If you’re operating or planning to start a business in China, understanding and complying with the country’s tax regulations is essential for smooth operations and success. There are two main categories of taxes to consider: those related to company income and profit distribution, and those related to sales and turnover. Within these categories, you’ll encounter taxes such as corporate income tax, withholding tax, VAT, consumption tax, stamp tax, and real estate tax. Don’t worry if it seems overwhelming at first – we’re here to guide you through the essentials of China’s tax system. In this comprehensive guide, we will provide everything you need to know with clear explanations.
The Tax System in China
Taxation in China is administered by the State Taxation Administration which is responsible for formulating and implementing tax policies, laws, and regulations at the national level. The STA is also responsible for setting tax rates for various types of taxes, such as value-added tax (VAT), corporate income tax, and personal income tax. The handling and collection of taxes, however, is dealt with at a local level by regional tax bureaus.
In general, most taxation schemes apply nationally, but there are cases where regional differences apply such as in free trade zones (FTZ). The following can occur for several reasons, for example:
- Tax incentives in China that apply to specific regions or specific industries (for example lower CIT rates)
- Policies and changes that are first tested/trialed regionally before expansion nationwide.
- Special tax rates or policies which apply to Free Trade Zones
China’s tax laws and regulations have undergone significant changes in recent years due to the country’s rapid economic growth and development. The Chinese government has been working to modernize its tax system and make it more transparent, efficient, and effective in order to support business growth and development in the country. As a result, tax rules and rates in China have been subject to frequent changes, as the government seeks to improve the investment climate and stimulate economic activity. For example, China has recently implemented significant changes to its VAT system, with the introduction of a new VAT regime that covers more sectors and applies lower tax rates for certain industries.
Taxes for WFOEs in China
There are two main types of taxes that apply to wholly foreign-owned companies (WFOEs) in China.
- Taxes related to company income & profit distribution:
- Corporate Income Tax: Tax on income
- Withholding Tax: Tax on profit distribution
- Taxes related to sales & turnover:
- Value added tax (VAT): Tax on consumption
- Consumption tax: Tax on purchase
- Stamp tax: Tax on legal documents
- Real Estate Tax: Tax on property owned by the company. Also called property tax.
Here is a table summarizing the information on taxes related to company income & profit distribution, sales & turnover in China:
|Corporate Income Tax (CIT)||Tax on income earned by a company||25% (standard rate)|
|Withholding Tax||Tax on profit distribution, including dividends and interest||10-20% (depending on the recipient and nature of income)|
|Value Added Tax (VAT)||Tax on consumption, applies to most goods and services||13%, 9%, 6% or exempt (depending on the industry)|
|Consumption Tax||Tax on the sale of luxury goods, tobacco, alcohol, etc.||Varies depending on the product|
|Stamp Tax||Tax on legal documents, such as contracts and licenses||0.005% to 0.1% (depending on the contract type)|
|Real Estate Tax||Tax on commercial property owned by a company, and on leased residential property||1.2% of the purchase price (with discounts of 10% to 30% offered by most local governments)|
Corporate Income Tax (CIT)
Corporate Income Tax (CIT) applies to all companies in China. All companies, including domestic and foreign-invested enterprises, are subject to corporate income tax on their taxable income generated within China. The corporate income tax (CIT) in China is a tax levied on the profits earned by all companies, including foreign and domestic companies.
Prior to the reforms in 2008, there were different tax rates for domestic and foreign companies, with foreign companies facing higher tax rates. However, the Corporate Income Tax Law was revised in 2008, and since then, the tax rates for both foreign and domestic companies have been equalized. Currently, the standard CIT rate in China is 25%.
Corporate Income Tax (CIT) in China is calculated on an accrual basis, which means that income and expenses are recorded when they are earned or incurred, regardless of whether payment has been received or made. It is calculated and paid monthly or quarterly (within 15 days of the period’s end) and then reconciled annually as part of a company’s year-end audit. As part of the annual audit, either additional tax is paid or a tax rebate is applied based on the calculations.
Corporate Income Tax (CIT) = total income – allowable deductions. Allowable deductions for CIT generally include:
- Costs of goods sold which refers to the cost of raw materials, direct labor, and other costs incurred in producing the goods sold by the company.
- Operating expenses: This includes expenses such as rent, utilities, salaries and wages, and other expenses related to the company’s operations.Financial expenses: This includes interest paid on loans, bank charges, and other expenses related to financing the company’s operations.
- Depreciation and amortization: This refers to the gradual decrease in the value of fixed assets over time, such as buildings, machinery, and equipment.
