Accounting in China: What one must discern regarding taxes and reports in the Celestial Empire

Publication date/update: 06.05.2024

The imposition of anti-Russian sanctions by Western partners is drawing Russian businesses closer to China. While many companies are merely procuring goods from Chinese suppliers, some are prepared to fully enter the Chinese market. What does this signify? It entails the comprehensive practice of accounting and tax management, albeit adhering to Chinese standards exclusively. What are these standards and regulations? We shall elucidate them in this article.

Russia has long fostered a close friendship with China, as evidenced by numerous business forums and collaborative projects jointly undertaken by our nations. What factors have contributed to this state of affairs?

It is noteworthy that the initial significant strides toward closer economic ties between the two countries were taken in 2005. An agreement was then signed on joint information sharing among tax inspectors on a wide range of issues. This encompassed the exchange of expertise. However, the main objective was to identify firms operating in both countries that were evading taxes.

Over time, China began to reform its accounting system, making it more transparent. To achieve this, all enterprises were mandated to transition to IFRS - International Financial Reporting Standards, a system that Russia also operates within.

Chinese themselves associate this decision with the onset of a new era in the development of China's accounting and auditing sector, which will drive the establishment of a modern economic model and facilitate investors in making more informed decisions. However, it is important to note that the new standards did not apply to all firms. Only companies listed on the stock exchange are required to prepare financial statements in accordance with IFRS requirements. Others can still operate under internal rules, but there is a desire to change this rule.

Russian individuals can establish a Limited Liability Company (LLC) in China. This option is deemed most favorable for operating within the country, as Chinese individuals tend to be wary of anything foreign. Consequently, not all partners are willing to collaborate with Russian LLCs. What nuances should be taken into account in this regard?

Russian founders can establish one of three types of companies (business forms). This pertains to:

As for the tax burden, up until 2008, foreign firms felt comfortable and privileged in the Chinese market due to low tax rates. However, over the past 16 years, the corporate income tax rate for companies with foreign capital participation has risen from 15-24% to a fixed 25%, while for domestic companies it reached 33%.

Regarding foreign specialists working in China, the income threshold for paying taxes has been increased from 4000 yuan to 4800 yuan. This is significantly more favorable. Overall, the personal income tax rate in China is progressive: the higher the income, the higher the tax. Representatives of low-paying professions contribute 5% of their income to the budget, while the highest earners pay up to 20%.

It is important to note that initially, and to some extent even now, Chinese did not consider Western developments in income and expenditure accounting. Consequently, accounting was initially perceived as simplified. In recent years, Chinese authorities have been striving to integrate existing Chinese planning and control methods with the best Western methodologies, making them applicable to China's unique industrial and economic environment.

In general, accounting in China is classified into the following categories:

What taxes need to be paid in China?

Can tax burden be optimized in China? Yes, it can be achieved by:

If attempts are made to violate the law regarding the preparation of financial statements or tax payments, it's possible to face penalties. In China, companies can be fined for tax violations, including late or non-payment. The penalties can be severe, with fines reaching amounts with five zeros. Additionally, inspectors may prescribe the repayment of the principal debt.

If a company is caught blatantly violating the law, it may lose its license and assets. That's why if there are doubts about the correctness of your calculations, it's better to seek help from competent consultants. The funds spent on their services will be offset by savings on penalties. Apart from the fine, the company may face public disgrace, affecting its reputation and that of its owners.

To prevent companies from concealing revenue from the tax authorities, Chinese authorities have introduced a system of so-called invoice lotteries. Several times a month, inspectors conduct drawings of various prizes, which can be obtained if the invoice number matches the drawing number. Because of this, Chinese almost always demand receipts from sellers, forcing companies to operate transparently.

Moreover, China strictly monitors money laundering. In 2007, a corresponding law was enacted. Bribery is also among the crimes covered by this law. It allows tracking the movements of funds of officials who take bribes and suspending them from office.