Accounting in China


All companies in China, including FIEs, are required to prepare financial reports in compliance with Chinese Accounting Standards (“CAS”), for tax and audit purposes. CAS were originally issued by the Ministry of Finance in 2000 (Accounting Standards for Business Enterprises), and further reviewed in 2006 and 2014. Under CAS, financial reports (books and records) shall be made in RMB, maintained in Chinese (Mandarin), and retained for at least 15 years. These statements will be used for computing Enterprise Income Tax (“EIT”) and distributable profits. Although CAS tend to converge with International Financial Reporting Standards (“IFRS”), differences still remain and foreign investors shall get familiar with China’s accounting rules and practices.


Many FIEs often prepare two sets of financial reports: (i) one for the entity itself, in compliance with mandatory CAS, and (ii) one for the group, in compliance with the accounting standards adopted in the country of the parent company. Because of the different standards adopted, some difficulties may arise when consolidating Chinese accounts into the parent’s accounts. Besides, in practice, it is not uncommon for managers of FIEs to maintain several sets of accounts (i.e. official and non-official): (i) one exaggerating sales and profits, for the parent company/foreign investor; (ii) one minimizing performances, for the tax authorities; and (iii) one accurate, for the managers themselves. Foreign investors shall therefore remain cautious with the collection and recording of financial data.  


By law, any business transaction carried out in China requires a written invoice, drafted in Chinese and stamped with the official seal of the business provider (a “fapiao”). More than just an official receipt, a fapiao is a tax invoice according to which the Chinese government receives tax payment. A significant portion of small and medium-sized Chinese companies conduct certain sales under the table and prefer avoiding issuing fapiaos, in order to reduce their taxable basis. On the other hand, when purchasing goods and services, fapiaos are essential for claiming VAT refunds and lowering tax liability.  


China adopts a strict control of foreign exchanges, in order to limit foreign currency flows. As mentioned above, the system distinguishes current account transactions (e.g. import and export of goods and services, interest or dividends, etc.) and capital account transactions (e.g. registered capital, equity, debt securities, loans, etc.), and requires foreign investors to open two separate bank accounts. Capital account transactions are generally subject to the approval of the State Administration of Foreign Exchange (“SAFE”), while current account transactions can be made directly. However, to achieve current account transactions in a foreign currency, FIEs shall apply for a Foreign Exchange Registration Certificate with SAFE and open a specific foreign-exchange bank account. Such certificate shall be renewed annually. In addition, FIEs shall provide SAFE with a Foreign Exchange Reconciliation Report every year. This report shall be audited by an authorized Certified Public Accountant (“CPA”) registered in China. FIEs that do not comply with those requirements may lose the ability to remit foreign currency abroad. Therefore, keeping correct records of foreign currency transactions is crucial.  


Annual financial statements shall be audited and certified by an external Chinese CPA. Such report is aimed at ensuring companies are using CAS. Besides, this report helps preparing Enterprise Income Tax Reconciliation (“EIT Reconciliation”). Because of discrepancies between accounting standards and tax laws, the actual amount of EIT often differs from the amount of profits booked in the financial reports. Thus, within 5 months from the end of the tax year, companies shall submit an EIT Reconciliation to the State Administration of Taxation. The latter shall determine whether Chinese EIT has been paid entirely or in excess.  


Since March 2014, annual inspection filing has replaced the previous approval system. Accordingly, companies are only required to complete online annual inspection filing with the Administration of Industry and Commerce (“AIC”). Most information to be provided derives from the annual audit report.


FIEs shall successfully complete the above steps (Annual Tax Return, Annual Audit Report and Annual Inspection Filing) before remitting profits abroad. In addition, banks will only accept to remit dividends to the foreign parent company upon SAFE’s approval and receipt of documents evidencing payment of Chinese taxes by the FIE (including dividend withholding taxes). Since June 2015, SAFE’s approval is handled directly by eligible banks. It means that investors do not need to go through SAFE and can simply go to the bank and request the transaction.

See also​

October 2015

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