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 bracket* (RMB) | New bracket (RMB) | Effect | IIT rate (%) | Quick deduction (under new law) |
|---|---|---|---|---|
| <1,500 | <3,000 | Widened | 3 | 0 |
| 1,500-4,500 | 3,000-12,000 | Widened | 10 | 210 |
| 4,500-9,000 | 12,000-25,000 | Widened | 20 | 1,410 |
| 9,000-35,000 | 25,000-35,000 | Narrowed | 25 | 2,660 |
| 35,000-55,000 | 35,000-55,000 | Unchanged | 30 | 4,410 |
| 55,000-80,000 | 55,000-80,000 | Unchanged | 35 | 7,160 |
| >80,000 | >80,000 | Unchanged | 45 | 15,160 |
| *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:
- Education expenses for children;
- Expenses for further self-education;
- Healthcare costs for serious illness;
- Housing loan interest;
- Housing rent; and
- Support for the elderly.
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.
| Industry | Old law | New law |
|---|---|---|
| ≤ RMB 500,000 | Unified 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.
| Scope | Old VAT rate | New VAT rate |
|---|---|---|
| Sale of goods, processing, repair and replacement services, physical property leasing or impartation | 17% | 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 gas | 11% | 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
| Type | VAT Rules |
|---|---|
| Sales or Imports of goods (except for other goods listed below) | 16% |
| Cereals and edible vegetable oils | 10% |
| Tap water, heating, cooling, hot water, coal gas, liquefied petroleum gas, natural gas, methane gas, coal/charcoal products for household use | 10% |
| Books, newspapers, magazines (excluding newspapers and magazines distributed by the Post Department) | 10% |
| Agricultural machinery and plastic covering film for farming | 10% |
| Agriculture, forestry, products of animal husbandry, aquatic products | 10% |
| Audio-visual products | 10% |
| Electronic publications | 10% |
| Dimethyl ether | 10% |
| Edible salt | 10% |
| Providing Processing or Repair and Replacement Services | 16% |
| Type | VAT Rules |
|---|---|
| Building | 10% |
| Structure | 10% |
| Type | VAT rules |
|---|---|
| Patented Technology | 6% |
| Non-Patented Technology | 6% |
| Trademark | 6% |
| Copyright | 6% |
| Goodwill | 6% |
| Infrastructural assets Management | 6% |
| Public utility concessions | 6% |
| Quotas | 6% |
| Operation rights (including franchise, chain management, and other business rights | 6% |
| Exclusive distribution rights | 6% |
| Distribution rights | 6% |
| Procuration rights | 6% |
| Membership rights | 6% |
| Seat rights | 6% |
| Online gaming virtual reality props | 6% |
| Domain names | 6% |
| Appellation rights | 6% |
| Portrait rights | 6% |
| Naming rights | 6% |
| Transfer fees | 6% |
| Sea use rights | 6% |
| Prospecting rights | 6% |
| Mining rights | 6% |
| Water drawing rights | 6% |
| Other natural resource usage | 6% |
| Land use rights | 10% |
| Category | Type | VAT rules | |
|---|---|---|---|
| Traffic and transit services | Road transport services | 10% | |
| Waterway transport services | 10% | ||
| Air transport services | 10% | ||
| Pipeline transport services | 10% | ||
| Postal Services | Normal postal services | 10% | |
| Special postal services | 10% | ||
| Other postal services | 10% | ||
| Telecoms services | Basic telecoms services | 10% | |
| Value added telecoms services | 6% | ||
| Construction services | Engineering services | 10% | |
| Installation services | 10% | ||
| Renovation services | 10% | ||
| Decoration services | 10% | ||
| Other construction services | 10% | ||
| Financial Services | Loan services | 6% | |
| Direct charging financial services | 6% | ||
| Insurance services | 6% | ||
| Financial assets transfer | 6% | ||
| Modern services | |||
| Research and Technology Services | Research Services | 6% | |
| Energy management contracting services | 6% | ||
| Engineering prospection and exploration services | 6% | ||
| Special skills services | 6% | ||
| Information Technology Services | Software | 6% | |
| Circuit design and testing services | 6% | ||
| Information systems services | 6% | ||
| Business process management services | 6% | ||
| Information systems added value services | 6% | ||
| Cultural and creative services | Design services | 6% | |
| IP services | 6% | ||
| Advertisement services | 6% | ||
| Conference and exhibitions services | 6% | ||
| Logistics auxiliary services | Aviation services | 6% | |
| Port and harbor services | 6% | ||
| Freight and passenger transport field services | 6% | ||
| Salvage relief services | 6% | ||
| Loading and unloading services | 6% | ||
| Warehousing services | 6% | ||
| Parcel receiving and dispatch services | 6% | ||
| Real estate services | Tangible property financing leasing services | 16% | |
| Real estate financing leasing services | 10% | ||
| Tangible property operating leasing services | 16% | ||
| Real estate operating leasing services | 10% | ||
| Authentication and consulting services | Authentication services | 6% | |
| Attestation services | 6% | ||
| Consultation services | 6% | ||
| Radio and television services | Radio and television programs (works) production services | 6% | |
| Radio and television programs (works) issuance services | 6% | ||
| Radio and television programs (works) broadcast services | 6% | ||
| Business support services | Corporate management services | 6% | |
| Brokerage agency services | 6% | ||
| Human resources services | 6% | ||
| Safety protection services | 6% | ||
| Other modern services | 6% | ||
| Life services | |||
| Cultural and fitness services | Cultural services | 6% | |
| Fitness services | 6% | ||
| Educational and medical services | Education services | 6% | |
| Medical services | 6% | ||
| Travel and entertainment services | Travel services | 6% | |
| Entertainment services | 6% | ||
| Food, beverage, and accommodation services | Food and beverage services | 6% | |
| Accommodation services | 6% | ||
| Residents' daily services | 6% | ||
| Other life services | 6% | ||
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:
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.
