Step by step guide for the annual compliance procedures of foreign invested enterprises in China
The probably well-known Chinese social security system (SCS) makes all the topics surrounding compliance in this country more important and of relevance than ever. Therefore, companies operating in China need to pay more attention to their legal and regulatory compliance as scope and punishments by the SCS can lead to highly unwanted consequences such as extra expenses, penalties or even revocation of business license. Every year, foreign invested enterprises (FIE) are obliged by law to hand in an annual compliance report. Besides, representative offices are required to submit one as well. In the following article, we will walk you through the requirements needed for FIEs in China.
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Scope of the annual compliance report and deadlines
In China, FIEs are required to hand in the following documents yearly to the authorities:
- Annual audit report
- Conduction of annual tax reconciliation and reporting to the respective tax bureaus.
WFOEs (wholly foreign-owned enterprises) and joint ventures are types of FIEs, thus they are falling under this requirement as well. The requirements for this procedure start every year after the end of the fiscal year (December 31st) and take place until the end of June. Here a timeline (which may vary between regions):
Step 1: Preparation of the annual audit report
This is the first step of the whole procedure. Preliminary audits may already start in November / December, the actual annual audit needs to be prepared after the end of the fiscal year. Data from the complete past year need to be taken account of. This course of action needs to be finished latest by end of April as annual tax filing starts in May.
How is this report structured? Basically, it consists of a
- Balance sheet
- Income statement
- Cash flow statement
- Statement of change in equity
- Supplementary statement of financial indicators
To make guarantee the correctness of this report, it should be conducted by qualified accounting firms and signed by two Certified Public Accountants (CPAs), registered in China.
Step 2: Conduction of corporate income tax reconciliation
Before May 31st every year, annual corporate income tax (CIT) reconciliation / filing is to be conducted. The State Taxation Administration (STA) gives companies a time frame of five months from the year before in order to determine whether all tax liabilities are met or if a payment of supplementary tax is necessary, or if tax reimbursement is needed. Only the CIT requires an annual reconciliation to the tax bureau at the company level.
As a side note, CIT in China is either paid every month or on a quarterly basis. CIT returns have to be filed within 15 days from the end of the months or quarter by the company. Actual CIT taxable income differs from total profits due to discrepancies between Chinese tax laws and accounting standards.
Step 3: “Many-in-one” annual reporting
Deadline here is June 30th every year and this report needs to be conducted to multiple government bureaus, certifying the compliance of the company and that every department’s information is updated accordingly:
- Commerce bureau,
- Financial bureau,
- Statistical bureau,
- Foreign exchange bureau and
- Local State Administration of Market Regulation
To simplify this procedure, all the information can be submitted to all government bureaus at once via the National Credit Information Publicity system; hence it is also called “many-in-one” reporting. Separate reporting to the bureaus is no longer required. The handed in report must include at least e. g. these following information:
- Basic company information (contact, existence status, business scope, staff, salary etc.)
- Investor profile
- URL of company website and online shop
- Information regarding equity change
- Balance sheet information
- Operation of the company (imports and exports, total revenue, R&D expenses etc.)
- …
What happens if the annual compliance requirements are not submitted or the requirements were not met?
If companies fail to submit their information within the given deadline or if fraudulent evidence or severe concealment are detected, they will receive an entry in the Catalogue of Enterprises with Irregular Operations (Irregular Operations Catalogue). Staying in this list for over three years, will come with consequences such as being black listed for operations and investments in the future. Legal representatives will be banned from taking this position in other companies for three years and the affected company will be in a more than disadvantageous position.
Our legal advise and compliance with audit expertise from Ecovis Heidelberg and Ecovis Ruide Shanghai
At the end we can conclude here, that a sharp eye on the compliance and audit, financials and taxes is essential for every (foreign) company operating in China. But how do I make sure of both? The best strategy here would probably be someone who works together and covers both the legal and financial part as advisory for the respective company. Ecovis Heidelberg under the leadership of Richard Hoffmann is specialized in compliance in Chinese companies and has long-term experience as a Supervisor himself. With the close relationship to Ecovis Ruide (an A-license Chinese CPA law firm based in Shanghai), they will be the perfect contact people for compliance and the annual compliance report. Feel free to contact us!
