most practical and popular choice, our multi-national Clients’ occasionally need to register a Branch office or a Representative office. This web page will help your Firm determine the optimum corporate structure for your overseas business expansion.
A representative office (RO) is a cost center in a foreign country, acting directly on behalf of its overseas head office. Through this entity, foreign investors can set up an office in the target country and recruit staff to i) manage and promote sale contracts with local business partners and ii) research the local market and develop products and services and iii) source local customers and suppliers and iv) provide customer service support and v) offer IT and technical support and vi) supply back office administrative operations. A RO cannot conduct commercial operations nor invoice local customers. Representative offices are often used by international banks to enter a new market without needing to secure a local regulatory license.
A Branch office (BO) is a profit center in a foreign country, performing the same business operations as the parent company, including generating profits. BO usually have a limited duration and are often used in the Middle East to do business with the local Government or to perform a specific project, after which the branch is deregistered.
Compare both entities
- An overseas company will establish a local representative office to conduct market research and to find local customers and suppliers. This entity is a cost centre and cannot engage in profit-generating activities nor generate income from local customers. It is often used as a satellite back-office, for technical, financial and administrative support.
- An overseas company will establish a local branch office to complete sales with local customers and Government. The branch is not a separate legal entity from its parent company. Consequently, liabilities of the branch extend to its head office.
- In the majority of countries on the planet, the following simple general rules apply:
No To consider Specific question? Branch office Representative office 1. What can the entity do in the target country? Can invoice local customers? Yes No Can sign contracts with local customers? Yes No Can import and export products? Yes No Can hire local and expatriate employees? Yes Yes Can lease physical office premises Yes Yes Can invoice local customers? Yes No Can bid on Government contracts? Yes No Can generate annual net profits? Yes No Can be a liaison office with local customers? Yes Yes Can market parent products in local market? Yes Yes Can participate in trade shows and exhibitions? Yes Yes Can open a local multi-currency corporate bank account? Yes Yes Can conduct local customer negotiations on behalf of its parent company? Yes Yes Open and receive letters of credit? Yes No Can hire local sales staff? Yes Yes Can conduct manufacturing activities? Yes No Can store products on behalf of the parent company? Yes No Can own commercial property? Yes No Can supply local distribution support? Yes Yes Can prepare local commercial contracts on behalf of the parent company? Yes Yes Lease a local warehouse? Yes No 2. Legal and compliance considerations Must apply for an employer identification number Yes Yes Must apply for an employer identification number None None Monthly & quarterly Government payroll reporting? Yes Yes Monthly & quarterly Government GST or VAT reporting? Yes No The entity has a separate legal personality from the parent company? No No The entity enjoys limited liability status? No No The entity must obtain a business license from the local Government? Yes Yes Must appoint a local resident officer accountable to the local Government? Yes Yes Considered a local legal entity under local commercial laws? No No Must comply with all local employer and employee regulations? Yes Yes Must use the same legal name as the parent company? Yes Yes Statutory obligation to maintain proper records and book-keeping? Yes Yes Must obtain a local trade or regulatory license? Yes No The entity is included in the Government Registrar of companies Yes Yes 3. The entity is included in the Government Registrar of companies Considered a tax resident entity by the local Government? No No Deemed to have a local permanent establishment Yes No Must pay corporation tax on annual net profits Yes No Must submit an annual corporation tax return Yes No Must prepare annual audited financial statements Yes No Entity results are included in the overseas parent company consolidated financial statements? Yes Yes Allowed to register for VAT or GST? Yes No Local withholding tax on overseas payments to the parent company? Yes Yes Can access double taxation treaties? Yes No
Advantages and disadvantages of each entity
- In complex countries, a representative office (RO) is significantly cheaper than establishing and maintaining a subsidiary LLC. For example, in Vietnam and the Philippines. Therefore, multi-national Clients’ may use a RO as a stepping-stone to enter foreign markets, prior to establishing a Branch office (BO) or a subsidiary; and
- If our Client expects to make significant losses in a foreign country, a Branch office may be advantageous. For example, a USA corporation opens a BO in Australia. For the first five years of operations, the Australian entity made losses. The USA parent company income statement can automatically benefit from these overseas expenses, significantly reducing USA corporation tax; and
- In some countries, multi-national Clients’ will find:
- it is easy and fast to convert a RO into a subsidiary LLC, e.g. Singapore; and
