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Trade Commissioner Service > Country and sector information > China > SME gateway > Taxes in China

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.

Individual income tax (IIT)

In accordance with the Individual Income Tax Law, 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. A new IIT law, meant to ease the tax burden for low to mid-income earners and to take a tougher stance on foreign workers and high-income earners, will fully come into force on January 1, 2019.

Under the new IIT law, the tax brackets for IIT are:

Previous and New Tax Brackets for IIT on Taxable Comprehensive Income (Monthly)
Previous bracket* (RMB)New bracket (RMB)EffectIIT rate (%)Quick deduction (under new law)
<1,500<3,000Widened30
1,500-4,5003,000-12,000Widened10210
4,500-9,00012,000-25,000Widened201,410
9,000-35,00025,000-35,000Narrowed252,660
35,000-55,00035,000-55,000Unchanged304,410
55,000-80,00055,000-80,000Unchanged357,160
>80,000>80,000Unchanged4515,160
*Note: this is calculated based on bracket for the annual income. Taxable comprehensive income refers to the comprehensive income after allowable deductions.

The new IIT law also introduced a new monthly taxable income formula:

[(Pre-tax income – social security contribution – standard deduction – deductions stipulated by other laws and regulations – special additional deductions) * tax rate] – quick deduction.

Taxable income

(Pre-tax income) – (social security contribution) – (standard deduction – (deductions stipulated by other laws and regulations) – (Special additional deductions)

X

Tax rate

Quick deduction

The standard deduction threshold is RMB 5,000 per month for both non-resident and resident taxpayers.

Special additional deductions include:

Those who donate to charity (an amount not exceeding 30 percent of their income) can deduct this amount from their taxable income as well.

Article 1 of the IIT law deems that a foreign individual who resides in China for an accumulated 183 days or more in a year is considered a ‘tax resident’, and therefore subject to Chinese tax on their worldwide income. This stipulation will replace the previous five-year-rule, under which a foreign individual was subject to Chinese taxation on worldwide income if they lived in China for more than five years.

This previous five-year threshold was easily circumvented by expatriates who would choose to leave the country for an aggregate of 91 days per year or more than 31 consecutive days to ‘reset the clock’ on the five-year threshold. Article 11 of the IIT law stipulates that, for tax residents, IIT will now be calculated on an annual rather than monthly basis. However, withholding agents will continue to withhold the tax in advance on a monthly basis and non-residents will continue to pay tax on a monthly or subordinate basis.

Turnover taxes

Value-added tax

VAT is one of the two turnover taxes in China, with the other being consumption tax. Previously, there was another turnover tax called business tax (BT) that was levied on goods and services at rates ranging from three to 20 percent. However, to avoid double taxation and support its modern services industry, China launched a pilot program in 2012 replacing BT with a VAT for selected industries, which was subsequently expanded nationwide in mid-2013. By May 1, 2016, the VAT reform was completed with Caishui [2016] No.36 coming into effect, although BT may still be in the course of being phased out in certain industries.

Under the VAT, taxpayers fall into one of two categories based on their annual taxable sales amount: general taxpayers or small-scale taxpayers. Taxpayers with annual taxable sales   exceeding the annual sales ceiling set for small-scale taxpayers must apply for general taxpayer status. A company must obtain VAT general taxpayer status in order to issue fapiao, which is a key requirement for conducting business.

Small-scale taxpayers are those whose annual sales are less than RMB 5 million (US$796,330). They are subject to a lower three percent uniform VAT rate.

China’s New Small-scale Taxpayer Criteria
IndustryOld lawNew law
  • Manufacturing of goods or provision of taxable labor services
  • Primarily engaging in manufacturing of goods or provision of taxable labor services and concurrently engaging in wholesale or retail of goods
≤ RMB 500,000Unified to be ≤ RMB 5 million
Wholesale or retail of goods≤ RMB 800,000
Provision of services originally subject to business tax≤ RMB 5 million

Since May 1, 2018, general taxpayers are subject to rates of six percent, 10 percent or 16 percent, depending on the good or service sold.

China’s New VAT Rates
ScopeOld VAT rateNew VAT rate
Sale of goods, processing, repair and replacement services, physical property leasing or impartation17%16%
Transportation tools sales, postal service, basic telecommunications, architecture, real estate lease and sales, land use right transfer, sales or import of agriculture products, tap water, natural gas11%10%

Taxpayers who have annual taxable sales below the ceiling, as well as taxpayers who have recently established a new business, can voluntarily apply for general taxpayer recognition, provided they are capable of setting up legitimate, valid, and accurate bookkeeping.

Additional “soft” or 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, and number of employees.

