Representative Office

Introduction

A representative office is an alternative form to the legal entity, designed for representation of foreign companies. It is often used in the initial stages of an overseas company’s establishment in the targeted market providing the foreign company with a physical presence in the host country market place without the commitments and administrative requirements that apply to a registered company or branch office. It is a common legal vehicle used by foreign investors in some countries.

The main objective is to provide marketing and sales assistance in connection with the products and/or services offered by the foreign company to its local or host country customers.

No Legal Personality

The Representative Office, as it happens with a Branch, does not have a separate legal personality. It acts in the name and on the account of its mother company.

Legally, in most countries a representative office is not defined or (except in countries like Belgium, France, Spain or Ukrania) regulated. It is, however, important to ensure in practically all countries that the activities of the office are limited to representative functions only. This means for instance that the representative may not conclude any sales or perform any after sales services.

Registration

In all countries, Bank representative offices must be registered with the Bank regulator. In many countries, a representative office must be registered in the host country. Furthermore, if
an office is designated as a “technical” representative office, in some countries (like Egypt) it must be registered with the Ministry responsible for its field of activity.

Recognition

In countries like the United Kingdom or Togo a representative office is not a recognised form of business and, as such, cannot carry out business activities.

Scope of activity

In some countries, the sole authorized activity for a representative office is to conduct market
research, market surveys, and production studies. In the case of a “technical” representative office, the scope also includes technical review of products in the market.

Management and control

Management can be handled by a foreign manager for the representative office. A representative office is under the full control of the parent company. Activities of a representative office are subject to review by the corresponding authority to ensure compliance with laws and regulations.

Capital

There is no requirement for any capital investment. The parent company is in charge of the expenses of maintaining the representative office.

Limitation of Scope

A representative office promotes the products and/or services. It cannot derive income from its activities. Given that the scope of activity for a representative office is very limited, a representative office may be useful to monitor commercial activities undertaken by some other form of business entity undertaking the actual commercial activity on behalf of the foreign
entity in the host country. For example, a foreign entity’s representative office may be used to monitor the activities of a foreign entity’s distributor or agent. The office may, indirectly, assist the distributor through the undertaking of market research and market surveys.

Legally, a representative office is not defined or regulated. It is, however, important to ensure that the activities of the office are limited to representative functions only. This means for instance that the representative in the UK may not conclude any sales or perform any after sales services.

Example of activities carried by a Representative Office

• To provide assistance to the clients visiting the host country by coordinating their business appointments, accommodations, transportation, and office facilities etc.
• To handle the trade inquiries on behalf of its clients.
• To provide assistance with the host country public business agencies.
• To provide negotiation services with different agencies and offices.
• To provide periodical reports to the clients for monitoring the progress.
• Sales & Marketing Meetings
• Warehousing
• Logistic support
• Dealing with complaints, returns
• Trade show, exhibition support
• Mass communications media support
• Launching and growth campaigns of the products

Accross the Legal Systems

Pursuant to the Companies Law and its Executive Regulations, a foreign company may establish a representative office in Egypt for the purpose of performing market study and research for the benefit of the foreign company.

In Russia, Representative office is not a legal entity. They do not need to prepare full-scope accounting: in this case calculation of tax liabilities is enough.

In the UK, because is not a recognised form of business, the representative office cannot carry out business activities. This office is often used in the initial stages of an overseas company’s establishment in the UK providing the foreign company with a physical presence in the British market place without the commitments and administrative requirements that apply to a registered company or branch office. The main objective is to provide marketing and sales assistance in connection with the products and/or services offered by the foreign company to its British customers.

In Ukrania

There are two types of the Representative Office in Ukraine: the RO of foreign states (e.g. embassies, consulates) and the Representative Office of non-residential legal entities.
The Representative Office is supposed to operate without exercising commercial activities or generating income.
Under current Ukrainian legislation a Representative Office may also exercise commercial activities (permanent commercial Representative Office) it may conduct trade and other commercial activities, including conclusion of trade contracts.
Current Ukrainian legislation distinguishes two types of the Representative Office of foreign legal entities:
• The permanent (commercial) Representative Office with the right of execution of business activity in Ukraine;
• The non-commercial Representative Office with the functions of representation the parent company in Ukraine only. In this respect, its functions are limited to the representation and protection in Ukraine of the interests of a foreign parent company, and are especially limited to the promotion of its activities and related marketing affairs; in this regard, the RO is not supposed to operate commercial activities or generate income.

Incidentally, in case when some activity requires a license, neither the Representative Office, nor its foreign mother company will be able to obtain it.

Taxation

A representative office is generally treated as a non-resident entity for tax purposes in countries like the UK.

Foreign persons who are entitled to engage in business activities according to their national laws may carry out business in the host country by opening a representative office. Since a representative office does not constitute a separate legal person, it may not perform business activities on its own behalf. Rather, the representative office acts in the name and on behalf of the principal in its transactions with local parties.

The host legislation applies, in general, only to transactions that relate to the creation and operation of the representative office itself (eg, local staffing and lease). These transactions are not concluded to realize the business objective of the principal, but are rather supporting transactions involving the maintenance of the representative office.

Although it does not constitute a separate legal person, a representative office in most cases must be registered (sometimes in a Registry or Chamber of Commerce, and before the Tax Authorities, like in Spain, France and Bulgaria.

In this last country, a representative office is considered to be a tax-liable entity, and thus owes taxes to the state budget in relation to the local transactions which it concludes in order to facilitate its daily operations.

Permanent establishments

Representative offices, like in the case of Branchs, which conclude local business transactions and representative offices which are engaged in profitable business activities on their own behalf may both fall within the category of ‘permanent establishments’.

Some ideas:

A ‘permanent establishment’ is a defined premises or fixed base through which a foreign enterprise performs partially or wholly autonomous business activities in the country.
An ‘autonomous’ activity is an activity which is carried out on a regular basis or in which a person is necessarily engaged due to the nature of his trade activities.
Although no allowance is made for representative offices to engage in business activities, if such business activities are in fact performed locally then the resulting profit will be allocated to the representative office. The principal will therefore be taxed for income derived from these activities.

Tax authorities tend to interpret taxation provisions broadly, and apply them only to cases in which a representative office is authorized to transact directly on behalf of the foreign entity since it has declared itself to be a permanent establishment. If a representative office is a permanent establishment, it is obliged, following the OCDE guidelines, to keep books and records in accordance with the host country accounting standards, and file tax returns on a regular basis.

In some cases, a representative office may be a representative of the principal (and therefore not taxed for business transactions, but only for transactions relating to the representative office existence and operation), while at the same time part of its activity may constitute a taxable permanent establishment, for which it must keep books, file tax returns and pay taxes.

In some countries, any income derived in the host country, other than funds sent by the principal to enable the representative office to pay its staff and meet other expenses, will be deemed to have its source in the country and will thus be taxed.

Value added tax (VAT)

In Europe, the representative office must pay VAT on transactions relating to the supply of goods and services which meet its local needs (eg, supply of stationery or car rental) and when the representative office is involved. If the transaction is international and involves the export of goods or services since it is concluded directly with the principal, then the representative office will not be liable for VAT or any other tax.

There is, then, no substantial difference in the income taxation regimes for resident legal entities and non-resident legal entities that have registered a representative office when activities are performed locally, particularly if the representative office derives income in theBulgaria and falls under the definition of a’ permanent establishment’.

In other countries, like Egipt, since a representative office is legally not involved in any commercial activities, it does not realize any profits and as such is not subject to taxation. Employees are subject to applicable taxes on their employment income.