Be ready for the Annual Inspection of Foreign-Invested Chinese Enterprises (Jan 1-June 30 each year)

If you're a foreign investor who's running a Chinese enterprise, probably a WFOE, you will need to undergo an annual inspection each year.

Let's examine what the annual inspection is, why it's done, what could happen to you if you don't have one, and how to avoid the inspection if you need to without breaking any rules.

What is the annual inspection for foreign-invested Chinese enterprises?

The 'annual inspection' undertaken by the Statement Administration for Industry and Commerce (“SAIC”) requires you to declare your business situation each year by June 30th and is one of the year-end activities companies must undertake in order to remain compliant in China.

It is a report that includes a lot of the information you need to produce for tax purposes anyway (see below), showing your financial statements, business license, up-to-date tax affairs, etc.

This helps the authorities confirm which companies are operating in China and whether they're operating legally and normally. If a company is, say, avoiding tax or doing something else that's illegal, this inspection helps the government pinpoint and tackle such behaviors.

Which companies are obligated to undergo such an inspection?

Basically, almost any enterprise you can think of in China that foreigners can invest in should undergo such an inspection. These include:

• Companies 
• Non-corporate enterprise legal persons
• Partnerships
• Sole proprietorship enterprises
• Enterprise branches
• Individual Industrial and commercial households
• Professional farmers' cooperatives that have been established for more than one year

For foreign investors reading this, it's probably most likely to be a normal company (WFOE) or a joint venture with a Chinese partner.

What documents are required for the annual inspection?

You will need the following documents. They are submitted online at first and then will need to be submitted as hard copies, too, after an initial appraisal by SAIC indicates whether you can go ahead or if they have questions or suggested changes for you:

• Annual inspection report
• Audit report issued by external accounting firm
• Financial statements of the previous year
• Certificate of approval for FIEs (foreign-invested enterprises)
• Business license
• Capital verification report
• Foreign exchange information
• Industry-specific license or permit
• Financial registration certificate
• Tax registration certificate
• Plus other information that may be required on a provincial or city level

What's the inspection process?

The process is a combination of online and offline work that your Chinese accountant should be able to help you handle:

• Log onto the online annual inspection system
• Submit the report online including the information above
• SAIC checks the submission and provides feedback or approval
• Following approval, you visit the local annual inspection office to give them the same information in hardcopy which will be approved

Remember, all of this needs to be completed before June 30th.

The consequences of not doing the annual inspection

The annual inspection report may be unfamiliar to many foreign investors as it is perhaps not done in Western countries, but don't let that fool you into thinking that it's unimportant paperwork. The penalties for not completing your annual inspection can be serious! 

Fines

Fines can range from just 3,000RMB up to 100,000 RMB with a new deadline being given to you to complete the late annual inspection by SAIC. This can vary by province, though. For example, in Guangdong if an enterprise fails to publish the annual report for two consecutive years there will be a fine of 5,000 yuan; if it fails to publish the annual report for three consecutive years (including three years), a fine of 10,000 yuan is imposed.

Revocation of your business license

If your enterprise fails to submit the annual inspection report etc within the new time limit given by SAIC, the company's business license may be revoked. This, obviously, means you must cease operations and effectively shutters the company.

Other punishments

The enterprise may have penalties raised against it that affect its ability to operate normally, such as:

• Being stopped from importing or exporting goods, materials, etc
• Being blocked from banking
• Not being allowed to renew or apply for visas for foreign staff
• Being added to a list of 'serious illegal enterprises' (after some years of non-compliance) - this would probably negatively affect the legal representative who would face trouble with the law in China in this case
• The legal representative and person in charge of an enterprise listed in the list of seriously illegal enterprises being barred from acting as the legal representative or person in charge of other enterprises for 3 years
• Operators will be listed as trust-breaking personnel

How can the annual inspection be avoided?

If your enterprise is operating normally then the annual inspection can't be avoided. However, there are a couple of legitimate reasons why the annual inspection may be missed or unnecessary:

1. Your enterprise is dormant
   For whatever reason, you applied for a 'commercial subject closure record' and your enterprise isn't currently operating. As long as everything is up-to-date, no annual inspection will be required as you are not operating right now. Upon resumption of business, the annual inspection will once again become mandatory.
2. You have closed down the enterprise
   For obvious reasons, a company that has been wound up and is no longer operating will not need to be inspected. However, you must first go through the correct procedures for closing your enterprise such as settling your outstanding tax liabilities.

Are you running an FIE (foreign-invested enterprise) in China and have questions about the annual inspection?

Don't worry, at the time of writing in April you still have time to collect the information and submit your inspection report. Our team of experienced China accounts can help you if you're stuck. Contact us and let us know about your business and needs if you need help.