Updates on 2020 Annual Compliances and Tax Planning for Foreign Companies in China

2020在华外资企业如何合规报告与进行税收筹划

Annual Compliance

According to the Company Law of China and the related regulations, all companys with foreign investment, such as the wholly foreign owned enterprise(WFOE), foreign joint venture (JV) company, and foreign company representative offices (RO) shall report to the government departments (such as Tax bureau, SAIC and SAFE) with required statutory reports, including but not limited to Annual Financial Report, Tax Audit Report and Foreign Exchange Report. This is also known as the "Joint Annual Inspection". It means that in addition to the annual audit and final tax settlement, foreign companies should look into a series of annual reporting procedures after the deadline of annual audit on 30^th of April every year.

The relevant data and information of the Joint Annual Public Reporting of Business Information as the result of the inspection will be shared among government departments such as MOFCOM, Bureaus of Finance, Taxation, Quality & Technical Supervision (market supervision and management), Statistics and SAFE.

During a statutory annual-inspection, the government bureaus require the submission of (including but not limited to) the following reports or the retrieval of financial data from an audit report.

Annual Corporate Income Tax Filing/Declaration Final Settlement to Tax Bureau-- as of May 31, 2020.

Annual financial statements, including balance sheets, income statements and cash flow statements submitted to the SAIC for Annual statutory inspection. The 2019 annual reports shall be uploaded to the National Company Credit Information Publicity System and make public as of June 30, 2020.

Annual Foreign Exchange Reconciliation, the required data shall be submitted to SAFE either by a foreign company itself or by entrusting the CPA and the bank to SAFE through SAFE's Capital Account Information system, as of September 30,2020.

If an company wants to renew its business license and relevant certificates, it also needs to complete the above annual declaration process before handling the renewals.

Tax Planning

The income tax on companies with foreign investment and foreign companies is a tax levied on the income derived from production, business operations and other income of companies with foreign investment within the territory of China, as well as the income derived from foreign companies within the territory of China. Just like domestic companies, foreign companies are required to conduct annual audit and final settlement in accordance with the law.

What is Annual income tax final settlement?

Final settlement refers to the calculation of the annual taxable income in accordance with Chinese tax laws and other relevant provisions on corporate income tax (CIT) within a specified period after the end of a tax year. First, the company shall determine the amount of tax payable or refundable in the year according to the monthly or quarterly prepayment of income tax, and fill in the annual corporate income tax return form. Second, the company shall file an annual CIT return with the corresponding tax authorities in charge and settle the annual CIT according to the relevant information required. Attention need to be paid to the following aspects by Foreign-invested entities:

Final settlement period

For Foreign-invested companies, the collection method of income tax is to calculate on an annual basis, pay in advance quarterly, the overpayment or refund will be settled at the annual final settlement. In China, the fiscal year is the calendar year, from January 1st to December 31st. An company shall submit its financial statements and income tax returns to the local tax authorities in advance within 15 days after the end of a quarter, and submit its annual financial statements and income tax returns within five months after the year end (as of May 31) to settle the amount of tax payable or refundable.

A written application in accordance with the provisions shall be submitted to the corresponding tax authorities for approval when companies are unable to complete the relevant financial statements, materials and income tax declaration within the deadline and the declaration period may be appropriately extended. However, the maximum period of extension of declaration will not exceed one month.

Documents to be submitted

Annual CIT return and attached tables/work sheet

Annual financial statements include balance sheet, income statement, cash flow statement, inventory statement, fixed assets & accumulated depreciation statement, intangible assets& other assets statement, foreign currency fund statement, detailed statement of VAT payable, detailed statement of accrued expenses and other relevant financial information, etc.

An Audit report from Chinese CPA: the annual statutory audit of foreign companys can only be conducted by a Chinese certified public accounting firm. Foreign companies shall repatriate their profits and dividends only when they complete their annual audit and pay all relevant taxes. There are also some exceptions for limited trading companies in free trade zones, where the authorities can grant exemptions.

Other documents, including copies of relevant approval documents for the application of tax preference, etc.

Declaration procedures

China has been encouraging Chinese company “go abroad”, at the same time attracting foreign corporates to expand their market shares in China. For this reason, the latest CIT law has been launched and many preferential policies for foreign-invested companies have been announced. What are the current preferential policies for foreign-invested entities that should be noticed?

1. For the production-oriented foreign-invested companies in the Development Zone, with operation period more than 10 years, taxes shall be exempted for two years from the profit-making year, and the tax shall be reduced by half for three years. If the output value of their export products reaches more than 70% of the output value of the corporate products in the same year, the tax rate of 10% shall be levied on the High Tech corporates for three years;

2. For foreign corporates that engaged in energy and transportation construction businesses such as the ports and wharves companies with operation period of more than 15 years, the CIT can be exempted from the first to the fifth year of the profit-making year, and reduced by half from the sixth to the tenth year;

3. Foreign invested companies in service sectors with foreign investment of more than 5 million US dollars and operating period of more than 10 years, CIT shall be exempted for the first year and reduced by half for the second and third year;

4. For a Sino-foreign JV or a foreign-invested bank established in the special economic zone that has a business term of more than 10 years and a total investment of more than 100 million RMB, the CIT shall be exempted for the first year and reduced by half for the second and third year from the profit-making year

5. For the newly established foreign-invested corporates with an investment amount of more than 10 million US dollars and an operating period of more than 15 years, or a high-tech corporate with an investment amount of more than 5 million US dollars, the first two years from the profit-making year shall be exempted from CIT;

6. High-tech achievements transformation projects with independent intellectual property rights shall be exempted from CIT for five years and reduced by half in the following three years. The profits obtained from a new project of high & new technology that introduced and put into operation after digestion and absorption by a high-tech company can be exempted from CIT for three years.

As we all know, the current pandemic has inevitably caused a great deal of damage to the global economies, especially on small sized businesses. In order to further support small and micro companies to resume businesses and stimulate the vitality of market, in May of 2020, the State Administration of Taxation implemented a policy of delaying the payment of CIT to alleviate the pressure on these companies

It can be seen that the relevant preferential policies on CIT in China in general are closely related to the economic environment, the government opening-up polices and keep pace with the times no matter to domestic or foreign-invested companies.

Since the foreign investment law took effect on January 1, 2020, it has entered a new era that the key words of foreign investment management changed from "government approval" in the past to "internal and external equality" and "national treatment". Together with the related above-mentioned new provisions, we believe it will make more conveniences’ for foreign companies to continue to invest in the China market and accelerate their development.

It is very important and necessary for foreign companies to understand the compliances requirements by law and the latest preferential policies. The practice such as determination on the types of income &expenses, the taxable amount and the applicable tax rate to make optimized tax planning and take the full advantages of preferential policies will benefit for their sustainable development in the long run.

Hope this article was helpful! With its rich experience our professional team can assist you on China's annual report compliance process, and provide reporting & consolidation according to the international accounting standards such as the United States GAAP, IFRS, etc. For further consultation and service, please contact us by scanning the code.