- a RO can reclaim VAT on annual operating expenses including rent and utilities. For example, the French Government allows an annual refund application to be submitted by the parent company; and
- foreign sourced income of a Branch office is legally tax exempt. For example, an Australian or Irish or Korean Branch office does not suffer local tax on foreign sourced income;
- The RO neither has to i) register for income tax ii) nor prepare annual financial statements iii) nor submit a legal annual return iv) nor submit a annual corporation tax return. For example, a Singaporean Representative office; and
- The RO is a tax efficient vehicle. For example, an RO can be used to procure goods in China including handling sourcing and quality control. Thereafter, a Hong Kong free zone company can handle the actual trading activities and house commercial profits;
- Because the RO does not generate sales income, the entity does not suffer local corporation tax. it is merely a cost centre that is funded by the parent company. The parent company consolidated financial statements can include the annual operating costs of the RO; and
- A Branch office (BO) and a Representative office (RO) are not independent entities and do not enjoy limited liability status; they are simply extensions of the foreign company. Consequently, the parent company is legally responsible for the activities of the BO and RO. Liability freely flows up to the overseas parent company, exposing it to reputation, litigation and financial risk. The directors of the head office are primarily responsible for the activities of the overseas BO and RO; and
- During BO and RO registration, local Governments require countless parent company documents including i) a certificate of incorporation and ii) an M&AA and iii) historical annual audited financial statements. Unfortunately, these documents must be translated into the local language and notarised and attested and apostiled. Consequently and compared to the common LLC, BO and RO registration takes a long time and is expensive and administratively inconvenient and painful; and
- Because of the above and if time is of the essence, we recommend our multi-national Clients’ register the common LLC because local Governments and banks are familiar with this type of entity. There are however some exceptions, for example France or Djibouti, where registration of a branch can be faster than registration of a subsidiary LLC; and
- In the vast majority of countries on the planet, it is difficult to open a local corporate bank account for the BO and RO. The in-house Legal and Compliance Department of the local bank will need to review and approve the parent company documents, legally translated into the local language!
- Depending on the country, the local legal representative of the Branch or Representative office must receive a Power of Attorney; and
- Before some Governments approve the registration of a RO, the local bank account must show a large deposit to cover the coming year operating expenses. For example, the Nigerian Government needs to see the RO bank statement showing a minimum of US$ 100,000. Some of our multi-national Clients’ are hesitant to deposit large sums in developing countries; and
- Changes to the corporate structure of the parent company must be reported to the foreign Government. For example, an Irish LLC has a Representative office in Beijing. In 2022, the Irish parent company appoints a new director or shareholder or company secretary or changes the paid-up share capital. Within 30 days, the Chinese Government must be informed of these corporate structure changes!
- In most countries, our multi-national Clients’ will find:
- the BO suffers both i) local corporation tax and ii) withholding tax on overseas funds transfers back to the parent company, e.g. the USA Branch office. Consequently, this type of entity is not a tax efficient vehicle; and
- BO and RO are considered non-resident vehicles. Consequently, they are unable to benefit from i) local Government grants and ii) double taxation treaty benefits and iii) tax incentives, exemptions and reliefs; and
- the parent company must be a profitable going concern for a minimum of three years;
- In some countries, our multi-national Clients’ will find:
- these entities have a limited life. For example, a Singaporean or Egyptian RO cannot exist longer than 3 years and must be converted to a subsidiary or branch office; and
- these entities can employ a limited number of employees. For example, a Chinese Representative office can employ a maximum of 4 staff; and
- the parent company must place a large bond with the local Government. For example,
- during the registration of a branch in Dubai, a deposit of US$13,650 is kept by the UAE Government during the life of the entity; or
- the Ethiopian government requires an amount of US$100,000 to be injected to the RO bank account to cover operational expenses and salaries; or
- the Filipino Government requires a US$ 200,000 paid-up capital. During the registration of a RO or BO in the Philippines, a deposit of up to US$ 30,000 is kept with the Government during the life of the entity; and
- local law demands the parent company financial statements have a minimum balance sheet value and a minimum annual turnover; and
- the RO or BO is required to appoint local citizens as i) the bank signatory and ii) legal representative and iii) office manager. For example, an Iraqi RO or BO; and
- The Representative office must submit annual financial statements and tax returns, e.g. Brazil.
