A Guide to the China Tax System & Compliance for Foreign Companies

corporate tax in china Guide to China Tax System for Foreign Companies

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In this China guide, we take a deep dive into corporate taxes in China, the China tax system overview and go over China’s corporate tax rates (no pages will be left unturned). The China tax system for foreign companies has not been static over the years, and is frequently subject to change. We update this guide every year. Last updated to corporate taxes in China for the year 2022.

It is important for all companies operating in China to understand and comply with the mandatory tax requirements. These policies affect virtually all businesses registered in China and indirectly affect all businesses working with businesses in China.

Discussed in this article:

  • The China tax system as it is now, as it was then, and how it continues to evolve
  • An overview of all taxes that affect WFOEs in China
  • Rules and allowances for income Taxes in China
  • The use of corporate income tax (CIT) breaks as tax incentives in China
  • Withholding tax and dividend/profit payment
  • A look at the VAT system and categories
  • Other applicable taxes:
    • Business Tax
    • Consumption Tax
    • Stamp Tax
    • Real Estate Tax
  • Our thoughts on possible future changes to the taxation system

accounting-china

Corporate Taxation in China

Taxation in China is administered by the State Taxation Administration. This government body establishes the tax laws in China and sets the tax rates for all company types. 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 example:

  • Corporate Income Tax incentives (tax breaks) in China that apply to specific regions and in specific industries
  • Policies and changes to tax rates that are tested and trialed regionally before expansion nationwide.
  • Special tax rates or policies which apply to Free Trade Zones

The rules and tax rates in China change frequently. This comes partly from a rapidly changing business environment, a modern taxation system that only started in the 1980s, and partly from the government’s ongoing desire to improve the market for both domestic and foreign companies in China. However, frequent changes has resulted in progress through overall tax reductions in recent years. For example VAT reforms carried out since 2012 have to date reduced overall tax by approximately 2.1 trillion Yuan (according to China Daily).

Taxes for WFOEs in China

There are two types of taxes that apply to wholly foreign owned companies (WFOEs) in China.

  1. Taxes related to company income & profit distribution:
    1. Corporate Income Tax: Tax on income
    2. Withholding Tax: Tax on profit distribution
  2. Taxes related to Sales & turnover:
    1. Value added tax (VAT): Tax on consumption at every transaction
    2. Consumption tax: Tax on purchase of manufactured or imported consumables and luxury goods
    3. Stamp tax: Tax on legal documents
    4. Real Estate Tax: Tax on property owned by the company. Also called the property tax.

China Tax Rate & Corporate Income Tax

The Chinese Business Tax or Corporate Income Tax (CIT) applies to all companies in China, foreign owned & Chinese owned. It is levied on company profits at a rate of 25%. Prior to 2008, domestic and foreign companies were imposed separate income tax rates, but these were equalized in as part of reforms to the Corporate Income Tax Law in 2008.

CIT is calculated on an accrual basis – that is income and expenses are recorded at the time they are earned/spent. It is calculated and paid monthly or quarterly (within 15 days of the period 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 by the company or a tax refund is applied based on the calculations.

Corporate Income Tax (CIT) = total income – allowable deductions.

Allowable deductions for CIT generally include:

  • Business costs and expenses incurred in relation to income received
  • Appropriate losses & other taxes such as property taxes, Stamp tax, etc…
  • Charitable donations (capped at 12% of total income)
  • Depreciation of fixed assets
  • Amortization of intangible assets (depreciation of non-physical assets)
  • Any reductions based on local tax incentives

Tax incentives in China are a common method of encouraging investment in particular industries or regions, and these are often offered through Corporate Income Tax (CIT) cuts. There are currently several general CIT reductions in place, including:

