To comply with the PRC regulations, all companies in China need to follow a series of annual requirements. In this article, we walk foreign-invested enterprises through the three steps of annual compliance requirements they have to comply.
The annual compliance requirements start after the end of the fiscal year (31 December as China follows the calendar year), and usually take place until the end of June.
The annual compliance requirements are divided into three steps:
- Statutory annual audit: the first step is the preparation of an annual audit report by a certified public accounting firm registered in China.
- Annual tax filing: the second step is to carry out the reconciliation of corporate income tax.
- Annual reporting procedures: the last step requires various filings to local government departments.
According to the company law of the PRC, a limited liability company shall hire a qualified certified public accountant firm to conduct an annual audit of the previous year’s activity of the company’s financial reports. The annual audit is a requirement by company law, however, in some cities, the local tax bureau may not strictly need it. Therefore, some companies may not conduct an audit in order to save costs.
Despite this, it is advisable to carry out an audit of financial statements at least once a year to get an independent assessment of the financial status of the company. The purpose of this annual audit is to ensure that the company’s financial statements conform to the Chinese GAAP (Generally Accepted Accounting Principles) standards while showing the true financial position of the company.
It is important to note that an audit also guarantees good governance of the company, as it is one of the main duties of the legal representative to draft the financial statement and submit it for the approval of the shareholders.
The annual audit report is also required to distribute profits.
Standard reports include a balance sheet, an income statement, a cash flow statement, statements of changes in equity, notes of financial statements and a taxable income reconciliation sheet.
It is important to note that audit reports might have different requirements per region. The reports should be presented in Chinese to the authorities; however, they can also be prepared in English for foreign companies.
In order to proceed with the annual corporate income tax filing in May, the audit reports should be completed before the end of April.
Annual tax filing
The next step following the audit report is to proceed with the annual corporate income tax (CIT) filing. The standard rate of the CIT is 25% on profits. However, this rate might vary depending on the size of the company and the industry in which it operates.
CIT is paid on a quarterly basis during the year; the annual CIT reconciliation ensures that the tax has been fully paid in the previous year and verifies if additional tax might need to be paid or a reimbursement made. The deadline to submit the yearly tax reconciliation is at the end of May.
Once this step is completed, it is important to note that foreign companies can proceed to distribute and repatriate profits.
Annual reporting procedure
Once the annual audit report and CIT reconciliation are completed, companies need to proceed with submitting information to several government authorities, such as the Ministry of Commerce (MOFCOM), the State Administration for Market Regulation of Industry and Commerce (SAMR), the State of Foreign Exchange (SAFE) and the Finance Authority and Customs Authority (for trading companies). This is to ensure that companies are compliant and that the information related to each department is updated.
The relevant information and documents required for the annual reporting procedure include basic information on the company, top-level financial data, investments, and UBO (Ultimate Beneficial Owner) information. Depending on where the company has been registered and the business scope, additional documents may be required.
The deadline to submit the annual reporting is at the end of June. If a company fails to submit its annual report before the deadline, it will be listed into the SAMR abnormal list. After three consecutive years of not submitting an annual report, it will be considered a serious legal violation and in the worst-case scenario, a company may have its business license revoked.
The annual compliance requirements are applicable to all companies as well as Representative Offices (“RO”).
In this regard, it is worth mentioning that ROs are required to pass the annual inspection by submitting the notarised and legalised business certificate of the foreign entity to the local SAMR every year (by 30 June). The documents should also be translated into Chinese, so ROs should plan this activity well in advance in order to avoid any delay in the preparation and submission of the required documentation.
Even though annual compliance is required by law, it is also an opportunity for companies to review their operations and conduct a financial health check to determine if there are any tax and compliance issues. Failing to carry out annual compliance procedures might result in the payment of penalties, blacklisting, or a negative effect on the company’s and directors’ social credit.
Apart from the above annual compliance requirements, there is also the annual individual income tax (IIT) returns, which is the responsibility of the employees; this should be performed between 1 March and 30 June, if certain conditions are met.
This is to ensure that the individual income tax has been fully paid and to adjust the IIT paid during the previous year by paying additional IIT or applying for a refund of the IIT overpaid.
How can Hawksford help?
Hawksford is an established provider of company incorporation and outsourced corporate services in China.
Hawksford can provide audit support, coordination between the auditor and the client, preparation of the documentation and assistance during the audit. Hawksford can also assist you with reoccurring tax compliance services, the annual corporate income tax filing and annual reporting.