- Losses from bad debts: This refers to losses incurred by the company due to customers who are unable to pay their debts.
- Research and development expenses: This includes expenses related to research and development activities that are necessary for the company’s operations.
- Donations and charitable contributions: This includes donations made by the company to qualified charitable organizations, subject to certain limitations.
Tax incentives in China are a common method of encouraging investment in particular industries or regions, and these are often offered through CIT cuts.
Withholding Tax (WT) applies to payments of China-derived income to non-resident enterprises.
- Dividends: Dividends paid to resident companies in China are tax-free, while nonresident companies are subject to a 10% withholding tax, which can be reduced under tax treaties. Both resident and nonresident individuals face a 20% withholding tax on dividends unless reduced by a tax treaty, especially for nonresident individuals.
- Interest: Resident companies in China are exempt from withholding tax on interest payments. Nonresident companies face a 10% withholding tax, potentially reduced by tax treaties. Both resident and nonresident individuals are generally subject to a 20% withholding tax on interest, except for bank deposits and government bonds. A 6% VAT typically applies to interest payments.
- Royalties: No withholding tax is imposed on royalties paid to resident companies in China. However, royalties paid to nonresident companies are subject to a 10% withholding tax, which can be reduced under tax treaties. Resident individuals face a 20% withholding tax, while nonresident individuals have progressive rates ranging from 3% to 45%, unless reduced by tax treaties. A 6% VAT generally applies, but it may be waived for qualified technology transfers.
- Fees for Technical Services: Resident companies in China are not subject to withholding tax on technical service fees. Nonresident companies are typically taxed at a 25% rate on a net-profit basis unless reduced by a tax treaty. For resident individuals, a withholding tax of 20% to 40% applies. Nonresident individuals face progressive rates from 3% to 45% unless reduced by a tax treaty. A 6% VAT may be levied for services rendered within China.
Withholding taxes are important when looking at Chinese profit repatriation. The most straightforward way to repatriate profit is to do so using dividends out of profits. However, this means that corporate income tax (CIT) will have to be paid on the profits first, and then withholding tax (WT) will be paid on the dividends. The alternative way to repatriate profits is to pay profits out as service fees or royalties. Tax on remittance can be saved here – service fees are subject to VAT and WT, and royalties are subject to VAT and WT – but both can be deducted against CIT, as long as they are properly set up and documented. It’s important to note that specific tax regulations and requirements may vary, and proper setup and documentation are crucial to ensure compliance and eligibility for deductions against corporate income tax (CIT).
Value Added Tax – VAT
China introduced VAT in the 1990s to improve tax collection. Since 2012, it has been gradually replacing the previous business tax system with VAT. In China, VAT is a tax added to goods and services during their production and distribution. At each stage of the process, VAT is added based on the value added during that stage. This tax is included in the product’s price and companies have to pay it based on their sales to the government. Essentially, it’s a tax on the value added to a product or service during the production and distribution process involved.
VAT is calculated using the following formula:
VAT Payable = Output VAT – Input VAT
Let’s say you are a sculptor in China who buys stones for ¥200 to make statues to sell for a profit. The VAT rate is 13%, so you pay ¥26 in VAT. You make a statue from the stone and sell it for ¥800. The VAT rate is also 13%, which amounts to ¥104 in VAT that the government expects from the sale. However, you already paid ¥26 in VAT for the raw material (the stone). You can deduct the VAT you already paid (input) from the final VAT (output): ¥104 – ¥26 = ¥78.
For most companies, VAT is calculated based on total applicable sales/invoices raised, as a specified percentage of the sale amount – this is known as output VAT. The total VAT payable is calculated by subtracting from this input VAT. This is an allowance for VAT paid for purchases by the company.
VAT – Registration and Options
All companies in China are required to obtain VAT registration numbers from the local tax bureau to pay VAT on sales once a minimum threshold is attained. This threshold varies by region from approximately 5,000 to 20,000 CNY sales per month. Companies that exceed this threshold are required to register for VAT and obtain a VAT registration number.
In China, there are two types of VAT taxpayers: general taxpayers and small-scale taxpayers. Large-scale enterprises with an annual taxable income of more than RMB 5 million are known as general taxpayers and pay VAT at a rate of 17%. Meanwhile, businesses with an annual taxable income of less than RMB 5 million are called small-scale taxpayers and are subject to a lower VAT rate of either 3% or 6%.
