China has complicated administrative procedures and a set of corporate compliances different from that of many foreign nations. Companies must complete all compliance requirements to ensure the company is in line with national and local regulations and avoid penalties. This article provides you with a complete list of corporate compliance requirements for companies in China.
Ongoing business compliance requirements for companies in China
Annual Shareholders Meeting
The shareholders' meeting must be held at least once every year. However, there is no statutory requirement when the meeting should be held.
The notice period for holding meetings is 15 to 20 days or as stated in the articles of association.
Matters to be decided in the shareholders' meeting may include:
- Amendments to the articles of association
- Deciding the remuneration of directors and supervisors
- Passing resolutions on company mergers, divisions, dissolution or liquidation
- Passing resolutions on the increase or reduction of the registered capital
- Reviewing and approving the reports of the board of directors
- Reviewing and approving the reports of the supervisor or board of supervisors
- Reviewing and approving the company's annual financial budget and financial plans
Business licenses
Business licenses are needed for companies to operate in China. You will need to apply for a business license at the Administration of Industry and Commerce (AIC).
The information contained in the business license include:
- 18-digit business registration number
- Business scope
- Company name
- Date of establishment
- License expiry date
- Legal representative
- Registered address
- Registration bureau
- Registered capital
- Registration number
- Type of entity
Accounting and tax compliance requirements for companies in China
Date of the financial year-end
The financial year-end of companies in China is the same as the calendar year, which starts on 1 January and ends on 31 December.
Safekeeping of proper accounts and records
Companies in China are required to keep accounting records in accordance with the accounting standards issued by the Ministry of Finance. All of the books, records and financial statements must be in Chinese and kept for 15 years. Companies must keep three types of accounting records:
- General ledger and sub-ledgers
- Journals
- Supplementary memorandum records
Appointment of an auditor
The board of directors is responsible for appointing an auditor, and the financial statements must be audited by a Chinese-registered certified public accounting (CPA) firm.
Income tax return
Companies must file and pay income taxes monthly or quarterly within 15 days of the following month or quarter. They also need to file and settle their annual income tax return within five months after the end of the tax year.
Employment law in China
There are certain employment laws that foreign investors should consider when doing business in China.
These laws include:
- 1995 Labour Law of the People's Republic of China
- 2008 Labour Contract Law of the People's Republic of China
- Law of the People's Republic of China on Labour Dispute Mediation and Arbitration
- Employment Promotion Law of the People's Republic of China
- Law of the People's Republic of China on Work Safety
- Social Security Law
Social security contribution in China
China's social security system covers five types of benefits and a housing fund.
| Benefit | Employer contribution rate | Employee contribution rate |
| Pension | 14% – 16% | 8% |
| Medical expenses | 10% | 2% |
| Unemployment (up to 12 – 24 months of benefit in the case of redundancy) | 0.5% – 0.8% | 0.2% – 0.5% |
| Maternity | 0.8% – 1% | 0 |
| Work-related injuries | 0.5% – 2% | 0 |
| Housing funds (residents only) | 5% – 12% | 5% – 12% |
Entitled leaves for employees in China
The number of leaves an employee is entitled to depend on the number of employment years.
| Years of employment | Entitled leaves |
| Less than one year | No leave |
| 1 – 10 years | 5 days |
| 11 – 20 years | 10 days |
| Over 20 years | 15 days |
Sick leaves in China are given to employees who suffer from an illness or a non-work-related injury. Sick leaves in China are required to be paid for local and foreign employees. An employee is compensated at 60% to 100% of their normal salary during their sick leave. The percentage of compensation depends on the seniority of the employee, the city and its regulations.
| Working period | % of salary |
| Less than six months of sick leave | |
| Less than two years | 60% |
| Between 2 and 4 years | 70% |
| Between 4 and 6 years | 80% |
| Between 6 and 8 years | 90% |
| More than eight years | 100% |
| More than six months of sick leave | |
| Less than one year | 40% |
| Between 1 and 3 years | 50% |
| Between 3 and 6 years | 60% |
The maximum sick leave is three months for employees with less than a 10-year employment history, while the maximum sick leave for employees with 20 years of work history is an unlimited paid leave.
Examples of common compliance risks
There are many examples of common compliance risks which should be carefully considered when active in China. Here are some of the most prominent examples.
Employment Taxes
Many companies traditionally sought to save on the cost of individual income taxes and social insurance contributions by paying part of salaries (and bonuses!) as reimbursements against valid legal invoices (fapiao). However, an employee complaint to the Labor Department or local tax officer may be sufficient to trigger an inspection, which could result in back-payments as well as late fees and fines. If the amounts of evaded taxes are large enough, these practices could even lead to criminal liability (though this is not common).
Corporate Taxes
Recently, some companies were pursued by a local district tax office in Shanghai for failure to pay withholding taxes on intercompany expenses booked in the previous year. Tax offices are improving their systems, and many are becoming more assertive at initiating inspections and monitoring compliance. Campaigns focusing on certain kinds of activities (in 2014: affiliated party transactions) are causing havoc to companies that do not strictly play by the rules.
Tax Evasion and Bribery (Commercial and Official)
Some companies manage to receive income off the books and then use some of these funds to pay illegal commissions (kickbacks) to promote sales, win projects or obtain licenses. Not only does this practice expose the company and its managers to liability for accounting fraud and tax evasion, but it can also result in administrative, civil and criminal liabilities for commercial or official bribery under PRC laws. Even in industries where such practices are common, especially foreign businesses may be the first to get caught – with life-altering consequences for the business and the involved managers.
Business Scope Restrictions
China continues to restrict foreign investment in certain sectors or subjects businesses to special licenses that are difficult to obtain. Examples in the service industry are recruitment (joint ventures only, unless the investor is CEPA qualified), labour dispatch (license difficult to obtain), legal services (closed to foreign investment), accounting and auditing (joint ventures only), as well as certain forms of education (subject to restrictions or licensing). Many foreign investors avoid such restrictions by establishing a general consultancy WFOE. But this exposes the business and could lead to fines and even revocation of the business license. As part of a long-term strategy, foreign investors should also consider alternatives such as making the extra effort to obtain the required licenses, relocating to a pilot area that allows this business (e.g. the Shanghai Free Trade Zone), using a VIE (Variable Interest Entity) structure or entering into a joint venture with a local partner.
Future of compliance in China: Social Credit System
The future of compliance in China has already been announced through the introduction of the Social Credit System (SCS). The SCS is a system designed to measure individuals' compliance, companies, and government entities. For business entities, the Chinese Government envisions the SCS to promote self-control through fear of unfavourable conditions.
The SCS can be seen as a big data initiative, connecting the dots between data already in possession of the Chinese government. Such data includes whether all due taxes have been paid, whether organizations have all relevant licenses to operate, or whether the company has been fined for employment infringements. Based on these combined metrics, the government might impose unfavourable conditions, leading to a market disadvantage compared to competitors.
Conclusion
All companies have sets of compliance requirements they must follow. Failure to meet these requirements may negatively impact the company, which may also lead to potential legal and administrative risks in the future.
Acclime will help you navigate through all kinds of difficulties you may face. To ensure you have satisfied all corporate compliance requirements for China companies, we recommend engaging with Acclime's services.
