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Company Compliance in China – in a nutshell

 last modified 7 May 2025

Companies operating in China must meet a wide range of compliance requirements in order to operate in a legally compliant manner. They are subject to a complex set of regulations and administrative procedures, compliance with which is essential. This includes foreign-invested companies. Although China has harmonized the legal environment for foreign- and Chinese-invested companies to a very large degree in the last 20 years, certain special regulations may additionally sometimes apply to foreign-invested companies. The following article provides an overview of the most important compliance requirements in China, in order to give companies a general understanding of the relevant laws and regulations and their corresponding legal obligations.

Legal structure and registration procedures

The appropriate legal structure for the Chinese subsidiary must be selected for market entry and the planned business activities. For example, representative offices (RO) face significant restrictions on their operations in China.

The most common market entry approach is the establishment of a limited liability company (Co., Ltd.) in China. Although all production activities are allowed for foreign-invested companies since 2024 without exception, foreign investment can still be restricted in some other sectors. The establishment and registration of the Co., Ltd. with the Administration for Market Regulation (AMR) is required. Prior to initiating any business operations, the relevant business license and any additional licenses or permits, as applicable, must be obtained. of the permitted operations for the Co., Ltd. is generally limited to the scope specified in the business license, but locally details may differ. If the Co., Ltd. shall operate in other business areas, the business license must be amended in advance.

Corporate governance

A Co., Ltd. must have a certain internal organizational structure. Minimum is a shareholders' meeting and a single director or a board of directors. Optionally, also a (general) manager. Separately, a director or manager must also serve as the single legal representative allowed to represent the company externally. Companies above a certain size must have a supervisory mechanism, either in the form of a supervisory board or single supervisor, or a so-called audit committee, created within the board of directors. Above 300 employees, an employee participation mechanism must also be established. The convening, holding, passing of resolutions are subject to certain legal formalities and differing majority requirements, which can be further specified in the articles of association and in separate internal management rules.

Finance and taxes

Newly established companies must also register with the local tax authority, which operates under the State Taxation Administration. During this registration process, several key parameters are determined, including the applicable accounting framework, tax filing methods, and invoicing systems. Timely tax filings and payments are essential to maintain compliance and avoid penalties.

China's accounting framework primarily comprises two standards:

Accounting Standards for Business Enterprises (ASBE)
These standards are closely aligned with International Financial Reporting Standards (IFRS) and are mandatory for listed companies. They are also commonly adopted by foreign-invested enterprises due to their compatibility with international reporting practices.
Accounting Standards for Small Business Enterprises (ASSBE)
Tailored for small-scale enterprises, ASSBEs simplify accounting processes by aligning more closely with tax regulations. This alignment facilitates easier compliance for smaller businesses.

Additionally, some enterprises may adopt the Accounting System for Business Enterprises, which provides a set of accounting regulations and principles applicable to medium and large enterprises, excluding listed companies and financial institutions. This system serves as a foundational framework for entities not required to adopt ASBE.

For intra-group transactions, especially those crossing borders, adherence to transfer pricing regulations is crucial. All parties involved must ensure transactions are conducted at arm's length and are supported by appropriate documentation and disclosures in each relevant jurisdiction.

Annual statutory audits are mandatory and must be conducted by licensed Chinese audit firms. These audits are a prerequisite for profit distribution.

It's important to note that China's tax authorities have enhanced their oversight capabilities through advanced data analytics and artificial intelligence. Systems like the Golden Tax IV enable comprehensive analysis of financial data, allowing authorities to detect anomalies and ensure compliance effectively.

Employment

Chinese labor law is designed to be employee-friendly. Employment contracts must be in writing and contain the minimum content as stipulated in the Labor Contract Law, including provisions on duration of employment, working hours, overtime, wages / other compensation, and termination.

In practice, the employment contract should contain provisions that go beyond the (minimum) legal requirements. In addition, except for very small companies, it is generally recommended that an employee handbook be drawn up to regulate further rights, obligations and behavior (work discipline, consequences of violations, etc.) of employees. The employees need to be involved in a mandatory consultation and rollout process.

Employees must be registered with the various branches of the social security system (pension, health and maternity, unemployment, work injury) and the housing fund. Contributions must be withheld and paid accordingly. Foreign employees must have valid work and residence permits (or a China green card). Work without the required immigration titles is illegal and can lead to serious consequences for both sides.

Data security and protection

China's data protection legal framework is highly complex. Companies must navigate overlapping requirements and ensure compliance with all relevant laws. They include the Personal Information Protection Law (PIPL), the Cybersecurity Law (CSL) and the Data Security Law (DSL). Certain types of data, particularly "important data", "personal data”, “sensitive personal data”, and “scientific data," trigger additional compliance requirements, especially if a cross-border transfer to outside China is planned. Companies must also ensure that their IT systems and cloud storage comply with Chinese requirements. A transfer of personal information and certain other data to outside of China is subject to strict regulations, and may require either a governmental security assessment, or certification by a licensed certification entity, or the conclusion of a standard contract.

Customs and import/export

Compliance with all customs regulations is a fundamental prerequisite for smooth trade. Failure to comply with regulations can result in delays in delivery, financial penalties, and the seizure of goods. To ensure seamless operations, companies should first ascertain that they are in possession of all necessary permits and licenses for importing and exporting. Certain goods may require specific licenses, while others may be subject to complete bans. Goods must be properly declared, and the accompanying documents must be complete. These documents may include commercial invoices, certificates of origin, and packing lists. Special attention must be paid to the use of the correct HS (Harmonized System) code and accurate price information so that any customs duties incurred can be calculated correctly. Compliance with inspection and quarantine regulations is also paramount.