- A Representative office caught engaging in commercial revenue generating activities will either be i) immediately closed and de-registered (e.g. Middle East) or ii) classified as a tax resident entity and suffer corporation tax (e.g. the UK or USA); and
- Before the Government approves a Representative office or Branch office in most developing countries, it is necessary to lease physical office premises and supply a legalized lease agreement. For example, Brazil, Kuwait and Thailand;
Examples of fees
Practical examples of a Representative office
- IBM in the United States sees an increase in demand for its products and services in Europe. The USA Head Office decides to open a Representative office (RO) in Amsterdam, to employ local staff to conduct market research and promotes IBM products and services in the Netherlands; and
- The Dutch RO will i) need to secure an employer identification number and register for social security and ii) does not need to register for corporation tax or VAT, because it will not generate local profits; and
- The USA parent company will annually remit funds to the RO bank account to pay local operating expenses, which are consolidated within the USA annual financial statements; and
- IBM USA will directly issue sales invoices to Dutch customers and sign local sales contracts. Sales proceeds will be remitted direct into the USA corporate bank account. The Representative office cannot issue sales invoices nor can the Dutch bank account receive income from local customers;
- Each month from the Dutch bank account, the RO pays local employee salaries, net of 30% withholding tax. This payroll tax is then paid to the Dutch Government;
Practical examples of a Branch office
- IBM in the United States signed a contract with the Omani Government, to install a computer system in a large hospital in Muscat. To bid for the Government project, IBM USA was required to register an Omani Branch office (BO). The entity was wholly foreign owned from the USA and did not need an Omani 51% national shareholder. The BO must appoint a local Omani to be the Government Liaison Officer; and
- Before the Ministry of Commerce and Industry approves the Omani Branch office license, IBM USA deposits a bank guarantee of US$39,000; and
- IBM USA will appoint a managing director to run the business activities in Oman. Some USA managers and Staff may be expatriated to Muscat for the duration of the project. Additional employees will be hired locally;
- The M&AA of the BO was approved by the Omani Ministry of Commerce and Industry, and the bylaws stipulate i) the duration of the entity is limited to the period of time necessary for the execution of the hospital project and ii) the entity is not permitted to carry out any other type of work for any third parties and iii) the USA parent company is responsible for the liabilities of the branch and the acts of the Omani branch manager;
- The pays BO pays Omani corporation tax on annual net profits and suffers withholding tax on overseas remittances to the USA;
- This web page serves as a general guide to RO or BO registrations across the world. Each country has specific laws governing an RO or BO, some more strict than others. For example, Germany and Singapore severely limit the activity of an RO. By contrast, a Middle Eastern or Mexican RO is flexible re commercial profit generating activities; and
- The RO or BO registration process significantly differs in each country, including i) documents required and ii) time frame and iii) Government costs and iv) Government restrictions. For example, a Singaporean RO is fast and easy and cheap. A Brazilian RO is very expensive, administratively painful and takes approximately one year!
- In some countries like India and Korea and Turkey and France, an RO is known as a ‘Liaison Office’. In some countries like Germany, a BO is known as a ‘Dependant Office’; and
- In China, a BO name must be in Chinese and contain i) the nationality of the parent entity and ii) the Chinese name of the parent entity and iii) the city where the branch is located and iv) the suffix “representative office.”; and
- For each target country, I recommend your Firm prepares a specific tailored detailed comparison table contrasting the different entity types. Healy Consultants Group will help you with the same;
I hope this web page helps your Firm choose the best entity to meet your business goals in the target country. Engage Healy Consultants Group to project manage the A to Z of the business set up. To advance the engagement, communicate with our Staff via the contact details below: