Corporate Taxes in China – that will be the topic of today’s article.
This article isn’t formal tax advice and the facts might have changed since we wrote it.
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Table of Contents
Today, I will be discussing corporate taxes in China, which prove to be beneficial if you want to start a business in China.
Kindly note that the information provided within this article is accurate and up to date at the time of writing this.
However, there is a good chance that there might be changes in these taxes by the time you read this.
The main objective of providing this article is to offer a general idea regarding the taxes that are involved with businesses.
Having said that, let us now begin discussing the details related to corporate taxes in China.
Before we get to the actual details, let us have a look at some general information regarding corporate taxes.
This information would include the basic information revolving around corporate taxes as well as those imposed in China.
Let’s say, we start with the types of corporate taxes that are imposed on a business (in general).
Types of Corporate Taxes
There are several types of corporate taxes that companies may be required to pay, and I am going to discuss the most common types.
Corporate income tax
Corporate income tax is to businesses similar to what an income tax is to individuals.
It is based on the net income of the company, which is calculated by subtracting business expenses from revenues.
These are taxes that companies must pay on the wages paid to their employees.
Payroll taxes include Social Security and Medicare taxes, as well as federal and state unemployment taxes.
This is a tax on real estate and other property owned by a company, such as buildings, land, and equipment.
Some states and localities impose sales tax on goods and services sold by companies.
This is a tax on specific goods, such as tobacco, alcohol, gasoline, and other items that are considered “luxury” items.
Some states require companies to pay a franchise tax, which is a fee for the privilege of doing business in that state.
Alternative minimum tax
This is a separate tax calculation that limits certain deductions and credits to ensure that companies pay a minimum amount of tax.
Corporate Taxes in China
However, not all the corporate taxes mentioned above may be imposed on corporate entities in China.
This doesn’t necessarily mean that the taxes that haven’t been mentioned above are imposed on corporations in China.
Therefore, let us now have a look at some of the corporate taxes that are imposed on corporate entities located in China.
In China, companies are subject to a variety of taxes, including corporate income tax, value-added tax, business tax, and customs duties.
Let us now have a brief overview of corporate taxes in China which include (but are not limited to):
Corporate income tax
Companies in China are subject to a corporate income tax on their worldwide income.
Apart from the standard rate, some industries and regions may qualify for lower rates.
In addition to that, companies may be eligible for certain tax incentives and deductions.
Value-added tax (VAT)
VAT is a consumption tax that is imposed on the sale of goods and services in China.
Regardless of the standard rate, lower rates apply to certain goods and services.
Business tax is a tax on certain services, such as transportation and construction, that is separate from VAT.
The business tax rates vary depending on the type of service, and as for the details, we will get to that in a few moments.
China imposes customs duties on imported goods, for which, rates vary depending on the type of product and the country of origin.
China also imposes a withholding tax on certain payments made to non-resident companies and individuals.
In China, the WHT is imposed on payments such as dividends, interest, and royalties.
As usual, the rates vary depending on the type of payment and the country of origin.
It’s worth noting that the Chinese tax system can be complex and subject to change.
Therefore, companies operating in China should consult with a tax professional to ensure compliance with local regulations.
Having focused on all the details regarding the general information, let us now get to our topic, i.e., Corporate Taxes in China.
Under CIT regulations, an “establishment” or “place” is described as a site or facility within China.
Such entity should participate in production and commercial operations such as:
— Management organizations
— Business entities
— Representative offices
— Areas with natural resources utilized
— Venues, where labor services are supplied
— Locations where contracted projects are in effect such as construction, installation, assembly, repair, and exploration
In addition to those mentioned above, facilities or areas where production and commercial activities take place.
Finally, it would also include business agents who frequently sign contracts, store and transport goods, and perform other duties on behalf of the non-TRE.
Corporate Income Tax
Tax resident enterprises (TREs) are required to pay corporate income tax (CIT) on all their income.
However, non-TREs without an establishment or place in China are only taxed on their China-source income.
If a non-TRE has an establishment or place in China, they must pay CIT on income generated from within China.
This also includes any income connected with that specific establishment or place.
The standard CIT rate is 25%, but some industries under certain special circumstances, qualify for a lower rate.
For instance, new/high-tech enterprises meeting certain criteria are eligible for a reduced CIT rate of 15%.
In order to state the reduced rates for corporate entities under special circumstances, let us take a look at an example.
Encouraged designated key software enterprises and encouraged designated integrated circuits (IC) design enterprises can also benefit from a reduced CIT rate of 10%.
That too, the reduced rate is provided after the first five years of CIT exemption.
Similarly, qualified technology-advanced service enterprises may receive a reduced CIT rate of 15%.
Furthermore, the CIT rate is also lower for some specific regions or industries.
For example, enterprises in the Western Regions are entitled to a reduced preferential CIT rate of 15%.
However, this is only valid until December 2030, and after that, this is subject to change.
