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Annual audit, tax reconciliation and inspection in China.

Annual audit, tax reconciliation and inspection in China

All registered companies in China are legally required to prepare certain year-end processes. These are not only important to stay compliant in China, but they also do need to be completed so that dividends can be paid out to shareholders. This article elaborates on the different steps, namely the annual audit, tax reconciliation, inspection and subsequent profit repatriation.

Annual statutory audit

The annual statutory audit is performed by a certified accounting firm (CPA) and normally is a basis in preparation for the Annual Tax Reconciliation & Clearance and the Annual Inspection.

It starts by preparing the financial statements:

  • Balance sheet
  • Profit & loss statement
  • Cash flow statements
  • Statement of changes in equity
  • Notes to the financial statements

These documents must be checked by the CPA firm, which will provide the final clearance to the audited accounts. Please note that this financial information is prepared according to PRC GAAP. If an entity wants to (also) prepare its financial information according to IFRS, a separate audit must be performed. As companies have usually filed their documents on a monthly or quarterly basis, the preparation of these documents should not take too long.

Acclime can support companies with the annual audit. We often liaise directly with the auditor for our corporate service clients, as we are responsible for the accounting and tax filing on their behalf. We prepare all documentation and ensure that the process is smooth for both our client and the auditor.

We assist with:

  • Assist in preparing the documentation required for the audit
  • Liaise with our client and the auditor to schedule fieldwork and follow-up

We advise that this step should generally be completed no later than 30 April after the closing of the financial year.

Annual tax reconciliation & clearance

The reconciliation & clearance is required by the tax authorities and refers to the activities for which the taxpayer calculates the taxable income and the payable amount of Corporate Income Tax (CIT). This is done within four to five months after the end of the financial year.

This calculation is made based on the monthly or quarterly prepaid amount of income taxes. The taxpayer should subsequently fill out the annual corporate income tax return forms, file an annual corporate income tax return to the competent taxation authority, provide relevant materials as required by the taxation authority and finally settle the amount of corporate income taxes for the whole year.

Looking at Acclime’s support for its client in preparing the reconciliation, we assist with:

  • Attend meetings organised by the local tax bureau, discuss with officers to learn their special requirements on the Annual Tax Reconciliation & Clearance this year
  • Prepare information and vouchers regarding all the financials, income, IIT, enterprise income tax, expenses such as social insurance, housing fund, rental, etc.
  • Prepare documents and information required by the accounting firm, and assist in the preparation of annual audit reports
  • Proceed to the tax bureau and submit all documents, data, reports created in the above processes and make an explanation to the tax bureau if requested
    • Any major restructuring of the company or organisation in the previous year and a per invoice per entity form covering all interparty transactions with the tax authorities must also be prepared. The forms will be filed together with the other documents in this step.
  • Follow up with the tax bureau and obtain the Annual Tax Reconciliation Completion Receipt

These steps should be completed before 31 May.

Annual inspection of the business

As per the notice issued on 16 December 2019 jointly by three governmental authorities (i.e. Administration for Market Regulation, Ministry of Commerce and the State Administration of Foreign Exchange), all foreign-invested enterprises must declare their business situations for the past year by the end of June of every year.

This means:

  • Register and log into the annual inspection online system
  • Complete the basic company information and submit a united annual report relating to business, finance, tax and foreign exchange information of the company, subject to the requirements of each of the five authorities, and then submit this online.
  • The authorities will check and request modifications (if any)
    • Meanwhile, the company will also need to prepare the relevant information and data in hardcopy.
  • After the authorities approve the online information and report, the company should visit the annual inspection office and submit the hardcopy documents as required by the authorities for final check and approval.

This step should be completed before 30 June .

Repatriation of profits

Only when all of the above steps have been completed, the company can repatriate its profits for the past year. To begin remitting profits towards the parent company, subsidiaries must comply with prerequisites and file the required paperwork.

The required paperwork will at least include the following:

  • Business License
  • A recent audit report of paid-in capital
  • External auditor’s report
  • Certificate of tax filing
  • Tax payable receipt
  • Relevant board resolution on profit distribution
  • The entire procedure may take two to four weeks, though it can take longer for complex cases.

Next to filing the required paperwork, several legal requirements must be fulfilled before a dividend distribution is approved. Please read more details on this procedure in our detailed article.

At Acclime China, our goal is to support our clients to become successful in China. We understand that compliance is a crucial step in the process of success. Our team is specialised in ensuring a smooth annual audit process. For insights, questions and support, please feel free to reach out to us.

Contact our teams for expert support and further information about auditing requirements in China to ensure you are compliant in the market.

Russel Brown OBE, Vice Chairman, Partner,
Yolanda Xie, Partner, Audit,

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About Acclime.

Acclime is Asia’s premier tech-enabled professional services firm. We provide formation, accounting, tax, HR and advisory services, focusing on delivering high-quality outsourcing and consulting services to our local and international clients in China and across the region.

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