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Navigating taxes in China can be intimidating. China’s taxation system is one of the most important revenue sources for the government and it constantly undergoes thorough several major changes, especially in recent years 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. . It is necessary for foreign investors to understand the potential tax costs related to their investment especially considering that different types of investment have different types of taxes.
Tax Filing
Monthly and quarterly declarations of local direct and indirect taxes, among which, Corporate Income Tax (CIT), Value Added Tax (VAT), Individual Income Tax (IIT), local surcharges. Export VAT refund and special local tax deductions.
Audit Assistance
Audit of day-to-day operations to improve financial reports in accordance with Chinese accounting standards.
Annual Statutory Compliance
Annual Statutory Audit, Corporate Income Tax (CIT) Settlement and Annual Inspection.
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Tax System in China
According to China’s local tax regulations, all companies operating in the country are required and must complete monthly tax filings. The main purpose is to maintain control over the operations of the subsidiaries in China and minimize the risk associated with non-compliance which can result into major problems down stream such as fines and the revocation of the business license. In addition, local businesses must meet other numerous administrative and compliance requirements on a monthly, quarterly, annual or ad-hoc basis. 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 Chinese Business Tax, or Corporate Income Tax (CIT), applies to all companies in China — foreign owned and Chinese-owned. The rate of 25% is applied on company profits at the time they’re earned/spent (accrual basis) which can be reconciled annually as part of the year end audit process where either additional tax needs to be paid or refunded.
Corporate Income Tax (CIT) = total income – allowable deductions.
Tax incentives in China are a very popular way to encourage investment in certain industries and regions. They often come through Corporate Income Tax cuts, which currently have several general reductions in place in different regions.
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Individual Income Tax (IIT) in China
Residents in China are generally taxed on their worldwide income with a progressive tax rate system. Non-residents, on the other hand, are only taxed on their China-sourced income.
Personal income in China is categorized into different parts. Below you can see the 9 parts that compose an individual’s income:
- Wages and salary;
- Income from remuneration for personal service;
- Income from the author’s remuneration;
- Income from royalties;
- Business income;
- Income from interest, dividends, and profits distribution;
- Income from rental;
- Income from the transfer of property;
- Incidental income.
How can you tell if you are a tax resident in China?
Here prevails the 183 days rule, where individuals who spend 183 days or more in China during a tax year are deemed residents for Individual Income Tax purposes. Individuals who spend less than 183 days in China during a tax year are considered non-residents and are solely subject to taxation on income derived from China.
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Withholding Tax in China
Withholding Tax (WT) is a tax that must be imposed before remittance on payments from China derived income. The current rate of withholding taxe is 10% on gross income from dividends, interest, lease of property, royalties, and other China-source passive income unless reduced under a tax treaty.
Where double taxation treaties are in place between China and other countries, it is possible 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.
The tax payable on income derived by non-resident enterprises should be withheld at the source, with the payer (i.e., the Chinese enterprise who remits the fund overseas) as the withholding agent.
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Value Added Tax (VAT) in China
China’s value added tax (VAT) is a consumption tax levied on the sale of goods and services. The VAT is imposed at each stage of the production and distribution chain, and is ultimately borne by the final consumer. There are several reduced VAT rates in China at 6%, 10% and 16% depending on the goods and services involved.
VAT in China is calculated as: VAT Payable = Output VAT – Input VAT
VAT small-scale taxpayer or general VAT taxpayer
Following the setting up of a Chinese Company, all entities are required to undergo a tax registration within 30 days after receiving the business license. As part of the process, the company must declare their taxpayer’s status. The decision of whether to register as a VAT small-scale taxpayer or VAT general taxpayer is one that can have major consequences for the company.
The significant differences are listed as follows:
- General taxpayers can deduct their input VAT from output VAT at a specific rate, while small-scale taxpayers cannot.
- VAT rate for small-scale taxpayers is 3%, while for general VAT taxpayers rates are at 13%, 9%, and 6%.
- To claim input VAT credits in China, the company must be registered as a general VAT taxpayer and receive a special VAT invoice.
To note that general VAT taxpayers cannot be converted to small-scale VAT taxpayers without the approval of the relevant tax authority.
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