Published by ChinaMNC · Lusong

Annual Compliance and Reporting for a Lusong Company

A practical guide for foreign founders on the annual compliance and reporting obligations of a Lusong company in China, including annual reporting, tax filings, and other key requirements.

Understanding Annual Compliance for a Lusong Company

For foreign founders establishing a business in China, understanding the annual compliance and reporting obligations is essential. A Lusong company (a common term for a wholly foreign-owned enterprise, or WFOE, registered in China) is subject to various annual requirements. This article outlines the key obligations to help you stay compliant and avoid penalties.

1. Annual Report to the Market Supervision Administration (MSA)

All companies in China, including Lusong companies, must submit an annual report to the local Market Supervision Administration (MSA) between January 1 and June 30 each year. The report covers the previous fiscal year and includes:

• Basic company information: name, registration number, address, and legal representative.
• Shareholder and capital details: information on shareholders, capital contributions, and changes during the year.
• Business operations: a summary of activities, including whether the company is operating or suspended.
• Financial data: simplified balance sheet and income statement figures (assets, liabilities, revenue, profit, etc.).
• Website and online presence: if the company operates a website, its URL must be reported.

Failure to file the annual report on time can result in the company being listed in the "abnormal operations" directory, which may affect business activities and credibility.

2. Tax Annual Reconciliation and Filing

Lusong companies must complete annual tax reconciliation (企业所得税汇算清缴) within five months after the end of the fiscal year, typically by May 31. This involves:

• Corporate income tax (CIT) reconciliation: adjusting taxable income based on annual financial statements and tax regulations.
• Submission of annual CIT return: filing the final CIT return and settling any outstanding tax liabilities.
• Related-party transactions: if applicable, disclosing related-party transactions and ensuring they comply with arm's length principles.

Additionally, monthly or quarterly tax filings (e.g., VAT, individual income tax) must be maintained throughout the year.

3. Financial Audit and Accounting

Foreign-invested enterprises are generally required to undergo an annual financial audit by a certified public accounting firm in China. The audited financial statements are often needed for:

• Annual MSA report (though not always mandatory to submit, they must be available).
• Tax reconciliation and other regulatory filings.
• Bank loan applications or other financing activities.

Ensure your accounting records are kept in accordance with Chinese accounting standards and are up to date.

4. Foreign Exchange Annual Reporting

Lusong companies with foreign exchange transactions must comply with the State Administration of Foreign Exchange (SAFE) regulations. This includes:

• Annual foreign exchange inspection (if applicable) or online reporting through the SAFE system.
• Reporting of foreign capital utilization and profit repatriation.
• Timely registration of changes in registered capital or foreign debt.

Non-compliance can lead to restrictions on foreign exchange transactions.

5. Social Insurance and Housing Fund Reporting

Employers must make monthly contributions to social insurance and housing fund for their employees. While there is no separate annual report, the annual base adjustment (usually in July) requires updating employee contribution bases based on previous year's average salary. Ensure contributions are accurate and timely to avoid penalties.

6. Other Sector-Specific or Local Requirements

Depending on your industry and location, additional annual filings may be required. For example:

• Customs annual report for companies involved in import/export.
• Statistics bureau reporting for companies above certain thresholds.
• Environmental reporting for manufacturing or other regulated industries.

Check with local authorities to ensure you meet all obligations.

7. Consequences of Non-Compliance

Failing to meet annual compliance requirements can lead to:

• Fines and penalties.
• Listing in the abnormal operations directory, affecting business reputation and ability to conduct transactions.
• Restrictions on foreign exchange, invoicing, or government tenders.
• In severe cases, revocation of business license.

Therefore, it is crucial to maintain a compliance calendar and work with professional advisors.

8. Practical Tips for Foreign Founders

• Maintain accurate records: Keep thorough financial and corporate records throughout the year.
• Engage local professionals: Work with a qualified accounting firm or corporate service provider familiar with foreign-invested enterprises.
• Set reminders: Mark key deadlines (MSA report by June 30, tax reconciliation by May 31) in your calendar.
• Stay informed: Regulations can change; regularly consult with your advisors or check official announcements.

Disclaimer

This article provides general information only and does not constitute legal, tax, or professional advice. The requirements for annual compliance can vary based on your company's specific circumstances and changes in laws and regulations. You should consult with qualified professionals for advice tailored to your situation.