Taxes in China
Foreign business in China needs to be aware of income tax, turnover tax, consumption tax, and a variety of other local taxes to be compliant with the law.
Income tax
Corporate income tax
Corporate income tax (CIT) is calculated against the company’s net income in a financial year after deducting reasonable business costs and losses – in other words, it is effectively a tax on profits. CIT in China is settled on an annual basis but is often paid quarterly, with adjustments either refunded or carried forward to the next year. The final calculation is based on a company’s year-end audit. China’s revised corporate income tax law, which took effect in 2008, unified the tax rates for foreign and domestic enterprises. The income tax rate applied to all companies in China today, both foreign and domestic, is 25 percent. Small and low-profit enterprises are entitled to a reduced CIT rate of 20 percent, and if a taxpayer qualifies as a high-tech enterprise, a reduced CIT rate of 15 percent applies.
CIT payable is calculated using the below formula:
CIT payable= CIT taxable income X CIT rate -tax exemptions or reductions based on tax incentives
CIT taxable income is calculated on an accrual basis, meaning that income items are recorded when they are earned and deductions recorded when expenses are incurred.
Reasonable expenditure could be deducted from gross income, including:
- costs, expenses, taxes (except CIT and VAT), and losses
- charitable donations and gifts within 12 percent of the gross annual profit
- reasonable depreciation of fixed assets
- amortization of intangible assets and long-term prepaid expenses
- inventory cost
- net value of an asset transferred
- other deductions stipulated by laws and regulations
CIT is prepaid on a monthly or quarterly basis according to the figures shown in the accounting books of the company. Companies are required to file CIT returns within 15 days from the end of the month or quarter. Further, the State Administration of Taxation (SAT) requires companies to submit an Annual CIT Reconciliation Report within five months after each year’s year-end to determine if the company has met all tax liabilities, and whether the company needs to pay supplementary tax, or apply for a tax reimbursement.
Companies engaged in diversified businesses should be especially mindful that the SAT requires separate accounts to be prepared both for sales that meet the conditions for preferential treatment and those that do not. If eligible sales cannot be clearly differentiated, they are not entitled to preferential treatment. They also need to pay attention to other relevant certificates for qualification. There are usually special tax benefits for companies in encouraged industries, such as high-tech and environmental protection. However, even if a company does qualify, it may still need to obtain certificates from relevant government departments to show its specialty in such areas to the tax authority.
Individual income tax (IIT)
In accordance with the Individual Income Tax Law of the People's Republic of China (PRC), IIT is imposed on all individuals, including Chinese and foreign nationals, residing in or deriving income from China. PRC residents are generally subject to tax on their worldwide income, while non-residents are taxed on their PRC-sourced income only.
Taxable income of resident and non-resident individuals
To determine whether a foreign individual working in China is subject to Chinese tax, it is necessary to look at how much time they have spent in China, the source of their income, and where they are based.
| Taxpayer status | Domicile and residence time | Tax liability |
|---|---|---|
| Resident taxpayer |
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| Non-resident taxpayer |
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Individuals who have no domicile in China won’t be subject to paying IIT on their worldwide income until they reach six consecutive years residing in China for 183 days or more each year. This ‘six-year rule’ starts counting from January 1, 2019, meaning the number of years before 2019 won’t be counted into the six years, and non-domicile individuals in China won’t be subject to worldwide income tax before 2024.
Individual income tax rates and quick deductions
IIT is imposed on:
- income from wages and salaries at progressive rates ranging from 3% to 45%
- capital gains, interest, dividends and royalties at a flat rate of 20%
IIT on wages and salaries is normally withheld by the employer and paid to the tax authorities on a monthly basis.
IIT rates for resident and non-resident taxpayers is as follows:
| Taxable income amount (RMB) | IIT rate | Quick deduction |
|---|---|---|
| ≤ 36,000 | 3% | 0 |
| 36,000-144,000 | 10% | 2,520 |
| 144,00-300,000 | 20% | 16,920 |
| 300,000-420,000 | 25% | 31,920 |
| 420,000-660,000 | 30% | 52,920 |
| 660,000-960,000 | 35% | 85,920 |
| >960,000 | 45% | 181,920 |
Although the IIT for resident taxpayers on comprehensive income is subject to yearly computation, employers who pay wage and salaries to their employees are still required to compute and withhold the IIT on a monthly basis (detailed method is in later sections).
Where resident individuals have comprehensive income other than wage and salaries, they are required to go through an annual settlement process, during which they may need to pay extra tax or get tax refund, based on the result of yearly computation.
| IIT amount to be withheld for the current period | = | taxable income amount subject to cumulative withholding × withholding rate – quick deduction – cumulative IIT credit – cumulative withheld IIT amount |
| Taxable income amount subject to cumulative withholding | = | cumulative income – cumulative tax-exempt income –cumulative standard deduction* – cumulative special deductions** – cumulative special additional deductions – cumulative other deductions determined pursuant to the law |
*Cumulative standard deduction shall be computed by multiplying RMB 5,000 per month with the number of months for which the taxpayer is employed at the current month in the current tax year.