For example, Enterprises operating in specific areas such as:
— Qianhai Shenzhen-Hong Kong Modern Services Industry Cooperation Zone
— Guangdong-Macao Intensive Cooperation Zone in Hengqin
— Pingtan Comprehensive Experimental Zone
In such cases, the corporate entities can benefit from a reduced CIT rate of 15%.
For this, the corporations should be engaged in projects listed in the respective Catalogues for CIT Preferential Treatments.
Furthermore, registered enterprises can also receive a reduced CIT rate of 15% for certain activities, which include:
— Hainan Free Trade Port
— Nansha trial-run areas
— Lingang New Area of the Shanghai Pilot Free Trade Zone
Local Income Tax
In China, there are no local or provincial income taxes for corporate entities.
Value-added Tax (VAT)
Value-added tax (VAT) is levied on the sale, and importation of goods, provision of services, and sales of intangible and immovable properties.
If you are a general VAT payer, you can offset the input VAT against the output VAT.
As of 1 April 2019, the VAT rate for general VAT payers is outlined in the table below, while small-scale VAT payers are subject to a rate of 3%.
Given below are the industries and their relevant VAT rates in China.
13% VAT rate applies to sales or importation of goods, provision of repair, replacement and processing services, and tangible movable property leasing services.
The 9% VAT rate applies to sales or importation of necessity goods like:
— Agricultural products
— Transportation services
— Postal services
— Basic telecommunications services
— Construction services
— Immovable property leasing services
— Sales of immovable properties
— Transfer of land-use right.
The 6% VAT rate applies to:
— Value-added telecommunications services
— Financial services
— Modern services (excluding leasing services)
— Consumer services
— Sales of intangible properties (excluding land-use rights).
There is no VAT applicable for the following types of businesses in China, which are as follows.
Exportation of goods, services, and transportation are subject to VAT but are given preferential tax treatment under certain conditions.
This includes R&D services, energy performance contracting services, design services, production and distribution services for radio, film, and television programs, software services, circuit design, and testing services, information system services, process management services, offshore outsourcing services, and transfer of technology.
Taxpayers who are eligible for zero-rated VAT may be able to claim a credit or refund for the input VAT they paid.
For exported services, the VAT refund rate is the same as the applicable VAT rate.
For exported goods, the VAT refund rates range from 0% to 13%, yet however, a prescribed formula is used to determine the amount of the refund.
This means that some exported goods may not receive a full refund of input VAT and exporters may face varying degrees of export VAT costs.
Certain taxable activities, including some sales of goods, services, and cross-border transactions, are exempted from VAT.
Input VAT incurred in these activities cannot be credited or refunded.
To address the impact of COVID-19, there are various VAT incentives available such as a reduced rate of 1% (which used to be 3%) from 1 March 2020 to 31 March 2022.
Starting from 1st April 2022 to 31st December 2022, VAT is not applicable for small-scale VAT payers.
Customs duty is charged on imported and exported goods. The Consignee, consignor, and owner are responsible for paying customs duties.
The customs classification of goods is the basis for customs supervision and taxation. China’s import and export tariff system has undergone significant changes.
Import duty is charged based on the value of goods. Duty collection on an ad valorem basis is the main taxation measure used by most countries.
The country of origin of imported goods determines other trade policies, such as TRQ and preferential tariffs.
State regulations allow for the reduction or exemption of customs duties, import VAT, and consumption tax on import and export goods.
Processing trade allows for an exemption of duties and taxes on goods to be re-exported.
Imported goods entering and exiting from customs special supervision zones are exempted from exportation but held over for sales in domestic markets.
Luxury and environmentally harmful goods are subject to a consumption tax.
The tax applies to items such as cigarettes, alcohol, cosmetics, jewelry, gasoline, and vehicles.
The tax amount is based on the sales amount or volume. The tax cannot be recovered, but it can be deducted as an expense for CIT purposes.
Real Estate Tax
An annual real estate tax is levied on buildings and land used for business or rental purposes based on their value or rental received.
The tax rate is 1.2% of the original building value, and local governments usually offer a tax reduction of 10% to 30%.
Alternatively, tax may be assessed at 12% of the rental income and the real estate tax is deductible for CIT purposes.
Urban and Township Land-Use Tax
Taxpayers who use land within a city, country, township, or mining district are required to pay an annual urban and township land-use tax.
The tax amount is calculated based on the taxpayer’s land area and a fixed amount per square meter set by the local government.
Arable Land Occupation Tax
Individuals and companies that construct non-agricultural buildings or houses on arable land are required to pay this tax.
The tax rate is evaluated by multiplying the area of the land occupied by a fixed amount per square meter set by local governments.
The tax is paid once.
Land Appreciation Tax
Land appreciation tax is imposed on gains from selling land use rights or real estate properties.
Tax rates for the land appreciation tax increase progressively from 30% to 60% and the land appreciation tax can be deducted for CIT purposes.
Stamp tax applies to taxable documents and securities trading in China, as well as taxable contracts used in China, which applies to both individuals and enterprises.
