Accounting and annual compliance in China
For foreign companies doing business in China, with local presence such as a representative office (RO), or a wholly foreign owned enterprise (WFOE), they need to be aware of the China local compliance requirements and follow the local legislations.
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China’s accounting requirements
At the general accounting principle level, China’s accounting is pretty close to the international financial reporting standard, however, there are some differences.
Everyday accounting practice
- The fiscal year for the company, it has to follow the same calendar year from 1st of January to December 31st
- The chart of accounts, all companies have to follow the same set up, but they have the freedom to set up the sub accounts according to their specific business needs
- China companies need to prepare the vouchers, ledgers and financial reporting in Chinese for all the local statutory filing
- The bookkeeping currency should be in RMB rather than in a foreign currency. However, the company can do the conversion at the financial report level and choosing a conversion rate
It’s not easy for a China companies to use their headquarters’ accounting software unless with a very serious localization, due to common barriers such as:
- allowing the Chinese entry into the system
- specific accounting features in China which the western accounting software normally can’t facilitate
- the monthly closing in China has to be done before you generate the financial reports, and afterwards there’s no further adjustments can be made to the previous month
Thus, it’s normally more cost effective to choose local accounting software to maintain China books.
Accounting documents maintenance
In China, the accounting vouchers have to be filed together with the supporting documents. That means if you have one specific transaction:
- the associated invoice and the bank slips have to be stuck to the set of accounting vouchers
- those vouchers at the monthly end have to be stuck together according to the voucher serial number in a time sequence, and afterwards this sequence cannot be changed
The accounting vouchers normally are kept in your China office because you have to deal with the annual audit and other random government inspections.
So due to these reasons it’s difficult for headquarters or accountants overseas to manage this function for your China subsidiary.
Annual compliance requirements in China
Annual compliance requirements include several items. They are different for ROs and WFOEs.
For ROs, the requirements are annual audit, annual tax reconciliation, annual reporting to the Administration of Industry and Commerce (AIC).
For WFOEs, in addition to these three steps, you also have to file another report to SAFE, and another combinative reporting including several government bodies. Without doing those annual compliances in a fixed timeline, the company may face penalties, also at the risk of getting their license suspended or cancelled by the AIC.
It’s important to understand that China is a developing country and the legislation environment is frequently evolving. You need to have a competent accounting team that could either be an in-house team or out-sourced service provider, which may be better for small or medium sized business, to help you maintain local compliance, and abreast of all the new changes.
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Accounting and Annual Compliance in China
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained in this report. Readers should independently verify the accuracy and reliability of the information.
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