Accounting and Tax Compliance Requirements for
Wholly Foreign Owned Enterprises (WFOEs) in China

INTRODUCTION

Wholly Foreign Owned Enterprises (WFOEs) can be incorporated by foreign investors in China according to Chinese laws. A WFOE is an independent legal entity, which takes responsibility for its performance limited to its capital. Generally, a WFOE can carry out various businesses if there are no prohibiting laws and if they are in accordance with its business scope. A trading company is one form of WFOE.

ACCOUNTING AND TAX REQUIREMENTS FOR TRADING COMPANIES

Accounting Set-up, Book-keeping Supporting Documents

For WFOEs, all accounting vouchers, ledgers as well as financial statements should be prepared and maintained under PRC Generally Accepted Accounting Principles (GAAP).

~ Source documents, Journal Vouchers (JVs) and ledgers should be in Chinese.
~ Standard China Chart of Accounts (COA) should be adopted.
~ All JVs in the prescribed format should be filed and bound according to China’s standard accounting practice.
~ The bank book, cheque records and bank reconciliation should be maintained as part of the accounting records.

Financial Statement Format/Content

~ The balance sheet and profit & loss statement are required monthly statutory filings for trading WFOEs.
~ Financial statements should be prepared under PRC GAAP using the defined format.
~ Financial statements to be submitted to the Tax Bureau should contain the company stamp before submission.

Group Reporting Reconciliation

If the parent company is required to prepare the balance sheet and profit/loss statements for the trading WFOE under IFRS to consolidate inter-company accounts, such group reporting statements should be prepared and reconciled to the PRC financial statements.

Corporate Taxes Compliance

General
The trading WFOE is subject to Value Added Tax (“VAT”), Business Tax (“BT”) and Corporate Income Tax (“CIT”) Liabilities.

Value Added Tax
There are two types of VAT taxpayers, i.e. General VAT Taxpayer and Small-scale VAT Taxpayer.

The criterion to differentiate between a General VAT Taxpayer and Small-scale VAT Taxpayer is the annual turnover. If the annual turnover of the trading company exceeds RMB 1,800,000, the trading WFOE can apply for General VAT Taxpayer status where the VAT rate is generally 17%. The calculation is based on the difference between input VAT and output VAT. The VAT rate for Small-scale VAT Taxpayers is 6% and there is no tax credit on input VAT. A benefit of a small-scale trading company is that it can apply for a preferential rate of 4% VAT.

A trading WFOE should apply the current month input VAT verification before month-end. It can then prepare the VAT returns and submit to the tax authorities within 10 days after the end of each month. It will need to make VAT payment when the amount of output VAT exceeds the amount of input VAT.

Business Tax
Business tax ("BT") is taxable based on non-VAT revenue. This is normally service revenue. It is calculated using non-VAT revenue multiplied by the business tax rate of the related industry. The WFOE should prepare and submit the business tax return to the tax authorities. It has to make BT payment within 10 days after the end of each month.

Corporate Income Tax
Corporate Income Tax (“CIT”) is based on the profit of the trading WFOE. The trading WFOE should prepare the Corporate Income Tax return every quarter even if its financial result shows a loss. The trading WFOE should submit the Corporate Income Tax return to the tax authorities within 10 days after the end of each quarter. CIT payment is to be made at the same time of the submission for profitable WFOEs.

Individual Taxes Compliance

General
The WFOE is the withholding tax agent responsible for calculating, withholding and submitting individual income tax (“IIT”) for both local Chinese employees and expatriates.

Annual Corporate Income Tax Return
A trading WFOE needs to prepare the Annual Corporate Income Tax return (“ACIT”) to the tax authorities together with the audit report of the same fiscal year within four months after the fiscal year end. The ACIT return must comply with tax regulations and requirements which are different from PRC accounting profit principles.

Submission
IIT is assessed on a monthly basis and shall be remitted within 10 days after the end of each month.

Local Staff
The tax deduction for a local staff is RMB 1,600.

Expatriates
~ The personal deduction for an expatriate is RMB 4,800.
~ According to China tax laws, expatriate IIT is dependent on the period that the expatriate stays in China and the tax treaty between his/her home country and China, amongst other conditions.
~ There are altogether 9 levels of progressive tax rates in China’s IIT.
~ An expatriate who is acting as the Chief Representative will be taxed on all his/her China-sourced income regardless of the period he/she has been staying in China. Certain schemes may apply to Chief Representatives whose duties cover other countries in addition to China, subject to approval from the tax authority.

Social Insurance for Local Staff

~ The main types of social security in China are Pension Insurance, Medical Insurance, Unemployment Insurance, Maternity Insurance, Work-related Injury Insurance and Housing Fund. They are contributed by both employees and employers.
~ The rate and policy for each kind of insurance vary from city to city, and are regulated by the local governments.
~ A WFOE is liable for the employer’s contributions for local staff.

Cash Management

~ A trading company should have a capital USD bank account for capital injection and a basic RMB bank account to make payment to suppliers, reimburse staff claims, pay salaries and taxes, etc.
~ Authorised stamps/seals, such as the financial seal and the legal representative’s seal or signatory must be applied onto payment documents (e.g. cheques) to take effect. These seals/stamps should be carved in advance and kept in safe custody. (Our company can act as signatory and custodian.)
~ Foreign currency could not be freely remitted in China due to foreign currency controls. A trading company needs to convert foreign currency to RMB under foreign exchange regulations in China.

Annual Inspection

Annual Inspections are mandatory for all companies registered in China. A company that fails the Annual Inspection will affect its qualification for a business licence. A WFOE should complete and submit the forms and other relevant information of the company for Annual Inspection to the following government departments:
1. Foreign Investment Administration Department
2. State Administration for Industry and Commerce
3. Economic Committee
4. Finance Ministry
5. Tax Bureau
6. State Administration of Foreign Exchange
7. Customs Bureau

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