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

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 = Sales x VAT levy rate
Sales = Sales including VAT / (1 + VAT levy rate)

China's Reduced VAT Rates 2018

Table 1: Sales of Goods
TypeVAT Rules
Sales or Imports of goods (except for other goods listed below)16%
Cereals and edible vegetable oils10%
Tap water, heating, cooling, hot water, coal gas, liquefied petroleum gas, natural gas, methane gas, coal/charcoal products for household use10%
Books, newspapers, magazines (excluding newspapers and magazines distributed by the Post Department)10%
Agricultural machinery and plastic covering film for farming10%
Agriculture, forestry, products of animal husbandry, aquatic products10%
Audio-visual products10%
Electronic publications10%
Dimethyl ether10%
Edible salt10%
Providing Processing or Repair and Replacement Services16%
Table 2: Sales of Real Estate
TypeVAT Rules
Building10%
Structure10%
Table 3: Sale of Intangible Assets
TypeVAT rules
Patented Technology6%
Non-Patented Technology6%
Trademark6%
Copyright6%
Goodwill6%
Infrastructural assets Management6%
Public utility concessions6%
Quotas6%
Operation rights (including franchise, chain management, and other business rights6%
Exclusive distribution rights6%
Distribution rights6%
Procuration rights6%
Membership rights6%
Seat rights6%
Online gaming virtual reality props6%
Domain names6%
Appellation rights6%
Portrait rights6%
Naming rights6%
Transfer fees6%
Sea use rights6%
Prospecting rights6%
Mining rights6%
Water drawing rights6%
Other natural resource usage6%
Land use rights10%
Table 4: Sale of services
CategoryTypeVAT rules
Traffic and transit servicesRoad transport services10%
Waterway transport services10%
Air transport services10%
Pipeline transport services10%
Postal ServicesNormal postal services10%
Special postal services10%
Other postal services10%
Telecoms servicesBasic telecoms services10%
Value added telecoms services6%
Construction servicesEngineering services10%
Installation services10%
Renovation services10%
Decoration services10%
Other construction services10%
Financial ServicesLoan services6%
Direct charging financial services6%
Insurance services6%
Financial assets transfer6%
Modern services
Research and Technology ServicesResearch Services6%
Energy management contracting services6%
Engineering prospection and exploration services6%
Special skills services6%
Information Technology ServicesSoftware6%
Circuit design and testing services6%
Information systems services6%
Business process management services6%
Information systems added value services6%
Cultural and creative servicesDesign services6%
IP services6%
Advertisement services6%
Conference and exhibitions services6%
Logistics auxiliary servicesAviation services6%
Port and harbor services6%
Freight and passenger transport field services6%
Salvage relief services6%
Loading and unloading services6%
Warehousing services6%
Parcel receiving and dispatch services6%
Real estate servicesTangible property financing leasing services16%
Real estate financing leasing services10%
Tangible property operating leasing services16%
Real estate operating leasing services10%
Authentication and consulting servicesAuthentication services6%
Attestation services6%
Consultation services6%
Radio and television servicesRadio and television programs (works) production services6%
Radio and television programs (works) issuance services6%
Radio and television programs (works) broadcast services6%
Business support servicesCorporate management services6%
Brokerage agency services6%
Human resources services6%
Safety protection services6%
Other modern services6%
Life services
Cultural and fitness servicesCultural services6%
Fitness services6%
Educational and medical servicesEducation services6%
Medical services6%
Travel and entertainment servicesTravel services6%
Entertainment services6%
Food, beverage, and accommodation servicesFood and beverage services6%
Accommodation services6%
Residents' daily services6%
Other life services6%

Consumption tax

Consumption tax (CT) applies whenever certain luxury or other goods are manufactured, processed or imported. Tax rates vary considerably depending on the product. The tax paid is generally computed directly as a cost and cannot be refunded. If a company undertakes processing of taxable goods in service of another party, the processor is liable to withhold and pay consumption tax based on the value of the raw materials and processing fees. Consumption tax should be filed and paid monthly.

Other taxes

The following is a non-exhaustive list of other prominent taxes in China. For more information, please consult a China tax specialist.

Withholding tax

Withholding tax is a tax levied on passive income (i.e., dividends, bonuses, other equity investment gains, interests, rentals, royalties, transfer of property) received by non-resident enterprises from China. The withholding income tax rate is currently 10 percent. If a foreign party is a tax resident of a country or jurisdiction that has entered into a double tax treaty with China that includes reduced withholding tax, the foreign party can enjoy these reduced rates upon approval from the designated tax bureau. The China enterprise remitting the fund overseas should be the withholding agent.

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.

Surcharges

Foreign-invested enterprises, foreign 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).

Property tax

All owners, mortgagees, custodians and users of property for commercial purposes must pay the real estate tax. This does not include residential property for self-use but does include residential properties for lease. The applicable tax rate is 1.2 percent, calculated on the residual value minus between 10 percent and 30 percent of the original value of the property (as determined by the local government).

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 is levied per square meter for land use and varied depending on the size of the city or town.

Land appreciation tax

All organizations and individuals who transfer state-owned land use rights, buildings and other structures on that land, and who earn income from the transfer, should pay land appreciation tax in accordance with relevant laws and regulations.

Calculation of land appreciation tax is based on the appreciation amount gained by the taxpayer through the transfer of real estate (i.e., the balance of the proceeds received by the taxpayer on the transfer of real estate after deducting the sum of deductible items), and should be levied in accordance with a four-step progressive tax rate based on the percentage amount by which the appreciation amount is in excess of the amount of deducted items.

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.

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 [2015] No.51, released by the SAT in May 2015, 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.

Disclaimer:

Dezan Shira & Associates

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 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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