Are you doing business or working in China? If so, you must have heard of income tax. Income tax is an essential part of doing business and working in China whether you’re a resident or non-resident, an individual or a business, and it’s crucial to understand how it works. We know that understanding income tax in China can be complicated, which is why we’ve broken it down into easy-to-understand sections. In this article, we’ll provide you with a comprehensive guide to income tax in China, including the different types of taxes in China, tax rates and brackets, tax filing procedures, foreigner’s income tax, and changes to the tax system for 2023.
What is income tax in China?
With so many people working or doing business in China these days, it’s no surprise that there’s a growing interest in understanding the income tax system in the country. So the question of what income tax in China is has arisen. Income tax in China is a tax that individuals and businesses pay on the money they earn. To put it simply, the more someone earns, the higher the tax rate they have to pay. Employers withhold and pay their employees’ income tax, while self-employed individuals report and pay their own income tax.
Yet, It’s worth noting that recent changes to China’s tax laws aim to simplify the system and reduce the tax burden on low- and middle-income earners. We will dive into these changes together so no need to worry if you’re not up to date on the latest changes to China’s income tax system, as we already mentioned the updates in this article. Also, make sure to comply with income tax regulations in China to avoid any legal or financial issues. The Chinese government takes tax compliance seriously and penalties for non-compliance can be severe.
Individual Income Tax
Individual income tax is a type of tax that individuals need to pay if they earn any income in China. It can include various types of income, such as wages, salaries, and bonuses. The amount of tax an individual needs to pay depends on several factors, such as their income level, marital status, and the number of dependents they have. Individual income tax includes wages, salaries, bonuses, royalties, rental income, and other forms of income.
The individual income tax rate is applied progressively based on income, with seven tax brackets ranging from 3% to 45%. Individuals are required to file an annual ITT return if their income exceeds a certain threshold, and they must also contribute to social insurance and housing funds. Non-residents are subject to different tax rates and filing requirements than residents. There are also tax incentives and exemptions available for certain types of income. In China, the State Administration of Taxation is responsible for collecting individual income tax.
Business Income Tax
In China, business income tax is known as the Corporate Income Tax (CIT) and is levied on the taxable income of enterprises and other organizations. The current standard CIT rate is 25%, although certain industries and regions may qualify for preferential tax rates.
To encourage investment and development in certain industries and regions, the government offers incentives and subsidies. For example, if a company operates in a high-tech industry or a less-developed area, it may be eligible for a reduced tax rate and other benefits.
The latest statistics from China’s State Taxation Administration show that corporate income tax revenue in 2020 was approximately 2.54 trillion yuan (about $388 billion USD), which accounted for roughly 27.6% of total tax revenue in China.
Here are some key points to keep in mind about CIT in China:
Taxable income
CIT is levied on a company’s taxable income, which is calculated as its revenue minus costs and expenses. Certain types of income, such as capital gains and interest income, are subject to separate tax rules.
Filing requirements
Chinese companies are required to file an annual CIT return within five months of the end of the fiscal year. Non-Chinese companies are generally required to file quarterly CIT returns.
Tax incentives
Certain industries and regions may qualify for preferential tax rates or exemptions. For example, high-tech companies may qualify for a reduced CIT rate of 15%, and companies operating in certain western regions of China may qualify for a reduced rate of 15% or even 10%.
Withholding tax
Foreign companies doing business in China may be subject to withholding tax on certain types of income, such as dividends, interest, and royalties. The withholding tax rate is generally 10%, although it may be reduced under certain tax treaties.
Transfer pricing
China has strict transfer pricing regulations, which require companies to set prices for transactions between related parties at arm’s length. Companies that do not comply with these regulations may face penalties and fines.
It’s important for companies doing business in China to understand their CIT obligations and to ensure that they are in compliance with Chinese tax regulations. Working with a qualified tax professional can help ensure that companies meet their tax obligations and avoid potential penalties and fines.
China Value Added Tax ( VAT)
China Value-Added Tax (VAT) is a tax levied on the value added during each stage of production and distribution of goods and services. Unlike a traditional sales tax, which is calculated solely on the final sale price, VAT is determined based on the value added by each business in the supply chain. It applies to both domestic and imported goods and services and is an important source of revenue for the Chinese government.
Tax Rates and Brackets
Taxable income refers to the portion of an individual’s or company’s income that is subject to taxation by the government. Tax rates and brackets in China are calculated based on the taxpayer’s income level. The tax system in China uses a progressive tax structure, meaning that the more income a taxpayer earns, the higher their tax rate will be in China, both corporate and individual income tax rates vary depending on different factors.
The corporate income tax rate is currently set at a standard rate of 25%, although some industries may be eligible for lower rates. For individual income tax, there are seven different tax brackets, ranging from 3% for the lowest bracket to 45% for the highest. To find out more details about individual income tax rates, please visit China Individual Income Tax: Everything to Know in 2023 | HROne
Tax Filing Procedures
Individuals who earn income in China are required to file an annual tax return with the local tax authority by the end of March of the following year. The tax return must report all sources of income, including wages, salaries, bonuses, and other types of income. Individuals can either file their tax returns on their own or with the help of a tax agent. To support their tax filing, they must supply essential documents such as their ID card, work contract, and proof of income.
