In this six-part business guide to doing business in China produced by Hawksford, we’ll give an overview of what you need to consider before entering the market. Ranging from localisation, to the legal and banking systems, to type of company set up. This series is a great jumping-off point to understand the many nuances of doing business with China.
Part 4: Corporate taxes
China’s current tax framework was put in place after the tax reforms of 1994 to meet the needs of its socialist market economy. Since the beginning of the 21st century, the Chinese State Administration of Taxation has made a series of adjustments and improvements to its tax system, guaranteeing the government’s revenue stream and contributing to the country’s rapid economic growth.
Overview of PRC taxes
There are 18 different kinds of taxes in China, which can be divided into three categories according to their nature.
- Goods and services taxes, including VAT, Excise Tax, Vehicle Purchase Tax and Customs Duty.
- Income taxes, including Corporate Income Tax and Individual Income Tax.
- Property and behavioural taxes, including Land Appreciation Tax, Real Estate Tax, Urban and Township Land Use Tax, Arable Land Use Tax, Deed Tax, Resources Tax, Vehicle and Vessel Tax, Stamp Duty, Urban Maintenance and Construction Tax, Tobacco Tax and Vessel Tonnage Tax.
The major taxes are summarised below.
Corporate Income Tax (CIT)
Tax resident enterprises (TREs) are subject to corporate income tax on their worldwide income. In general, a company is regarded as a TRE in China if it is incorporated in China or effectively managed in China.
Non-TREs are taxed on their China-sourced income only. However, if the non-TRE has an establishment in China, non-China source income effectively connected with the China establishment is also taxed.
Corporate residents of China are taxed on their worldwide income, including income from business operations, investments and other sources. A foreign tax credit is allowed for income taxes paid in other countries. This credit is capped at the Chinese income tax level payable on the same income calculated under the Corporate Income Tax Law.
Taxable income generally includes profits, capital gains and passive income, such as interest, royalties and rents. Dividends received from a foreign entity are also included in taxable income but qualifying dividends received from another resident enterprise are tax exempt.
The taxable income of a company is the amount remaining from its gross income in a tax year after the deduction of allowable expenses and losses.
|Corporate Income Tax Rate (%)||25% (Statutory Rate)|
|Capital Gains Tax Rate (%)||25%*|
|Withholding Tax – Dividends, Interests, Royalties (%)||10%|
|Net Operating Losses (Years)||Carryback 0
*Foreign enterprises are subject to a 10% withholding tax rate instead of a 25% income tax rate. The tax rate may further reduce subject to double tax treaties signed with other countries/regions.
**Net operating losses for high and new technology enterprises and technology-based small and medium-sized enterprises can be extended up to 10 years.
The tax year is the calendar year.
Corporate Income Tax filing
Enterprises are required to file provisional CIT returns with the local tax authorities within 15 days of the end of each month/quarter. Annual CIT returns have to be filed on or before 31st May following the end of the tax year.
Value-Added Tax (VAT)
VAT is levied on the sale of goods, imports, services and sales of intangible assets and immovable properties.
There are two types of VAT payers:
- General VAT payers (0%, 6%, 9%, 13%): Enterprises whose sales revenue during a business period of not more than 12 months or four quarters exceeds RMB 5 million or those who have a sound accounting system. For general VAT taxpayers, input VAT can be credited against their output VAT.
- Small-scale VAT taxpayers (3%): Enterprises who don’t meet the conditions of being general VAT taxpayers.
A consumption tax is imposed on specified categories of luxury and environmentally unfriendly goods including cigarettes, alcoholic beverages, high-end cosmetics, jewellery, gasoline, automobiles, and batteries. The tax liability is calculated based on the sales amount and/or the sales volume, depending on the goods concerned. Consumption tax is not recoverable but is deductible as an expense for CIT purposes.
Urban Construction and Maintenance Tax/Education surcharges
The surcharges are levied based on the amount of VAT or consumption tax paid.
Urban Maintenance and Construction Tax
7%, 5%, 1%
Local Educational Surcharge
Customs levy import and export customs duties in accordance with their regulations. Customs is responsible for imported VAT and consumption tax. The import customs duty categories include the normal tariff, the most favoured nation tariff, the temporary tariff and the conventional tariff.
Real Estate Tax
Real Estate Tax is levied annually on the owners, users or custodians of houses and buildings. The tax rate is 1.2% of the original value of buildings.
All companies and individuals that execute or receive any kind of taxable documentations are regarded as obligatory payers of stamp duty, with rates varying between 0.005% and 0.1%.