Environment and ESG-reporting

China's environmental regulatory framework has grown steadily in recent years and imposes significant requirements on companies to prevent pollution. There are strict regulations on emission standards, water, soil and air protection, waste disposal and other industry-specific environmental protection measures.

Projects that may have an impact on the environment require an environmental impact assessment (EIA) for approval. Companies must comply with the statutory procedure, which may include the preparation of expert reports, public consultations and planned measures to minimize adverse effects. Violations of the EIA process can result in delays and suspension of the project by the authorities.

Companies that sell directly to end customers face significantly higher reputational risks and public pressure to produce in an environmentally friendly manner, remain innovative and go beyond the minimum compliance requirements.

Starting for the business year 2024, some companies, including listed companies in China are subject to ESG (Environment, Social, Governance) reporting requirements. It is planned to roll out a nationwide ESG reporting system for all companies until 2030.

Listed companies are required to submit ESG reports under the guidelines of the relevant Chinese stock exchanges. Recently, the Corporate Sustainability Disclosure Guidelines (Basic Standards) were published for trial implementation. These are intended to guide companies in disclosing sustainability-related information and ensure that their practices are in line with global expectations and regulatory frameworks. Companies should start to familiarize themselves with the evolving reporting system now and prepare for future reporting requirements.

Anti-corruption and anti-bribery

Especially during the last 10 years, China has made significant efforts to combat corruption and unfair business practices. This commitment is evident in the introduction of new regulations within existing laws and the tightening of existing laws.

The repeated implementation of anti-corruption campaigns across various industrial and service sectors underscores the authorities' commitment. Key anti-corruption regulations are codified in the Anti-Unfair Competition Law and the Criminal Law. The Anti-unfair Competition Law is particularly comprehensive and currently under revision. during which further strengthening of anti-bribery rules are expected.

Other rules aim at fostering a fair and transparent business environment.

Companies need to proactively combat corruption. Such measures may include the implementation of respective internal regulations (e.g., in a Code of Conduct, in employment contracts, management rules, and employee handbooks). It also extends to regular employee training, continuous monitoring of business activities and transactions, and the establishment of designated reporting channels for any potential violations.

Annual reporting obligations

Staying compliant with China’s annual reporting requirements is essential for any company operating in the market. These obligations are rooted in the PRC Company Law, tax regulations, and guidance from local authorities. Failure to meet them can lead to penalties, reputational harm, and business restrictions. Below is a practical overview of the three most important reporting requirements:

Annual audit report

Companies must prepare audited financial statements in line with Chinese accounting standards. The audit must be conducted by a licensed Chinese CPA firm and signed by two locally registered auditors. Reports typically include the balance sheet, income statement, cash flow statement, and statement of changes in equity. While submission requirements may vary by region, completing the audit by April 30 is advisable to facilitate subsequent tax filings.

Corporate Income Tax (CIT) reconciliation

In China, CIT is generally prepaid on a quarterly basis, with payments due within 15 days after the end of each quarter. However, the prepayment schedule can vary based on the size of the company and its specific circumstances, but an annual reconciliation is required to match accounting profit with the taxable income. Differences between accounting standards and tax rules often lead to necessary adjustments. Companies with related-party transactions must also submit proper documentation and disclose transfer pricing details. The CIT return must be finalized and submitted by May 31.

Annual report

By June 30, companies must submit an annual report through the National Enterprise Credit Information Publicity System (NECIPS), the official online platform managed by the State Administration for Market Regulation (SAMR) and its local branches, which consolidates reporting obligations across multiple government departments and serves as the portal for submission and public disclosure. While NECIPS facilitates the process, the actual regulatory oversight and enforcement of the annual reporting requirements remain with the SAMR and its local counterparts. The report includes:

Basic company details
Shareholder and capital contribution information
Financial data (revenue, tax paid, assets and liabilities)
Business license and permit updates
Social security data
Overseas investments and guarantees
Customs information

Non-compliances such as missed deadlines or inaccurate filings—may result in the company being flagged as "irregular." Extended non-compliance can lead to blacklisting, which has a direct impact on banking, bidding, and other business operations.

With Chinese regulators increasingly leveraging big data and AI tools to screen for inconsistencies, accurate and timely reporting is critical.

Tips for compliance strategies

The following measures support compliance and can lead to significant risk reduction:

Establish a compliance program that is tailored to the company's concrete operations and applicable industry-specific regulations. This program should cover areas such as corporate governance, finance and tax, employment, data protection, anti-corruption, and ESG.
Appoint a compliance officer to oversee these guidelines, ensuring adherence. Regular reviews and updates of the compliance program are essential to ensure its alignment with evolving regulations.
Conduct regular compliance audits to identify and address potential compliance violations. These audits should cover all aspects of the company's operations, from financial practices to supply chain compliance. The audits can help uncover areas where the organization may be at risk and allow for timely corrective action. These audits can be conducted by internal staff or third parties, providing an objective assessment of compliance and recommendations for improvement.
Employee training is crucial, as they often serve as the primary line of defense in ensuring compliance. Training programs that educate employees about Chinese laws, regulations, and the company's compliance policies are essential. Employees must be cognizant of their obligation to adhere to compliance standards, report potential issues, and understand the repercussions of noncompliance. Regular training and awareness campaigns can strengthen the company's compliance culture.

Conclusion

While compliance can present challenges for companies, it is a critical aspect of doing business in China. Given the extensive and complex legal framework at both the national and local levels, engaging legal advisors and compliance consultants who are familiar with Chinese regulations helps in addressing complex compliance issues in China. These experts can provide guidance on interpreting and complying with specific regulations, conducting due diligence, and representing the company to regulators. These consultants can provide industry-specific insights and help develop customized compliance strategies.