Preparation for the annual cooperative examination

First of all, every company needs to apply for and obtain the annual cooperative examination documents from the same office of the State Administration for Industry and Commerce from which they have obtained their original business license. They must also download the annual cooperative examination report form from the website of the relevant provincial or municipal administration of industry and commerce.

Companies must also select one of two options to apply for annual examination. You can apply either through the Internet or by taking your documentation directly to the authorities.

Requirements for annual cooperative examination documents

There are seven sets of documentation you need to bring, one for each authority, as follows. Note that all photocopied documents need to be stamped with the enterprise's seal.

-- The Bureau of Foreign Trade and Economic Cooperation

Original of annual cooperative examination report;

Original and photocopy of approval certificates of FIEs;

Audit report issued by CPA firm, or photocopy of capital verification report for enterprises set up after July 1, 2005;

For enterprises in encouraged industries, photocopy of encouraged project confirmation certificate;

For high-tech enterprises and export enterprises, photocopies of certificates for these two kinds of enterprises.

-- The Administration of Industry and Commerce

Photocopy of annual cooperative examination report;

Audit report issued by CPA firm, or photocopy of capital verification report for enterprises set up after July 1, 2005 and annual financial report as above;

Duplicate of business license.

-- The Economic Committee

Photocopy of the annual cooperative examination report.

-- The Financial Bureau

Photocopy of the annual cooperative examination report;

Annual financial statement (full set) of FIEs;

Audit report issued by CPA firm;

Duplicate of finance registration.

-- The State Administration of Taxation (SAT)

Photocopy of the annual cooperative examination report;

Duplicate tax registration certificate for state and local tax;

Audit report issued by CPA firm and annual financial report;

Photocopy of duplicate business license;

Photocopy of capital verification report.

-- The State Administration of Foreign Exchange

Foreign currency registration certificate of FIEs;

Audit report of foreign currency issued by CPA firm.

-- China Customs

Photocopy of the annual cooperative examination report;

Audit report issued by CPA firm and annual financial report;

Original registration certificate for custom declaration.

Preparing for declaration of dividends in China

As already explained, the accounting year runs from January to December in China, so now is a good time to start planning for declaring dividends for repatriation and/or reinvestment of profits. Your decision here will depend upon instructions from your parent company overseas, however there are a number of tax-related factors to bear in mind. This article first introduces the procedure that must be followed when declaring dividends and the extra steps necessary if funds are to be reinvested. It also covers the incentives available to investors either reinvesting funds into their existing Chinese entity or another operation in the country.

Repatriation of profits from China is of course preferable if your organization requires the funds for reinvestment abroad, or to return to the shareholders.

The process for declaring dividends and repatriating funds

1. First of all, the amount of funds available must be confirmed. The fourth quarter's Foreign Enterprise Income Tax (FEIT) filing for 2006 will need to be made in the first two weeks of January 2007 (China having a calendar fiscal year), and after this an annual audit must be carried out. The annual clearance process reflects the results of the audit on the accounts, and this is submitted to SAT for approval.

2. Assuming there are no problems with the submitted documents, SAT will issue a tax receipt confirming the final amount of FEIT payable.

3. With this figure defined, the profit tax payment for 2006 can be completed and the net profit figure derived.

4. Not all profit can be repatriated or reinvested. A portion of the profit (which must be at least 10 percent for WFOEs) must be placed in a fund reserve account. This is treated as part of owner's equity on the balance sheet. This account is capped when the amount of reserves equals 50 percent of the registered capital of the company. In addition, the investor may choose to allocate some of the remainder to a staff bonus/welfare fund or a development fund, although these are not mandatory for WFOEs.

5. The remaining balance is available for redistribution. Firstly, a resolution of the board of directors to authorize such redistribution must be signed by each director, and translated into Chinese.

6. Then an application form supported by the following documents (all in Chinese) must be submitted to SAT:

Annual audit;

Capital verification report;

Annual clearance report;

Quarterly FEIT filings;

Tax receipts proving FEIT payments have been made in full;

Bank and general details of the Chinese entity and entities receiving funds.

7. SAT will review all these documents to check that everything is legitimate and issue an evidence of FEIT payment certificate.

8. This certificate authorizes the bank to disperse funds as detailed on the certificate.

Some of these documents need to be provided by your licensed CPA firm in China (such as the capital verification report) and as the documentation can be awkward to manage for businesses overseas it is usually part of the role of the company's accountants to assist with the repatriation process and ensure transparency at all stages in the transaction. There have been cases of company employees arranging to have profits distributed elsewhere and then disappearing.

Chris Devonshire-Ellis is the Senior Partner of Dezan Shira & Associates - www.dezshira.com