Once the tax return is filed, the local tax authority will review and assess the individual’s tax liability. If the tax has been overpaid, the excess amount will be refunded. If the tax has been underpaid, the individual will need to pay the difference. It’s important to file the tax return accurately and on time to avoid any penalties or legal issues.
When filing taxes in China, there are certain documents that are required to be submitted to the tax authority. These documents help to support and verify the information provided in the tax return and ensure accurate reporting of income and tax liability.
Required Documents for Tax Filing
The following are the required documents for tax filing in China:
- ID card: This is a mandatory document for all taxpayers in China. It serves as proof of identification and is required for the tax authority to verify the individual’s personal information.
- Employment contract: If the taxpayer is an employee, they will need to provide a copy of their employment contract. This document verifies their employment status and provides information on their salary, benefits, and other relevant details.
- Proof of income: This can include salary statements, bank statements, and other documents that provide evidence of the taxpayer’s income for the year.
- Receipts for deductions: Taxpayers may be eligible for certain deductions, such as medical expenses or charitable donations. Receipts or other proof of these expenses should be included with the tax return to support the deduction claim.
- Business registration documents: If the taxpayer is a business owner or self-employed, they will need to provide relevant business registration documents, such as a business license or certificate of incorporation.
- Other supporting documents: Depending on the taxpayer’s specific circumstances, there may be other documents required, such as rental agreements, investment statements, or proof of foreign income.
It’s important to ensure that all required documents are accurately and completely provided to avoid any issues or delays in the tax filing process.
Foreigners’ Income Tax
Foreigners’ income tax is the income tax imposed on non-Chinese nationals who earn income in China, whether they are working for a Chinese company or a foreign company. They are subject to income tax on their earnings. Foreigners are classified into two categories for tax purposes: resident and non-resident. Residents in China are generally taxed on their worldwide income with a progressive tax rate system. Individuals who are not residents of China are subject to taxation solely on the income they earn from sources within China.
Taxable income for foreigners
Taxable income for foreigners in China refers to the income earned by non-Chinese citizens or residents in China that is subject to Chinese income tax. This includes income earned from employment, business activities, investments, and other sources within China. There are different tax rates for foreign companies.
When it comes to taxable income for foreigners, we can generally divide it into two categories: active income and passive income. Active income is the money you earn from working or running your own business, while passive income is the money you earn from investments or renting out property. The amount of tax you’ll need to pay and how you file your tax returns can be influenced by the type of income you have and the country where you earned it.
Latest Regulations on Income Tax in China
- Starting from January 9th, 2023, the Chinese Ministry of Finance will provide financial relief to small businesses by reducing their Value Added Tax (VAT) rate to 0% from 3%. To qualify as a small business, monthly sales should not exceed the threshold of Yuan 100,000 (approximately US$ 15,000).
- The State Taxation Administration has also announced a reduction in the VAT rate for small-scale taxpayers, from 3% to 1% for the year 2023. This reduction includes advance VAT payments.
- Individual income tax rates in 2022 are progressive, ranging from 3% to 45%.
- In certain cases, small companies are subject to a corporate tax rate of 5-20%.
- Hi-tech companies are subject to a corporate tax rate of 15%.
Key Takeaways
In conclusion, understanding income tax in China is crucial for anyone doing business or working in the country, whether you’re a resident or non-resident, an individual or a business. We hope this comprehensive guide to income tax in China, including the different types of taxes, tax rates and brackets, tax filing procedures, foreigners’ income tax, and changes to the tax system for 2023, has provided you with the necessary information to navigate the complexities of the Chinese tax system. Remember that you are always welcome to seek professional assistance from us if you need further help with your taxes in China.
FAQ
Q What are some good income tax calculators available for use in China?
There are several reliable and good income tax calculators available for use in China such as China Tax Calculator, KPMG China Tax Calculator, and China Briefing Tax Calculator. Please remember that income tax calculators are meant to be used for reference purposes only and should not replace the advice of a professional tax consultant or accountant. To make sure that your tax calculations are correct and dependable, it’s always best to seek the guidance of an expert in this field.
Q Do foreigners pay taxes in China?
Yes, foreigners who earn income in China are generally subject to individual income tax.
Q How to calculate foreigners’ income tax in China?
Foreigners’ income tax in China is calculated based on their income, deductions, and applicable tax rates.
Q What is the income tax rate in China?
In China, the tax levied on an individual’s income follows a progressive scale, ranging from 3% to 45%, depending on the income level. Meanwhile, domestic and foreign companies are subject to a corporate tax rate of 25% as of 2022. However, small companies may be eligible to pay a corporate tax rate ranging from 5% to 20% in specific circumstances.
Q What happens if I don’t pay income tax in China?
If you don’t pay income tax in China, you may face penalties, fines, and legal consequences. The government may freeze your assets, revoke your business license, or even deport you. It’s crucial to understand and comply with Chinese tax laws to avoid any legal or financial issues.