**Cumulative special deductions here refer to the cumulative amount contributed to the mandatory social insurances and house funding shared by the employee.
| Taxable income amount (RMB) | IIT rate | Quick deduction |
|---|---|---|
| ≤ 3,000 | 3% | 0 |
| 3,000-12,000 | 10% | 210 |
| 12,000-25,000 | 20% | 1,410 |
| 25,000-35,000 | 25% | 2,660 |
| 35,000-55,000 | 30% | 4,410 |
| 55,000-80,000 | 35% | 7,160 |
| <80,000 | 45% | 15,160 |
The IIT rates for non-resident taxpayers are generally equal to those for resident taxpayers, but is computed on a monthly basis.
| Monthly tax payable | = | monthly taxable income × applicable tax rate – quick deduction |
| Monthly taxable income | = | wages or salaries amount – standard deduction – other applicable deductions |
Turnover taxes
Value-added tax
Value-added tax (VAT) is one of two turnover taxes in China, the other being consumption tax.
VAT is considered a neutral tax, allowing businesses to offset VAT incurred in relevant purchases from their VAT liability. VAT taxpayers are categorized into:
- general taxpayers
- small-scale taxpayers
based on their annual taxable sales amount. Taxpayers with annual taxable sales exceeding the annual sales ceiling set for small-scale taxpayers, which is RMB 5 million, must apply for general taxpayer status.
VAT payers whose annual taxable sales are below the ceiling, as well as those who have newly established their business, can voluntarily apply for general taxpayer recognition upon meeting the following conditions:
- possess a fixed place of business
- capable of setting up legitimate, valid, and accurate bookkeeping
Additional unwritten requirements are also commonly found to influence the local tax authorities’ judgment on whether or not an applicant is eligible for general taxpayer status, such as:
- registered capital
- office size
- number of employees
Traditionally, a company must obtain VAT general taxpayer status in order to be able to issue special VAT invoices. However, starting from February 1, 2020, all small-scale taxpayers (except other individuals) can voluntarily use the VAT invoice administrative system to issue the special VAT invoice by themselves.
Small-scale taxpayers are subject to a lower uniform VAT levy rate of 3%, as compared to rates ranging from 6% to 13% for general taxpayers, but they cannot:
- credit input VAT from output VAT
- be entitled to VAT export exemptions and refunds
Rates
Specific VAT rates for general taxpayers depends on the class of the goods or services. Below are the VAT rates for several classes of goods as of April 2019.
| Taxable items | Rates |
|---|---|
| Export of goods (except where otherwise stipulated by the State Council) | 0 |
Sales and import of the following
| 9% |
| Sale and import of goods other than those listed above; processing, repairs and replacement services | 13% |
Tangible property leasing services
| 13% |
| Construction and real estate | 11% |
Financial services
| 6% |
Modern services
| 6% |
Life services
| 6% |
Sale of intangible assets
| 6% |
Calculation
For general taxpayers, the basic formula for calculating VAT payable is:
VAT payable = output VAT in the current period – input VAT in the current period
Output VAT = sales x VAT rate
Sales = sales including output VAT / (1 + VAT rate)
Input VAT = sales x VAT rate
If the output tax for the current period is insufficient to offset the input tax of the current period, the difference can be carried forward to the next term for continued offset.
For small-scale taxpayers, the formula for determining VAT payable is:
VAT payable = sales x VAT levy rate
Sales= sales including VAT / (1 + VAT levy rate)
To support the development of small and micro enterprises, the STA provides a preferential VAT exemption policy during the period between January 1, 2019 and December 31, 2021. According to this policy, small-scale taxpayers shall be exempted from VAT where their monthly sales do not exceed RMB 100,000 (or RMB 300,000 quarterly).
Fapiao
In China, invoices (or “fapiao” in Chinese) are more than just ordinary receipts. They are also the way in which the government monitors the tax paid on any transaction. Fapiao are printed, distributed, and administrated by tax authorities, and taxpayers are required to purchase the invoices they need from the tax authorities according to their business scope.
Fapiao can mainly be sorted into two categories:
- general VAT invoices
- special VAT invoices
Although these terms are often used interchangeably, there are notable differences between the two, including applicability for tax deductions, detail of information recorded, and usage by different types of taxpayers. It is therefore important to check with your accountant with regard to which type of invoice is needed according to the intended purpose.
Consumption tax
Consumption tax (CT) is imposed on all individuals and organizations which:
- manufacture and import taxable products
- process taxable products under consignment
- sell taxable products
Generally, CT is levied on the below categories of products:
- Products whose over-consumption is harmful to health, social order and the environment, e.g., tobacco, alcohol, firecrackers and fireworks
- Luxury goods and non-necessities, such as precious jewelry and cosmetics
- High-energy consumption and high-end products, such as passenger cars and motorcycles
- Non-renewable and non-replaceable petroleum products, such as gasoline and diesel oil
- Financially significant products, such as yachts
A company processing taxable goods for others is liable to withhold and pay CT based on the value of the raw materials used. CT is filed and paid monthly, and the rates vary considerably with the type of product in question.