  • A rate of 20% corporate income tax (down from 25%) for low-profit companies (companies with taxable incomes not exceeding 1 million RMB)
  • A rate of 15% corporate income tax for select high tech industries, in certain cities (including Beijing, Shanghai, Guangzhou, and Shenzhen). Criteria and application requirements for such companies are set out in government regulations “Guokefahuo” 32 and 362. Note that companies engaged in business in separate industries would need to prepare CIT returns for each industry (discount qualifying and non-discount qualifying).
  • A temporary 15% corporate income tax for encouraged industries in the western regions of China. (ended in 2021)
  • Infrastructure projects in areas of basic infrastructure (e.g. railways harbors, highways, public transport, and water resources) and environmental protection projects (including sewerage treatment, desalination, energy-saving, and emission reduction projects) can apply a scheme offering 3 years CIT exemption, followed by 3 years at 50% CIT reduction. Note that construction companies in China cannot be wholly foreign owned.

Withholding Tax (WT)

Withholding Tax (WT) applies to payments of China derived income to non-resident enterprises. For such payments, a tax must be “withheld” before remittance. The current rate of withholding tax is 10%.

This applies to the following:

  • Dividends or other equity investment proceeds from a source in China
  • Interest, Royalties, and rent

For certain countries, there are double taxation treaties in place to offset some of this tax paid. These treaties may specify a rate lower than 10% to be used, in which case this can be adopted. For further details on double taxation treaties, see our separate article.

Withholding taxes are of importance when looking at Chinese profit repatriation. The most straightforward way to repatriate profit is to do so using dividends out of profits. This, however, means that CIT will have to pay on profits, then WT is paid on the dividends. This has several disadvantages:

  • a higher total tax on remittance
  • the consideration that dividends can only be paid on accumulated profit (having offset losses and paid 10% of profits into a capital reserve fund if needed).

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 subject to VAT and WT – but both can be deducted against CIT, as long as they are properly set up and documented.

Capital Gains Tax

It should be noted that China does not have a specific Capital Gains Tax policy. Any capital gains are treated as normal company income and therefore taxed as part of CIT.

corporate taxes in china

Value Added Tax (VAT)

Value Added Tax (VAT) is applied as a consumption tax, based on a percentage of the invoiced sale amount for goods and services in China. VAT rates in China in 2022 are 6%, 10% and 16% depending on the goods and services involved.

VAT was first introduced in China in 1984. The system was notoriously complex, with many different rates and regional differences being applied, and a separate “Business Tax” soon being introduced for certain service sector sales. A major reform of the VAT system was carried out between 2012 and 2016, first applied only regionally but then expanded nationwide. Since July 2017, the new VAT system in China covers all appropriate goods and service sectors, with three different levels of VAT rates – 6%, 10% and 16%.

Which VAT rate applies to which goods & 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. 

How is VAT calculated?

VAT is calculated using the following formula: VAT Payable = Output VAT – Input VAT

For example: Say I am a sculptor and I buy stones to make statues and sell them for profit. I pay a stone dealer $30 dollars for a large stone. The VAT rate is 10% so I pay $3 in VAT. I sculpt the statue from the stone and sell the statue for $100. The VAT rate is also 10% which is $10 worth of VAT that the government expects from the transaction. However I already paid $3 in VAT from the raw material (the stone). I can deduct the VAT I already paid (VAT input) from the final VAT (VAT output). $10 – $3 = $7 VAT payable.

For most companies, VAT is calculated based on total applicable sales/invoices raised, as a specified percentage of 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 their 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 in sales per month.

There is an important distinction in China whether a company is registered as a general VAT payer or a small-scale payer. The criteria for this are based on annual taxable sales amounts, but there are often cases where a small-scale companies may be better off registering as a general payers.

