Important Considerations: Accounting and Financial Reporting for Foreign NGOs in China

Article 2 of the Overseas NGO Law (中华人民共和国境外非政府组织境内活动管理法) delineates Overseas Non-Governmental Organizations (NGOs) as entities that are not operated for profit and are established outside mainland China. These encompass a diverse array of organizations such as foundations, social associations, and think tanks. The law’s terminology, including “not-for-profit,” “NGOs,” and “social organizations” (the official term for non-profit NGOs in Chinese), effectively encompasses various entities, spanning industry and trade associations, chambers of commerce, development and human rights NGOs, educational and cultural institutions, as well as sporting and recreational associations.

Accounting and financial reporting for foreign NGOs operating in China are subject to specific regulations and requirements outlined by the Chinese government.

Registration

Foreign NGOs must first get approval from the relevant Professional Supervisory Unit (PSU) and then register with the Public Security Bureau (PSB) local branch to legally operate in China.

As part of the registration process, NGOs must provide detailed information about their sources of funding, planned activities, and organizational structure.

A foreign NGO (非政府组织) Representative Office (RO):

Monitored by the Public Security Bureau (PSB).
Overseas HQ is required to provide charity certificate for the China RO set up.
Can’t generate income (fundraising activities are not allowed)

A foreign Non-Profit (非营利组织) Organization:

Monitored by the Civil Ministry.
Financial reporting requirements are similar to ones for a Limited Liability Company (LLC).
Can generate income limited to membership fees, donations, etc. for charity organization.

Reporting

Once registered, foreign NGOs are subject to ongoing monitoring and oversight by Chinese authorities to ensure compliance with regulations and adherence to approved activities. They are also required to submit annual activity plans and financial reports to the relevant authorities for review and approval. Sometimes monitoring includes on-site inspections.

To continue China activity, Overseas NGO Representative Office (RO) must get an annual approval from Public Security Bureau. As part of its annual inspection PSB requires NGOs to:

Submit to the relevant Professional Supervisory Unit (PSU) an activity schedule by December 31 that includes project information, dates and funds distribution plans.
Submit an annual activity report and annual evaluation report to Professional Supervisory Unit (PSU) before January 31. After the PSU review, the activity report affixed with the opinions issued by the administrative department, must then be submitted to the registration authorities (PSB) before March 31 for the annual inspection.

PSB might require additional supporting documents (such as vendor contracts, invoices, etc.), and if necessary, invite for a face-to-face interview.

The distinguishing feature of NGO accounting is that it is project-based as all expenses must be allocated to the corresponding projects.

It is highly recommended for the annual evaluation to be performed by a law firm in close cooperation with a local accounting firm with an international background. The list of activities, personnel and organizational changes should be checked by the legal professionals and submitted together with the audit report and financial report online via PBS website for a detailed check.

Currency Regulations

Foreign NGOs operating in China are subject to currency regulations imposed by the State Administration of Foreign Exchange (SAFE). These regulations govern the conversion of foreign currency into Renminbi (RMB) and the repatriation of profits or funds outside of China. NGOs must comply with these regulations when conducting financial transactions and managing their funds.

Taxation

Foreign NGOs and NPOs may be subject to taxation on income generated within China, depending on the nature of their activities and their tax-exempt status. While some NGOs may qualify for tax exemptions or preferential treatment under certain circumstances, they are still required to fulfill reporting obligations and comply with tax laws and regulations.

Use of Funds

Foreign NGOs and NPOs must ensure that funds received from domestic and international sources are used in accordance with approved activities and purposes. They are required to maintain detailed records of income and expenditures, including documentation of project expenses, administrative costs, and other financial transactions.

Chinese authorities maintain close scrutiny over foreign NGO activities, particularly those related to sensitive issues. NGOs found to be in violation of regulations may face warnings, fines, or even expulsion from the country. NGOs whose registration has been revoked or activity been cancelled will not be allowed back into the country.

It is essential to engage a professional accounting firm to navigate specific regulations, standards, and reporting requirements for foreign NGOs in China as ensuring compliance with these regulations is necessary for maintaining legal status and conducting operations within the country.

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