Under this relatively new taxation that began in China on January 1 2018, companies that directly discharge pollutants into the environment need to pay taxes on taxable pollutants, meaning air pollutants, water pollutants, solid wastes and noise. Tax is calculated based on the volume of the pollution.
Foreign exchange controls
China is a foreign exchange-controlled country. The PBOC and State Administration of Foreign Exchange regulate the flow of foreign exchange in and out of the country and set exchange rates through a ‘managed float’ system.
FIEs are allowed to purchase and sell foreign currency in their designated foreign exchange account while overseas payments can be directly processed through banks. However, due to the enhancement of regulations on confirming transaction authenticity and compliance, it is strongly recommended that supporting documents are prepared in case of any inquiries by the relevant authorities.
China has a broad tax treaty network. Most of China’s treaties are based on the OECD model treaty, providing relief from double taxation on all types of income, limiting the taxation by one country of companies resident in the other and protecting companies resident in one country from discriminatory taxation in the other. As of Q1 2020, China had signed tax treaties with 102 countries and two special administrative regions.
Anti-tax avoidance rules
China has transfer pricing, thin capitalisation, cost-sharing and controlled foreign company (CFC) rules, as well as a general anti-avoidance rule (GAAR). Tax law and policy are developed jointly by the State Administration of Taxation (SAT) and the Ministry of Finance. The SAT is the body charged with collecting tax and enforcing compliance.
Major Tax Incentive Policies
By means of promoting some key sectors, the government has introduced several tax incentive policies, including various tax reductions and exemptions. These include but are not limited to:
New high-tech and qualifying advanced-technology service enterprises
These are eligible for a reduction in the CIT rate from 25% to 15%. These enterprises have to meet the criteria and are subject to assessment in order to qualify.
Large deduction for R&D expenses from Jan 1, 2018 to 31 Dec, 2020
R&D expenses are not converted into intangible assets and can enjoy an extra 75% deduction. If expenses have been converted into intangible assets, they can be amortised at the rate of 175% of the costs of the intangible assets.
For the technology transfer income obtained by resident enterprises nationwide from the transfer of non-exclusively licensed rights to use technology for five years or more, technology transfer income not exceeding RMB 5 million shall be exempted from CIT. The portion exceeding RMB 5 million shall be subject to CIT, but the tax rate is halved.
Dividends between resident companies
The investment proceeds obtained by a resident enterprise from its direct investment in any other resident enterprises can enjoy CIT exemption.
Small and thin-profit enterprises from 1 Jan, 2019 to 31 Dec, 2021
Companies need to meet the below criteria to qualify as a small and thin-profit enterprise:
|Total Assets (RMB)||≤50,000,000.00|
|Annual Taxable Income (RMB)||≤3,000,000.00|
|Taxable Income (X)||CIT Rate|
|1,000,000.00< X ≤3,000,000.00||50%*20%= 10%|
Incentives for small-scale VAT taxpayers from 1 Jan, 2019 to 31 Dec, 2021
- If the total monthly sales volume does not exceed RMB 100,000, or the quarterly sales volume does not exceed RMB 300,000, if one quarter is taken as a taxable period, companies are exempted from paying VAT.
- VAT surcharges and other taxes such as Stamp duty and House Property Tax shall be levied at a reduced rate of 50%. The company has to be a small-scale VAT taxpayer in order to enjoy the 50% reduced rate on Resource Tax, Urban Maintenance and Construction Tax, Real Estate Tax, Urban Land Use Tax, Stamp duty, Cultivated Land Occupation Tax, education surcharges and local education surcharges.
Additional input VAT deduction
Taxpayers that provide postal, telecommunication, modern and living services accounting for more than 50% of their total sales are also eligible for these additional VAT input deductions:
|Type||Additional VAT Input for Credit||Period of Validity|
|Postal, Telecommunication, Modern Services||10%||From 01/04/2019 to 31/12/2021|
|Living Services||15%||From 01/10/2019 to 31/12/2021|
VAT refunds for excess VAT Input
A new pilot VAT refund mechanism was introduced on April 1 2019, allowing refunds of excess input VAT credits for a broad range of businesses in China.
|Industry||Calculation of Excess VAT Input Refund||Effective From|
|General Industries||Increased Amount * Input VAT Component Proportion * 60%||01/04/2019|
|Advanced Manufacturing||Increased Amount * Input VAT Component Proportion||01/06/2019|
Exemption from relevant governmental funds
Since January 1 2016, enterprises with a total monthly sales volume of less than RMB100,000 or quarterly sales volume less than RMB 300,000 – when one quarter is taken as a taxable period – are exempted from paying educational surcharge and local educational surcharge.
