According to the People’s Republic of China (PRC) Law and Regulations, both domestic and Foreign-Invested Enterprises (FIEs) must follow specific annual compliance procedures (which includes the Annual Audit, the Annual Tax Filing and the Annual Reporting) to align with legal, financial, and regulatory standards. The annual compliance activities are not only a legal requirement, but also an opportunity for businesses to gain a clearer understanding of their operations and financial health.
As mentioned, the most significant procedures are as follows:
1. Annual Audit: Every company is required to conduct an annual audit of their financial statements. This audit, carried out by a domestic firm of certified public accounting (CPA) in China, ensures that the company's financial reports comply with Chinese regulations. While this requirement is stricter for Foreign-Invested enterprises, it is generally recommended for all companies to perform annual audit to maintain transparency and good financial governance.
2. Annual Tax Reconciliation: Companies must file Corporate Income Tax (CIT) on a quarterly or monthly basis. Additionally, by the end of May of the following year, they are required to complete their annual tax reconciliation. After completing this step, foreign companies can then move forward with distributing and repatriating their profits.
3. Annual Reporting: The report must be completed by the end of June of the following year and submitted to government authorities. It includes the basic information about the company as well as relevant updates, and the financial report for the year.
These three annual compliance procedures are required for Representative Offices (Ros). The representative office (Ros) is also required to submit the business certificate of its foreign organization to the local General Administration of Market Supervision when submitting its annual industrial and commercial report in the following year.
In addition, the main differences between foreign-invested enterprises and domestic enterprises include:
● SAFE Reporting: FIEs must report on foreign exchange, capital transactions and profit repatriation. Domestic companies are not required to submit this report unless they are involved in cross-border transactions.
● Tax Compliance: Both FIEs and domestic companies must file their Corporate Income Tax (CIT) return. FIEs also need to complete an audit report and withhold tax on repatriated profit.
● Transfer Pricing Documentation: Foreign-invested companies are required to submit it when eligible, especially when cross-border-related party transactions are involved. Domestic companies have less need for transfer pricing documentation but are also required to submit it when related transactions are involved.
● Corporate Governance Reporting: FIEs must report any changes in directors, shareholders and capital structure. Domestic companies have fewer restrictions in this area unless they are regulated.
Overall, while annual compliance mandatory activities apply to both FIE’s and domestic companies, FIE’s often face stricter requirements.
At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.
PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance.
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