Foreign Invested Enterprises (FIEs) and Representative Offices (ROs) in China must adhere to stringent annual compliance procedures, typically starting after the fiscal year ends and continuing until late June. Non-compliance can lead to severe repercussions, especially amidst the evolving social credit system where legal and regulatory adherence is increasingly scrutinized.
Importance of Compliance
Legal compliance is critical, as it helps avoid penalties, additional costs, downgrading in social credit ratings, or even business license revocation. Additionally, a company's ability to repatriate profits may be significantly impacted.
Annual Compliance Procedures for FIEs
For Limited Liability Companies in China, compliance activities usually commence 1 to 2 months before the end of the fiscal year (December 31) and continue through to late June.
Step 1: Preliminary Audit Planning
The compliance process begins with the preliminary audit where potential issues are identified early. Companies often start this phase in November or December to allow for corrections and/or adjustments to be made before the main audit.
Step 2: Annual Audit Report Preparation
Following the fiscal year, which in China is from January-December, an annual audit report must be generated, capturing the preceding year's financial data. The audit report typically includes essential financial statements and should be completed by the end of April to facilitate timely tax filings in May.
A frequently asked question we receive is whether it is mandatory by law to perform an annual audit in China. You may be surprised to learn that by law a company in China is not required to complete a year-end financial audit, HOWEVER, as part of the annual compliance procedure, the annual inspection form must be completed which is a government form to be passed onto 7 different state bureaus – finance bureau, tax bureau, customs bureau, SAFE bureau, etc. In this form they will ask whether the company has completed its year-end financial audit, which CPA firm it has used, and provide details of the report into the form. If this information is not completed, then you cannot complete this inspection report, and the company will be fined and placed on a blacklist. In addition, when the annual profits tax filing report is submitted to the tax bureau, the tax officer in general will not ask to see the audit report, HOWEVER, if they have a query regarding the declaration made and they require to have substantive evidence then the audit report MUST be submitted. Last but not least when a dividend transfer is requested to be made then the audit report is a mandatory document needed for both the tax bureau and the bank. As such it is highly recommended to think that financial audit reports are mandatory as all bureaus will request it at some point or another.
Step 3: Enterprise Income Tax (EIT) Reconciliation
By May 31, FIEs must reconcile annual EIT. This involves aligning discrepancies between actual taxable income and recorded profits to ascertain any additional tax liabilities or reimbursement claims.
Step 4: “Many-in-One” Annual Reporting
From 2020, FIEs can use the National Credit Information Publicity system to report multiple compliance requirements to various government departments in a single submission before June 30.
Step 5: Transfer Pricing Documentation
Entities engaging in significant related-party transactions must maintain appropriate transfer pricing documentation as part of their compliance obligations.
A frequently asked question about what "significant" related-party transactions means is as follows. The criteria for preparing a Local File in China includes:
Transfers of ownership of tangible assets exceed RMB 200 million.
Transfers of financial assets exceed RMB 100 million.
Transfers of ownership of intangible assets exceed RMB 100 million.
Any other type of related party transactions exceed RMB 40 million.
If your company falls into these categories, it's necessary to prepare the relevant documentation in accordance with Chinese transfer pricing regulations.
Consequences of Non-Compliance
Failure to comply with annual requirements can lead to expulsion from regulatory lists or worse, being categorized as an enterprise with illegal and dishonest behaviors, which throttles future business opportunities.
Annual Compliance Requirements for Representative Offices in China
ROs must produce an annual audit report, conduct a tax reconciliation report, and report their findings to the local State Administration for Market Regulation (SAMR) between March and June each year.
Step 1: Prepare the Annual Audit Report
ROs are mandated to submit an audit report, which should detail financial operations, employee registration, and expense verification.
Step 2: Annual Tax Reconciliation
ROs must submit their taxation report by late May each year, made simpler through online options.
Step 3: Annual Reporting to SAMR
ROs must submit key documentation to SAMR, including their legal status and business activity reports, often requiring additional tangible proof from their foreign headquarters.
Tips for Managing Compliance Requirements
Staying updated on regulatory changes is crucial, as compliance requirements can frequently change, and keeping informed helps businesses avoid compliance risks. Additionally, local variations mean that different regions may have unique requirements, so engaging with local authorities or consulting qualified service firms can help navigate these complexities. Utilizing professional services by hiring third-party providers can significantly ease the burden of regulatory compliance, especially for companies without robust internal finance teams.
How Woodburn Can Assist
At Woodburn, we provide a comprehensive range of compliance services tailored to your business needs in China. Our experts are well-versed in the intricacies of Chinese compliance requirements, including:
Full Annual Compliance Outsourcing: Woodburn can assist with full annual compliance outsourcing, ensuring that businesses meet all regulatory requirements efficiently and effectively.
Comprehensive Audit Support: Helping conduct thorough preliminary and annual audits to ensure you meet financial reporting standards.
Tax Advisory Services: Our team offers guidance on CIT reconciliation and manages all related tax compliance processes.
Local Insights: With our extensive network across different regions, we can provide tailored advice that accommodates local compliance variations.
Language Proficiency: Our team’s fluency in English ensures clear communication, making the compliance process smoother.
By partnering with Woodburn, you can navigate the complexities of annual compliance in China with confidence, ensuring your business remains compliant and positioned for success. For more information on our services and how we can assist you in your compliance needs, please reach out to our experts at Woodburn.
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Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.