  • “Small scale taxpayer. Companies with a sales turnover less than a certain amount can register for small-scale taxpayer status. This threshold is set at 800,000 RMB annually for commercial companies (e.g. sales of goods) and 500,000 RMB for industrial companies (e.g. manufacturing).
  • This limit is raised to 5 million RMB for companies providing certain services.
  • Small scale companies pay VAT under a different scheme. VAT is calculated at a flat rate of 3% of sales, with no ability to deduct input VAT. They also cannot issue VAT Fapiao (receipts) to Chinese clients.
  • “General taxpayer. Registration as a general taxpayer offers the tiered 6%, 10%, and 16% VAT brackets, and deduction of the input VAT. (VAT on expenses)

Note that for some companies it is beneficial to register for general status even with low income. Depending on the company finances, the ability to offset input VAT can be important, and to do business with some Chinese suppliers and clients it may be necessary to be able to issue VAT Fapiaos (invoices).

VAT – Tax Rates

There have been a 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 from May 2018 that has three VAT brackets of 6%, 10% & 16%.

Before May 2018, VAT tax rates were: 6%, 11% & 17%. These were set in July 2017, a clear depiction of how often VAT rates are subject to change.

corporate taxes in ChinaDownload your copy of the infographic about taxes in China. Click here to download. .

Consumption Tax (CT)

Consumption tax is another sales-based tax, this time applied to manufactured or imported consumables and luxury goods. It is based on the sale value of the item. Tax should be calculated and paid monthly.

Consumption tax rates vary from 1% to 56% depending on the item. The highest rates are applied to tobacco and alcohol.

Some examples of rates for some of the main product groups include:

  • Tobacco: Cigarettes 36% or 56% depending on strength, cigars 35%
  • Alcohol: Beer 220-250RMB/ton, white spirits 20%, others 10%
  • Gasoline: 1.52 RMB/liter
  • Cars: 1% to 40% based on engine cylinder size
  • Motorcycles: 3% to 10% based on engine cylinder size
  • Luxury watches: 20%
  • Golf equipment: 10%
  • Yachts: 10%
  • Wooden flooring 5%
  • Lead batteries: 4%
  • Paints: 4%

Business Tax

This tax is no longer applied in China but it is included here for completeness.

Business Tax was applicable for many years for various areas of service income (including financial, construction, leisure and entertainment) as well as various property and land use rights transactions. The China Business Tax was applied on a scale ranging from 3% to 20%, on gross turnover.

Following major VAT reform up to 2017, the areas where business tax was applied have now mostly been incorporated into the VAT system. There is a chance however that in some areas, WFOEs may still come across references to Business Tax.

Stamp Tax / Stamp Duty

Stamp Tax or Stamp Duty is a tax levied on various contracts, licenses, and accounting books. This includes purchases and sales contracts, transfer of property rights, property leasing, engineering and design contracts, technology contracts, storage, and financial loans.

The rate varies from 0.005% to 0.1% depending on the contract type.

Real Estate Tax

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.

Real Estate Tax is charged at a rate of 1.2% of the purchase price of a property. There is a discount of 10% to 30% offered on this by most local governments. Additionally, Real Estate Tax is eligible for deduction from CIT.

Land Value Appreciation Tax

The land value appreciation 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.

Future changes to the taxation system

The taxation system in China has undergone many changes since the 1980s and will most likely continue to do so. The Chinese government remains supportive of improving the business environment in China, for both domestic and foreign companies. Simplification of the tax system and reduction of the overall tax burden for companies is a key part of this.

Some areas we think likely to see future changes include:

  • Further reform and simplifications to VAT. There is speculation that it may change to a simplified two rate system from the current three – 6%, 10% & 16%.
  • Simplification to the Consumption Tax system, and possible inclusion within VAT.
  • Ongoing changes to CIT reductions, as the government’s regional and industry goals change.
  • Continued shift to digital bookkeeping. Many parts of the tax registration, filing, and management system have moved online in recent years, along with many areas of business license and registration. This is likely to continue, making tax management simpler.
  • More tax registration automations as part of a business license. A new “5 in 1” business license now includes several government-required business licenses. This could well be extended to include registration with different tax bureaus as well.
corporate taxes in China
corporate taxes in China

Download your copy of the infographic about taxes in China. Click here to download.