According to the Company Law of the P.R.C.(Press here for English) , all companies registered in China, including limited liability companies, companies limited by shares, non-company entities and other business entities, need to go through annual inspections for continuous operation in the coming year. The purpose of annual inspection is to examine and confirm the qualification of enterprises to continue operating on a yearly basis by the Administration of Industrial and Commercial.
With the development and implementation of China’s Social Credit System, legal and regulatory compliance has become increasingly important than ever before. More attention should be addressed to the annual compliance procedures as mandated by various governmental departments.
Here, we will take you through the annual compliance requirements for your Foreign Invested Enterprise or Representative Office in China.
Annual tax settlement means that the enterprise summarizes the taxable income of the previous fiscal year and the amount of tax paid to determine they need to pay supplementary tax or apply for tax rebate. After filling out the annual corporate income tax return form, the company can submit to the local tax bureau for corporate income tax declaration and tax payment settlement, by providing the relevant information required. An income tax final settlement report will be completed by a bookkeeping agency, an accounting firm, or a tax accountant firm and will be submitted to tax bureau.
For annual reporting, companies registered before the calendar year end should present its business ability to continue operating in the coming year by providing materials to satisfy the joint inspection requirements with various government authorities. The report is submitted to the Administration of Industry and Commerce, which is another department rather than the tax bureau.
According to Article 4 of the "Measures for Annual Inspection of Enterprises", the start and end dates of annual inspection are from March 1 to June 30 each year. The competent registration authority shall inspect the situation of the enterprise in the previous year within the specified time. Enterprises should submit annual inspection materials to their registration authority before March 15.
In addition, there are three important dates that you should always remember when doing business in China, before which you need to finish corporate income tax / individual come tax declaration and submit annual report. Failure to do so may result in the punishment and negative effects on company’s credit.
The annual compliance requirements start after the end of the fiscal year (December 31 as China follows the calendar year) and usually takes place until the end of June for both WFOE and JV.
Step 1: Prepare an annual audit report
The company yearly maintenance procedure starts with the preparation of annual auditing report, which can be prepared as early as November or December. However, as the data from the previous year needs to be included, it is suggested that the auditing reports should be completed by the end of April before proceeding to the annual tax filing in May.
The company needs to hire a certified public accountant (CPA) to conduct third-party annual auditing, required by the Company Law. The annual auditing report often includes a balance sheet, a statement of cash flow, an income statement, as well as the record of change in equity and a supplementary statement of financial indicators. It is always advisable to carry out an audit of financial statement on a yearly basis to ensure that the company’s financial statements conform to the Chinese Generally Accepted Accounting Principles (Chinese GAAP) standards. This also gives you the opportunity to examine the financial position and health of your company.
The deadline for submitting annual reporting is 30th June. Failure to submit annual report may result in your company being listed into the abnormal operation list of the State Administration for Market Regulation of Industry and Commerce. The business license may be revoked in the worst case then the company does not submit annual reports for three consecutive years. The industry and commerce authority may conduct spot checks on the contents of the company's annual report announcement. If it is found through inspection that the company's annual report conceals the real situation and resorts to fraud, the industry and commerce authority will punish it in accordance with the law, and notify the information and identity of the legal representative and managers to relevant departments and bureaus including the administration of public security, finance, customs, and taxation, leading to a "violation in one place, punishment in every place” situation.
Step 2: Conduct corporate income tax (CIT) reconciliation
After preparation of annual auditing report, the next step is to conduct annual CIT reconciliation, or the annual CIT filing. In China, CIT is paid on a monthly or quarterly basis and companies needs to file CIT returns within 15 days from the end of each month or quarter.
In addition, the State Taxation Administration requires companies to conduct annual CIT reconciliation within five months after the end of each year if all tax liabilities have been met. In some cases however, the companies need to pay supplementary tax or apply for a tax reimbursement.
The annual CIT reconciliation needs to be completed before 31st May each year. However, the investigation into the tax compliance may continue all year long, and the company should always be prepared to submit additional materials if demanded by the tax bureau.
Step 3: Company annual reporting procedure
Once the first two steps are completed, the next step is to conduct annual reporting to multiple administration departments before the deadline, 30th June. From 2020, the annual reporting can be completed by submitting information through the National Credit Information Publicity System (www. gsxt.gov.cn), so that the company no longer needs to report to different departments separately. A general report should include the following information:
The procedure of annual compliance for RO are very similar to that of WFOE and JV. However, different requirements and focuses can still exist during the process.
Step 1: Prepare an annual audit reportIt is a “must-do” requirement for ROs to prepare auditing reports, which shall be issued by third-party accounting firms and signed by two CPAs. The report should conclude detail information of the following, making it different from that of WFOE and JV:
Step 2: Conduct annual tax reconciliation
Like WFOE and JV, ROs also need to declare annual tax to the local bureau by the end of May each year. If the audited tax amount due are different from the taxes paid by the RO, the RO shall discuss the variation with the tax bureau. In this case, you can book a meeting with Hongda’s tax advisors to discuss the reason for the difference.
Step 3: Company annual reporting procedure
The key point of annual report of ROs is to present the legal status and standing of the overseas headquarter for approval. Information regrading to the business activities should also be added. The checklist for RO reporting is as follows:
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Yearly maintenance is crucial for China-based companies to stay competitive, compliant, and adaptable in the dynamic business environment. It helps identify operational inefficiencies, legal compliance gaps, and strategic opportunities that can contribute to the company's long-term success.
Based on the industry category that your company's operation is in, other specific requirements on additional factors may include:
Yes, many maintenance tasks can be handled internally. However, for tasks requiring specialized knowledge (e.g., legal compliance, tax planning), it's advisable to involve professionals familiar with China's regulations and business practices.
Costs can vary based on the complexity of your operations, the need for professional services, and any necessary system upgrades. However, these costs are an investment in the company's long-term sustainability. Partnering with third-party service provider can help you save budget by outsourcing the reports to professionals, just like Hongda.
There is no doubt that skipping yearly maintenance and annual examination requested by law will lead to administrative punishment, such as fines. In addition, it will also bring disadvantages to your own company besides the punishments. Neglecting yearly maintenance can lead to financial, legal, and operational risks. It might result in missed compliance deadlines, inefficient operations, loss of opportunities, and potential legal liabilities.
Sound United Vice President > Asia Pacific
Sound United is the leading designer and manufacturer of consumer audio products in the US. Sound United has been using Hongda since 2013. Moving one’s operation to China is not a small task, But Hongda’s expert services helped us set up a company and deal with tax issues so we could get on with growing our business in no time at all, and that’s why we continue to use them today.
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