Note that some businesses can choose to register for VAT as small-scale taxpayers or general taxpayers. Small-scale taxpayers are typically small businesses with lower annual revenue, while general taxpayers are larger businesses with higher annual revenue. When making this choice, businesses should consider their size, industry, customers, and their capacity to comply with VAT regulations.
VAT – Tax Rates
There have been significant changes in the VAT system in China in recent years. In the past, there were a number of different rates applied for different areas, alongside a separate business tax applied for some areas of service income. These have gradually been simplified and merged, resulting in a new VAT system applied nationwide.
Which rate applies to which goods and services?
The following is a summary of the VAT rates applied. For a full listing consult a China accountant, or obtain the government-provided listings.
- Note that exports of most goods are generally zero-rated. This may require re-claim from the local tax authority, however.
- There are some areas exempt from VAT (simpler than zero-rated as no reclaim process is required). These include the sale of agricultural products, contraceptive drugs and devices, antique books, and certain exported services.
- The general VAT rate of 16% (previously 17%) applies to domestic sales and imports of most goods. It also applies to the provision of repair, replacement, and processing services, and the leasing of tangible moveable assets.
- The lower rate of 10% (previously 11%) applies to certain goods – including some agricultural products, food grains, and vegetable oils, some agricultural chemicals, printed and electronic media, heating, and air-conditioning.
- The 10% rate is also applied to many service areas – such as transportation, postal services, construction and real estate, and basic telecommunications services (e.g. voice).
- The 6% rate applies to a number of other services areas:
- Financial (including loans, insurance, and financial products transfer)
- “Modern” services – such as research, consulting services, IT, business support, and radio, film, and TV services.
- “Life” services – such as cultural and sports services, medical services, tourism, and entertainment services.
- The sale of intangible assets (such as trademarks, copyright, and technology) is at the 6% level.
Consumption tax is a tax imposed on the sale or use of certain goods and services in China. It is an indirect tax, meaning it is passed on from the seller to the buyer as part of the product’s price. The consumption tax is levied on specific non-essential or luxury goods and services in China, including tobacco, alcohol, jewelry, cosmetics, high-end watches, passenger cars, motorcycles, and non-renewable petroleum products. The tax rate varies by product type and value and is collected by manufacturers, importers, and sellers.
Its purpose is to discourage the over-consumption of harmful products while generating revenue for the government, with mandatory monthly filing and payment. Consumption tax rates vary from 1% to 56% depending on the item.
Stamp Tax / Stamp Duty
China implemented a new stamp duty law on July 1, 2022. Stamp tax or stamp duty is a tax levied on various contracts, licenses, and accounting books. Effective from a specific date, the tax rate for certain contracts and documents, such as service contracts for processing, construction, and transportation, as well as documents related to the transfer of rights like copyright and patents, has been lowered from 0.05% to 0.03%.
- The recent regulation clarifies that VAT is now excluded from the tax base when calculating stamp duty. This clarification resolves previous disputes that arose due to the lack of explicit guidelines on this matter.
Real Estate Tax
Real estate tax is an annual tax imposed on land and buildings used for business purposes or rental. Owners or users of property for commercial purposes must pay real estate tax. Residential property is not included for individual use, but tax does apply for the leasing of residential property. It is calculated based on the value of the property or the rental income received.
The standard tax rate is 1.2% of the original building value, but local governments often provide a tax reduction ranging from 10% to 30%. Alternatively, the tax can be assessed at 12% of the rental income. Importantly, the real estate tax is deductible for Corporate Income Tax (CIT) purposes.
Land Value Appreciation Tax
This tax applies to all transfers of land use rights for state-owned land or buildings. Any income earned from the transfer is taxed on a sliding scale depending on the total appreciation. This starts at 30% tax for an appreciation of less than 50% and increases to 60% tax for an appreciation in excess of 200%. Costs incurred in the transfer, and also in the development of the land during ownership, can be deducted.
China’s taxation system is overseen by the State Taxation Administration (STA) at the national level, ensuring fair and transparent tax practices. The STA formulates tax policies and regulations to support economic growth while regional tax bureaus handle tax collection efficiently. China has implemented significant changes to its tax laws, aiming to create a conducive environment for businesses. These changes often involve adjusting tax rules and rates to promote economic activity. Notably, regional differences can be observed, particularly in free trade zones, where specific incentives and policies are in place. Wholly foreign-owned companies (WFOEs) are subject to various taxes, including Corporate Income Tax, Withholding Tax, VAT, Consumption Tax, Stamp Tax, and Real Estate Tax. To navigate the complexities of China’s tax landscape, it is advisable to remain updated, seek professional advice, and ensure compliance with evolving regulations.