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Investing in China: Ensuring Your Entity is Fully Compliant

Tax and legal requirements in China can be complex, and non-compliance can lead to penalties. It’s recommended that you consult with your professional advisors when pursuing investments in China. Rupert Gerald, commercial director and head of the APAC Sales Desk, Donald Tsang, executive director and head of Corporate Services Greater China, and Jack Yan, general manager at Shanghai, look at the requirements and obligations.

Doing business in China can be a different experience from operating in Europe or North America. Once you’ve incorporated your wholly foreign-owned enterprise (WFOE), you need to ensure you follow all administrative, legal, and tax requirements to avoid potential penalties.

Administering documents, meeting accounting requirements, choosing accounting software, and fulfilling tax obligations are all part of the ongoing maintenance of your WFOE in China—and the rules around these procedures can be complex. Depending on where your WFOE is registered, you may be subject to local as well as national requirements.

The importance of chops when administering your WFOE in China

One significant difference in doing business in China as opposed to Europe and the U.S. is the use of the chop, an official stamp.

Chinese companies and WFOEs are required to have a company chop. The simplest way to understand the chop is that it’s the equivalent of an official signature. It has legal authority and is used for contracts, legal agreements, and share sales.

Whoever holds the chop has the authority to run the WFOE—both from a day-to-day business perspective and through authorizing significant decisions such as selling the assets of the WFOE. Therefore, it’s paramount to understand the use of the chop and choose who can administer it with great care.

For this reason, it may be beneficial to consider authorization of the chop as part of a governance and administration policy, and to have effective controls on who will handle the chop, what method of chop will be used, and when.

Since the COVID pandemic, the government has allowed the use of the electronic chop in some cities. Due to its complexity, it’s important to draft policies and execute controls to ensure all related governance and security procedures are properly followed.

The company chop is a legal requirement in China and controlling access to it is an important security issue. The finance chop is also legally required and is used for important financial transactions and banking. The optional contract chop can be used for functions such as sales where the authority to make decisions can be delegated. An HR chop can be used to register employees, and an invoicing chop is used for accounting, bookkeeping, and issuing invoices.

Accounting requirements and tax obligations

There are also a number of important accounting requirements for WFOEs in China and the scope of these depends on which city the WFOE has been registered in.

A WFOE will need to fulfill monthly accounting requirements, file monthly and quarterly returns, and provide an annual audit and annual tax filings to the authorities. It will also need to apply for license renewals to continue to operate compliantly.

There are two choices for accounting software. Managers of a WFOE can use either Chinese government-approved accounting software or their own global accounting platform, although the latter will be subject to authorization from the government.

One important consideration when ensuring that your WFOE in China is properly maintained is the appointment of a finance responsible person. This is a key role within the WFOE management team. The individual must be registered with the tax bureau and is responsible for ensuring that the WFOE adheres to all tax rules. The finance responsible person will also need to liaise with the tax authorities.

Tax requirements for a WFOE in China

The tax system has many layers and there are potentially up to 18 types of taxes for which the WFOE might be liable. This adds a layer of complexity to tax obligations. Broadly speaking, there are three main categories into which a tax liability might fall:

  • Value-added tax (VAT): a turnover tax for service or trading revenue
  • Corporate income tax: tax applicable to profit before tax
  • Stamp duty: applicable when specific documentation is used, such as a commercial contract, accounting ledger, or equity transfer document

It’s essential to ensure you’re paying the right type of tax for your WFOE’s local business activity and that you understand the overall tax liability and tax position of your Chinese entity and your employees. This includes the individual income tax employees will need to pay and the social and housing allowances to which they’re entitled.

Why CSC?

CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types while adhering to global regulations and compliance. A market leader, we work with funds of all sizes, from start-ups to the largest and most experienced fund managers in the world. Founded in 1899, CSC prides itself on being privately held and professionally managed for more than 120 years. We are the trusted partner of choice for more than 90% of the Fortune 500® and more than 70% of the PEI 300. CSC has office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East. We are a global company capable of doing business wherever our clients are—and we accomplish that by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.

This document is provided by CSC for information purposes only and does not constitute an offer, invitation, or inducement to contract. The information herein does not constitute legal, tax, regulatory, accounting, or other professional advice, and therefore, one should seek appropriate professional advice before considering a transaction as described in this document. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document.