A corporate health check can ensure the longevity and success of your China business

How do you know if your China business is healthy, and its current

operations comply with local tax laws and regulations? Doing a regular

health check on your company is a good way to ensure its longevity

and success in the Chinese markets.

In the past few years, Chinese tax authorities have strongly enforced the collection of taxes, imposing significant penalties for tax evasion. These fines can go up to a maximum 5 times the amount of outstanding taxes, while surcharges could reach about 18% per annum on the taxes owed.

Health checks are an important part of managing risks. In China, a health report on the company will verify that it is complying with local business, foreign exchange and relevant tax laws and regulations. Entities that are non-compliant risk losing their business license in the country, among other legal consequences.

A corporate health check is an audit conducted by independent contractors who are hired to inspect accounting and legal compliance. Services of this kind consist of opening the company up to investigate possible compliance issues. These checks assess the business’ current status with all relevant government institutions.

A company can know if their actions and operations are clean by examining tax filings, social security payments, up to date licensing and general corporate housekeeping. Given the complicated tax laws and procedures in China, it is common for foreign entities to overlook or simply ignore compliance regulation. 

It is important to distinguish which type of check is required before conducting a corporate health review. There are two different kinds of corporate health check – a high-level corporate health check and an in-depth gap analysis.

A high-level corporate health check is a form of review that focuses on a company’s three key areas of legal compliance: registry filings, minutes of meetings, and statutory registers. The person in charge of the check can quickly evaluate the legal compliance of the firm through an in-depth analysis of these documents.

The in-depth gap analysis looks more into finances and accounting. Health checkers can dive into a company’s transactions and financial statements and find issues or gaps in their filings. This process will verify if a company is maintaining good and proper accounting practices.

Evaluating both legal and financial sectors of the company will provide the most conclusive and reliable result and guarantee the most thorough review.

Corporate health checks are crucial to avoid being penalized by financial or legal authorities. This is particularly the case for newer or foreign companies who are not yet familiar with local corporate law.

In China, during recent years, there has been numerous changes to major business legislation. Amendments to corporate law can easily slip under the radar of business owners so to avoid penalties and fines, it is always advised to get a check and evaluate if updates are necessary.

A corporate health check can highlight the potential consequences in relation to the non-compliance practices for the period under review to facilitate the future corrective actions and provide high-level suggestions to rectify non-compliance issues. It can also identify areas whereby the overall tax efficiency of the current operations of the China entity may be improved.

Some of the taxes in China that a health check review would normally focus on are Corporate Income tax, Withholding tax, Business tax, Value added tax, Consumption tax, Customs duty, Real estate tax, Deed tax, Stamp duty, Individual income tax for employees, as well as Land appreciation tax (where applicable).

Generally, these are the taxes that a foreign investment enterprise (including a wholly foreign owned enterprise, equity or cooperative joint venture) would be subject to. Based on the company, the review could also include the compliance status with respect to the business and foreign exchange laws and regulations.

Corporate health checks can be beneficial for any size company. More frequently, users of health checks fall under three categories: startups, mergers and acquisitions, and branch offices of large corporations.

Startups are often faced with several challenges, among them employing a workforce, bringing in capital, conforming to compliance, as well as a range of other administrative tasks associated with opening a new business.

Additional complications occur with foreign business startups. During this juggling act of tasks, it is common for compliance to be overlooked. This is where an entity health check provider could be useful pointing out gaps, whether it be fiscal or to do with licensing. Once the company is up and running, fewer of these checks will be needed.

When it comes to compliance, things can get even more complicated in company buyouts. On the surface of a company, all can seem profitable, compliant and equitable; underneath, however, can be a labyrinth of debt and fines.

Such issues are highly relevant when valuing a business, and without knowledge of these problems, a merger or acquisition could turn out to be a disaster for the buyer. Entity checks are common practice for mergers and acquisitions. By fully investigating a company’s financial books and legal background, both parties can come to a fair and reasonable agreement.

Foreign branch offices can be difficult to manage in China. Issues such as time zones, foreign work cultures, as well as simply not having the time to regularly review your branch’s performance, can mean the office is unregulated.

To ensure performance as well as compliance, independent entity health checkers can be summoned to keep an eye on the branch, acting as an overseer of operations. Large companies and their reputation can be damaged by the inconsistencies of the small branches. By looking after the specifics, companies can protect the bigger picture.

Risk mitigation and a demonstration of good governance are other important benefits of an entity health check.

In medium-large companies, it can be difficult for management to keep an eye on everything that is going on. Particularly in the process of expanding a company, where the focus is placed elsewhere and business owners are looking to the future rather than the past, it is common for compliance to slip.

The same can be said for companies with branch offices that have been neglected by management. By getting a health check on the company, the management team can ensure all is compliant as well as showing employees that their performance and actions are under review.

Corporate compliance penalties can come in a variety of forms. Some issues, if not serious, authorities penalize on a tiered warning system; others come as fines; while the most serious, if suspected criminal, can end in jail time.

Whatever the gravity of the situation, the consequences of penalties are never only direct; they invariably stretch out and impact the business as a whole. A fine can ruin a company’s reputation.

More importantly, however, penalties take time and effort to address, particularly in the cases involving the court. Health checks can prevent your company from wasting time and money on indirect consequences of a penalty and instead focus on achieving its objectives.

Some of the largest multinational companies in the world go through health checks every financial quarter to avoid the burden of compliance issues. Though small-medium sized businesses may not be able to afford this, entity health checks are advised, at the least on a yearly basis.

Should you have questions about conducting health checks for your China company, complete the below inquiry form with your questions and comments. 

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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