China Tax & Accounting Solutions
Eliminate all risks in China by outsourcing your tax & accounting in China to local experts.
Outsource Tax & Accounting
Once a representative office or WFOE is set up and registered in China, it is necessary to maintain proper records and accounts in line with Chinese accounting laws and principles. Periodic reporting of accounts and tax to authorities needs to be made. A full annual audit is also required of every company registered in China, including all forms of Foreign Invested Enterprise (FIE). For an FIE this is vital – as it is a pre-requisite for being able to start the repatriation of profit process.
This is no different to requirements in most countries – and accounting of course is nothing new! But without doubt, adapting to the rules and standards of tax and accounting in China is not straightforward.
Our Tax & Accounting Procedure
Tax and accounting with Top FDI
Maintaining an independent tax and accounting service is an expensive option for any company, especially a smaller one, and many WFOEs and rep offices choose to outsource this to an experienced accountant services firm.
We provide a full range of accounting and tax services in China, as well as audit services. We can adapt our offering to suit the assistance you need. We can operate a fully outsourced accounting, tax and audit solution for you, or can just handle parts of this in collaboration with your internal functions.
Areas we can assist include the following:
- Set up of initial accounting system and methodology for WFOE or rep office
- Monthly preparation of company books in line with Chinese accounting standards
- Monthly and annual preparation for tax filing with Chinese tax authorities
- Preparing filing for Business tax, Individual Income tax and Corporate tax
- Annual audit of financial statements
- Consideration of appropriate double taxation treaties
Chinese Accounting Standards
The Chinese accounting system follows the Chinese Generally Accepted Accounting Principles (GAAP) framework, also known as Chinese Accounting Standards (CAS). These standards have evolved over time and are now quite in line with the globally recognized International Financial Reporting Standards (IFRS) and also US GAAP. There are however enough differences to present challenges.
To give one important example, CAS uses different valuation methods for fixed assets. IFRS allows valuation either by historical cost or by revaluation of assets, whereas CAS insists on the historical cost principle. There are also regular discrepancies which occur between Chinese and International Standards not due to disagreement in treatment, but slow update processes. Changes released into one system often take some time to be adopted in the other.
The Benefits of Outsourcing Tax Services
There are several advantages to outsourcing tax and accounting services:
- The complex areas of Chinese accounting standards and tax reporting are entrusted to a company which deeply understand them.
- Less internal company time taken up on administration and reporting, resources are free to focus on real business tasks.
- Our accountants are always up to date with rules and regulations, and are well informed of current or future changes.
- Regular and accurate submissions to Chinese authorities are very important. There can be strict penalties for late or incorrect submission.
- We can advise on tax structures and planning, which can drastically reduce your taxes.
Frequently Asked Questions
A WFOE is short for Wholly Foreign Owned Enterprise. A WFOE is a 100% foreign-owned (individual or corporate) limited liability company able to generate profit, invoice clients and hire local / foreign employees in China.
Any operating profit made in China can be converted to foreign currency for transfer to an overseas parent company.
Yes, WFOE can hire staff ( locally & expat ) in China without third party agency.
A WFOE registration is the most complete and flexible option for opening a company in China. It has many advantages over a Representative Office or a Joint Venture operation. Here are some of the key advantages we see in WFOE formation.
Can be formed without a Chinese partner
A WFOE is independent, able to manage its own operations, funding and business development. Without a parent, it does not need to share profits, strategies or Intellectual Property.
Can make profits in China
A WFOE can fully carry out business in China, in line with its agreed business scope. It can issue local currency invoices to domestic customers, and make profits from its activities.
Able to send funds overseas
Any operating profit made in China can be converted to foreign currency for transfer to an overseas parent company.
Able to hire staff directly
A WFOE can manage its own human resources (without using an agency), and hire staff both locally and from overseas.
The best option to protect IPR in China
The WFOE structure provides some level of protection under Chinese law.
Employer on Record ( EOR ) is a third party contracted to take care on core compliance responsibilities of an employer in that country.
Apply for name approval and registration
The first step in registering a WFOE in China is to choose an compliant name and get it approved.
The name choice must follow rules set up in Chinese company registration laws. The company name must include the company industry or brand, operating region of the business, and a suffix of “Company Limited.”
The following will be checked during name approval:
- Availability of the requested name. This can be checked independently on the SAIC website (http://www.saic.gov.cn/sbjEnglish)
- Inclusion of restricted words, such as “China”, “State” or “National”
- Inclusion of foreign characters or symbols
- Whether the name is confusing or misleading
Don’t forget the importance of naming strategy and branding. Just as overseas, your company’s name is the first impression of your company. It should clearly reflect the company role and image. Consideration should also be made of the characteristics of the Chinese characters. Many words or characters have similar meaning or sounds which can strongly influence the impact of the chosen name (both positively and negatively!)