Rates of stamp tax vary depending on the type of contract, ranging from 0.005% for loan contracts to 0.1% for property leasing and insurance contracts.
Deed tax is a tax imposed on the transfer, sale, donation, or exchange of real estate or land use ownership rights.
The tax rate usually ranges from 3% to 5%, and the person who receives the ownership rights is responsible for paying the tax.
An employer has the responsibility of deducting an employee’s income tax from their salary and submitting it to the tax authorities every month.
Social Security Contributions
In China, social security contributions are compulsory for employers and employees.
Employers must contribute to pension, medical, unemployment, maternity, and work-related injury funds for their employees.
The percentage of social security benefits and contribution base vary from city to city.
Urban Construction and Maintenance Tax
Urban construction and maintenance tax is added to the amount of indirect taxes paid by taxpayers in China.
Taxpayers of indirect taxes are also responsible for paying urban construction and maintenance taxes.
The tax rate varies based on the taxpayer’s location, with rates of 7%, 5%, and 1% for urban, county, and other areas respectively.
Urban construction and maintenance tax is not applied to imported goods or services/intangible assets sold by foreign entities.
Cultural Business Development Levy
Individuals or entities involved with the entertainment business or advertising business pay a cultural business development levy of 3%.
Environmental Protection Tax (EPT)
EPT is collected from companies that release taxable pollutants in China.
These pollutants can be air, water, solid waste, or noise pollution and the EPT is determined by the pollutants released.
In China, there are some other types of corporate taxes such as:
— Motor vehicle acquisition tax
— Vehicle and vessel tax
— Vessel tonnage tax
— Resource tax
Tax incentives were introduced in 2022 to boost economic development in Hengqin and Nansha districts.
Enterprises registered in Hengqin receive a reduced corporate income tax rate of 15%.
Hengqin enterprises in tourism, modern service, and high-tech industries are exempt from CIT on new overseas direct investment income.
Eligible capital expenditures can receive deductions or accelerated depreciation or amortization methods.
High-end talents in short supply working in Hengqin receive an exemption on their portion of IIT exceeding 15%.
Nansha enterprises with operational substance get a reduced CIT rate of 15% if engaged in CIT Preferential Treatments of Nansha.
Unutilized tax losses before an enterprise become an HNTE or technological SME in Nansha can be carried forward for 13 years.
Hong Kong and Macao residents working in Nansha are exempt from IIT exceeding their tax burdens.
The SD Law, effective July 1, 2022, generally maintains the framework of the previous stamp tax system.
Taxable income is the gross income minus non-taxable and tax-exempt income, deductions, and losses from previous years. Use the accrual method of accounting.
Gross income includes all monetary and non-monetary income from different sources, such as sales, services, property transfers, dividends, interest, rentals, royalties, and donations.
Non-taxable income includes governmental administration charges, funds, appropriations, and other income specified by the central government.
Inventory must be valued based on costs, using FIFO, weighted average, or specific identification.
Unrealized gain/loss because of changes in fair value
Unrealized gains or losses from fair value changes are not taxable/deductible until the asset/liability is disposed of or realized.
Capital gains are treated as ordinary income for taxation purposes.
CIT exemption exists on dividends from direct investment in another TRE, except for stocks publicly traded for less than 12 months.
Dividends received by non-TREs from China are subject to a 10% WHT. Non-TRE shareholders using dividends to invest directly in China may be eligible for WHT deferral, subject to conditions.
Pre-2008 profits distributed as dividends by foreign investment enterprises to non-TRE shareholders are exempt from WHT.
Interest, Rent, and Royalties
Interest, rental, and royalty income are considered ordinary income.
Partnership income is taxable at the partners’ level.
Unrealized exchange gains
Unrealized exchange gains/losses from foreign currency assets/liabilities are generally taxable/deductible.
The worldwide income of TREs and their branches is taxable in China, with a CFC rule for foreign-controlled companies.
Enterprises in specific industries in Hainan Free Trade Port and Hengqin are exempt from CIT on income generated by new overseas direct investment.
Corporate taxes play a significant role in China’s economy as they are a major source of revenue for the government.
Corporate tax revenue accounts for a significant portion of China’s total tax revenue.
This is used to fund public goods and services such as infrastructure, education, healthcare, and social welfare programs.
In China, the corporate tax rate varies depending on the size and type of the company, with larger companies generally facing higher tax rates than smaller ones.
The standard corporate tax rate in China is 25%, although there are some variations and exemptions for certain industries and regions.
Corporate taxes in China also have implications for foreign companies doing business in the country.
For example, foreign companies operating in China are subject to the same corporate tax rate as domestic companies.
However, foreign companies may be eligible for tax incentives and exemptions if they invest in certain industries or regions designated as key development areas by the Chinese government.
Overall, corporate taxes in China are an important tool for the government to fund public services and support economic growth, while also shaping the business environment and incentivizing certain types of investment.
That being said, I strongly hope that the information provided within this article was helpful to you in knowing the corporate tax details in China.
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