Other taxes
Stamp tax
Stamp tax is levied on contracts with regard to purchases and sales, processing, construction and engineering projects, asset leasing, goods transportation, storage and warehousing, loans, asset insurance, technology contracts, property rights transfers, accounting ledgers and royalty licensing. The tax rates vary between 0.005 percent and 0.1 percent, or RMB 5 per document.
During the period between January 1, 2019 and December 31, 2021, small-scale taxpayers can enjoy up to 50% tax reduction, based on the decision made by provincial governments.
Surcharges
Foreign invested enterprises and foreign individuals who are subject to VAT or CT are also subject to urban construction and maintenance taxes (UCMT), education surcharge (ES) and local education surcharge (LES):
- UCMT rates are 7% for urban areas, 5% for counties (towns), and 1% for other regions
- The ES rate is 3% regardless of location
- The LES rate is 2% regardless of location
The total surtaxes amount to 12% of the total turnover tax liability (i.e., VAT and CT) in urban areas, meaning that these taxes are levied on the amount of the turnover tax but not the total value of the transaction.
Enterprises with monthly turnover less than RMB 100,000 (approx. US$14,000), or quarterly turnover less than RMB 300,000 (approx. US$42,000) shall be exempted from ES and LES. UMCT will be exempted if the taxpayer is categorized as small-scale taxpayer and the monthly turnover is less than RMB 100,000, or quarterly turnover is less than RMB 300,000. If the small-scale taxpayer issues special VAT invoices, then the taxpayer shall have to pay VAT and UMCT regardless of the invoicing amount.
During the period between January 1, 2019 and December 31, 2021, small-scale taxpayers can enjoy up to 50% surcharges reduction, based on the decision made by provincial governments.
Urban and township land use tax
Individuals and enterprises that use land in cities and towns are subject to urban and township land use tax. The taxable amount per square meter for land use tax is:
- RMB 1.5 to RMB 30 for large cities
- RMB 1.2 to RMB 24 for medium cities
- RMB 0.9 to RMB 18 for small cities
- RMB 0.6 to RMB 12 for county towns, towns and industrial and mining areas
Local governments have the right to increase or reduce the tax rate according to their socioeconomic conditions.
During the period between January 1, 2019 and December 31, 2021, small-scale taxpayers can enjoy up to 50% tax reduction, based on the decision made by provincial governments.
Resource tax
Companies or individuals engaged in the exploitation of certain mineral resources or salt production are liable for resource tax, which was originally calculated ad valorem or based on quantity.
On August 26, 2019, China passed its new Resource Tax Law, which came into force on September 1, 2020. This new law codifies taxes on resources that are already in place. There are currently 164 resources, mostly minerals, subjected to taxes ranging from 1% to 20%. Besides, the new law simplifies the time limit for tax declaration—taxpayers can make tax declarations within 15 days on either a monthly or quarterly basis.
During the period between January 1, 2019 and December 31, 2021, small-scale taxpayers can enjoy up to 50% tax reduction, based on the decision made by provincial governments.
Vehicle and vessel tax
Owners or administrators of certain types of vehicles and vessels are subject to vehicle and vessel tax. Preferential policies are available for energy-saving vehicles/vessels, or vehicles/ vessels using new energy technology. Tax exemptions may be applied to diplomatic vehicles and vessels. According to the Caishui [2018] No.74, released by the SAT in July 2018, eligible energy-saving vehicles/vessels can enjoy a half-reduced tax rate, and eligible new energy vehicles/vessels can be exempt from vehicle and vessel tax. Automobile manufacturers and importers who are engaged in making or importing qualified vehicles may apply to the Ministry of Industry and Information Technology (MIIT) for the tax incentives.
Environmental protection tax
On January 1, 2018, China’s first Environmental Protection Tax Law (EPT Law) came into effect, replacing the previous Pollutant Discharge Fees (PDF) system in a bid to strengthen the enforcement of environmental regulations. The EPT Law provides guidelines for levying taxes on entities that emit air and water pollutants, solid wastes, as well as noise pollution.
Major contents of the EPT Law, such as taxable items, tax rates, and specification of taxpayers, are largely consistent with the previous PDF system. However, changes concerned with tax incentives and administrating authorities significantly differ from the previous law.
Related authorities are currently drafting detailed regulations for implementing the EPT Law. Guidelines concerning how to monitor pollutants, how to collect taxes, and how to deal with appeals by taxpayers are still in the drafting process. It is recommended that enterprises keep up to date with the ongoing regulatory changes.
Disclaimer:
The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.
Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.
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