Note that the name registration can be done early whilst you prepare further, and to aid trademark registration. It is not necessary to immediately submit company filing to MOFCOM after the name is approved. Note also that it is common to submit more than one name for consideration.
Rent office space as necessary
Before submission for WFOE incorporation, it is necessary to have a lease for company space in the city of registration. The contract for this needs to be valid for a year from registration date. It is advisable to include a condition in the leasing contract to cancel the lease in case of registration refusal or difficulties. As with any contract in China, steps should be taken to minimize future problems – such as checking the owner’s details and land rights certificate for the property being leased.
Carry out environmental impact assessment – Only for a manufacturing WFOE
If registering a manufacturing WFOE, an environmental impact assessment will need to be carried out by a registered agency. This is done in order to obtain an approval certificate from the local environmental protection authority.
The procedure and required approval varies with the scale of the manufacturing operation and its potential impact, and will include consideration of material used, produced and disposed, machinery to be used, as well as any existing plans for environmental protection.
Online registration via MOFCOM
The registration process has been significantly simplified in recent years, and now makes use of an online filing submission. This is much faster than the previous methods, but still requires a lot of documentation! It should be noted that there is a somewhat greater burden with online submissions to have all details correct and finalized. The process of “blind submission” does not allow for discussion with authorities during submission. If rejected, the application will need to be revised and resubmitted.
Apply for a “5 in 1” business license from local AIC
Following approval from MOFCOM, the application for a business license with the local Administration of Industry and Commerce (AIC) needs to be made. This is another process that has been greatly simplified and quickened in the past couple of years. An application is now made for a so-called “5 in 1” business license, which covers all the major licenses required for a new company. Previously each of these required separate applications and naturally this was much more time consuming.
Again, this is now an electronic submission, accompanied by significant documentation (see section on documents required). Once submitted the AIC will share documentation with other relevant authorities to issue licenses – a major time improvement!
The 5 licenses issued by the AIC are:
- The business license
- Tax registration certificate
- Organization code certificate
- Social security registration certificate
- Statistical registration certificate
The company now exists and is licensed to do business in China, and the remaining set-up steps can be considered “post licensing” tasks. We would expect to reach this point in 2-3 months.
Carving chops for the new company
To Chinese business newcomers, the importance of chops is often a surprise! Every company requires a set of chops, or seals, to be used as representation for signing official documents. These hold the final say, above individual signatures.
Chops can be applied for through the Public Security Bureau (PSB) following company set up. Several additional chops are needed for different business areas (e.g. financial, invoice sealing and customs if appropriate). Each will have the company name in Chinese and English if required.
Opening bank accounts
Once chops are obtained, they can be used to open the WFOEs Chinese bank accounts. A WFOE should have at least two accounts, preferable with the same institution (Chinese or foreign banking institution are equally acceptable depending on company preference).
- A local currency RMB standard company account. This can be used for payments and receipts in RMB, as well as for company tax payments and day to day operating costs.
- A separate capital contribution account, designated in foreign currency. This is the official account through which capital can be injected from overseas.
WFOEs must be registered for VAT payments with the local tax bureau. There are two different categories for VAT registration for all companies – “general” and “small scale” (with low sales volume). A new WFOE which qualifies for small scale may choose to register under either category.
In general, a lower VAT rate is paid for companies that qualify as small scale, but there are some potential advantages in registration for general status (such as the ability to deduct input VAT). Discussion of individual situation with a tax expert is advisable here.
Customs and import-exit registration – for trading WFOEs only
For trading WFOEs involved in import-export there are several additional registrations required, which are not automatic under the AIC business license application. These must be made separately following company incorporation and the exact requirements depend on the company operation area, but will likely include the following:
- Import-export license
- Customs registration certificate
- Registration with Entry-Exit Inspection and Quarantine Bureau (for quality inspection)
Although there is now (since changes in 2016) no fixed minimum requirement, in practice most WFOEs will still require capital injection. The planned amount is reviewed by local authorities during application and it makes business / tax sense to get the level right from the start.
The amount will vary greatly for different types of business – naturally a small consulting company requires much less than a complex manufacturer. As a guide, sufficient funding is needed to cover the WFOE’s financial obligations before the company is self-supporting (often set as 1 year). Note that there is now much more flexibility than in the past regarding the time period over which capital should be injected.
It is important to set the capital level appropriately during formation. If it is set too low, any additional funding must be taxed as income (further capital injection is possible but there is a very time consuming approval process). Set it too high, and of course funds may be tied up that could be used elsewhere (and these will be hard to release).
A WFOE requires an executive director or board, as well as one or more separate supervisors who oversee director and company performance. A general manager (who can also be a director) is needed with responsibility for day to day operations. Ratios and requirements for boards are defined and depend on company size.
Yes, a WFOE can fully carry out business in China in line with its agreed business scope. It can issue local currency invoices to domestic customers, and make profits from its activities.