Incentives for Stamp duty
Since mid 2018, the stamp duty levied on the capital account book set up by taxpayers was reduced by half according to the total amount of paid-in capital and capital reserve. Of the new capital injection, which goes into an enterprise’s paid-in capital, the newly injected part is required to pay stamp duty.
Individual Income Tax (IIT)
A tax resident is defined as:
- A person who is domiciled in China, or;
- Any individual who is not domiciled in China but has resided in the jurisdiction for a total of 183 days or more within a tax year.
Tax residents are taxed on their worldwide income.
Non-tax resident individuals are subject to IIT only on their PRC sourced incomes. Thus any remuneration from foreign employers to individuals is exempted from IIT provided that the remuneration is not borne or paid by any permanent establishment in China
Exemption (six-year rule)
In 2019, the new IIT Law introduced a special relief that allows resident taxpayers who do not have domiciles in China to be taxed only on their China-sourced income if the following conditions are met:
- The taxpayer has not been resident for more than six consecutive years (this was previously five years) in each of which:
- The taxpayer has resided for at least 183 days in China and
- Has not left China for more than 30 days in a single trip in the previous six years
- The remuneration is not borne or paid by any permanent establishment or individuals in China
It is important to note that the six-year rule starts counting from 2019 and it will interrupt any worldwide tax obligations under the previous five-year rule until the taxpayer resides in China for another 6 years. Moreover, any trips outside China of more than 30 days will ‘reset the clock’.
Starting from 2019:
Rates and tax brackets
|Rates||Quick Deductions||Yearly in RMB||New Brackets||Previous Brackets|
|3%||0||36,000||≤ 3,000||≤ 1,500|
|10%||2,520||36,000 – 144,000||3,000 – 12,000||1,500 – 4,500|
|20%||16,920||144,000 – 300,000||12,000 – 25,000||4,500 – 9,000|
|25%||31,920||300,000 – 420,000||25,000 – 35,000||9,000 – 35,000|
|30%||52,920||420,000 – 660,000||35,000 – 55,000||35,000 – 55,000|
|35%||85,920||660,000 – 960,000||55,000 – 80,000||55,000 – 80,000|
|45%||181,920||> 960,000||> 80,000||> 80,000|
Deductions and allowances
Deductions for resident taxpayers (domiciled and non-domiciled) include the below categories for both foreign and Chinese nationals:
- Education of children
- Continuing education
- Medical treatment of chronic illnesses
- Mortgage interest
- Housing rent
- Support for elderly parents
(Monthly income – Social insurance and housing fund [personal portion] – Deductions – Exemption)* corresponding rate – quick deduction
The taxable year is every year from 1 January to 31 December.
Tax filing due date
Monthly income in the form of wages shall be declared in the same period in which it originated.
|Presence in China for More Than Six years Without a 30 Day Break||Fewer Than Six Years Presence or More Than Six Years With a 30 Day Break||Tax Declaration Date|
|Domiciled Individual Holding Chinese Household Registration (Hukou)||Taxed in China on their global income||The six year rule doesn’t apply||Between 1st March and 30th June of the following year (deduct RMB 60,000 and any other extra deductions)|
|Non-Domiciled Individual (Presence in China of More Than 183 Days per Year)||Taxed in China on their global income||Taxed in China on their China income only||Between 1st March and 30th June of the following year (deduct RMB 60,000 and any other extra deductions)|
|Non-Domiciled Individual (Presence in China of Fewer Than 183 Days per Year)||Taxed in China on their China Income only||The six year rule doesn’t apply||Monthly or pay-per-view (deduct RMB 5,000 per month tax exemption but no other deduction available)|
For IIT purposes, the taxable employment income refers to all compensation received by an employee (monetary and in-kind) for the work carried out for the employer. It normally includes:
- Base salary
- Profit share
- Any other income related to the employment
The tax authorities have also established that certain types of income granted to foreign employees can be treated as exempt provided that the amounts are reasonable and supported by official invoices and receipts.
A non-exhaustive list of exempted benefits includes the following:
- Housing allowances
- Language training allowances
- Children’s education allowances
- Meal allowances
- Laundry allowances
- Home trip travel allowances
It is important to note that according to the new IIT Law, the aforementioned benefits will be considered exempt until the end of 2021.
Income from interest, dividends, rents and transfer of properties
Such incomes are generally taxed at a flat rate of 20%. Lower rates can be applied depending on specific factors such as the nature of the entity paying out the dividend/interest.
PART 5: Sector-specific opportunities in China
To learn more about accessing the China market contact firstname.lastname@example.org for more information