Expat Income Tax In China

After speaking about expat taxes in ThailandSouth Korea and JapanGermany and Singapore, this article will speak about expat taxes in China.

Together with looking at income taxes for individuals, we will also focus on other forms of tax, including for businesses.

This article shouldn’t be considered as tax advice, but it is correct as far as we are aware at the time of writing.

If you are looking for portable expat tailored investment solutions in China or beyond, you can contact me on this form.

Introduction

China’s population is nearly 1.4 billion. It is logical to conclude that one of the main sources of income for the state treasury is tax revenues.

In the People’s Republic of China, tax payments are the main source of income for the state treasury.

This is not surprising at all, given the fact that by 2017, China’s population had grown to almost one and a half billion people.

Taxes in China must be paid not only by citizens of the country, but also by migrants who have come there to work. 

China’s tax system is quite complex. It consists of a large number of taxes, which can be divided into 5 groups:

  • Turnover taxes
  • Income taxes
  • Property taxes
  • Resource taxes
  • Taxes on certain actions

The main share of tax revenues comes from sales taxes. Turnover taxes include:

  • value added taxes (VAT)
  • business taxes
  • consumption taxes
  • transportation tax
  • tobacco taxes

In 1994, China’s tax system underwent significant changes. Currently, all taxes in the PRC are divided into three separate groups:

  • Central taxes, which include customs duties, consumption tax, VAT levied by customs, and business tax (business tax) levied on banks, financial institutions, state-owned enterprises and foreign trading corporations.
  • Joint taxes, including VAT, Natural Resources Tax, Securities Tax and Business Tax levied on other banks and insurance companies.
  • Local taxes, including corporate income tax, business tax from other sources, real estate tax, personal income tax, stamp duty and some other taxes such as inheritance tax and land appreciation tax.

State tax offices at the local level are under the control of the State Tax Administration, while local tax offices are local government bodies. State Tax Offices with Local Tax Offices handle all taxes imposed on enterprises with foreign investment

Enterprises with foreign investments must register with the tax authorities within 30 days from the date of obtaining a business license. Upon registration, a registration certificate is issued, the validity of which is 12 months, with subsequent renewal.

This article will examine the specifics of the Chinese tax system, especially the taxes on individuals’ income, business taxes, capital gains and others.

  1. 25 Types of Taxes.

The Chinese tax system includes 25 types of taxes, which, based on their nature and functions, can be classified into 8 groups:

  • Sales tax group – This includes value added tax, consumption tax and business tax. The object of taxation for these taxes is the volume of turnover or sales from taxpayers in the field of production, sales or services.
  • Income tax group – It includes corporate income tax (for resident enterprises such as state-owned enterprises, collectively owned enterprises, private enterprises, joint ventures, and joint-stock enterprises), income tax for enterprises with foreign investment and foreign enterprises, as well as personal income tax. The object of taxation here is the profit received by the manufacturer or intermediary, as well as the personal income of individuals.
  • Group of taxes for the use of resources – This includes a tax on the use of natural resources (natural rent) and a tax on the use of land in cities and urban areas. The payers of these taxes are users of natural resources and land in cities and urban areas. These taxes reflect the compensatory nature of the use of state natural resources and are intended to regulate the income of those taxpayers who have access to natural resources.
  • Special purpose tax group – These are the tax on the maintenance of urban development, the tax on occupied croplands, which regulates the tax on real estate investments and the tax on the transfer of the appraised real estate.
  • Group of property taxes – This includes homeowner taxes, city property tax, and inheritance tax (not yet implemented).
  • A group of taxes and fees levied on the performance of certain actions – This includes tax on the use of vehicles and ships, tax on the use of registration numbers of vehicles and ships, stamp duty, duty on the sale of residential real estate, turnover tax (not yet introduced), tax on slaughter and banquet tax. The object of these taxes is the corresponding actions of the taxpayer.
  • Agricultural tax group – This includes agricultural tax (including tax on agricultural activities) and tax on livestock. The payers of these taxes are enterprises, organizations or individuals who receive income from farming or livestock farming.
  • Group of customs duties – Customs duties are imposed on goods and other items imported into or exported from China.

The payers of turnover taxes are enterprises (organizations), their structural divisions and citizens.

The legal basis for the collection of these taxes is the Temporary Instruction for each tax and the Clarifications on their implementation, adopted by the Council of State on December 13, 1993 and the Ministry of Finance on December 25, 1993, respectively.

The State Tax Administration of the People’s Republic of China is the competent authority in the area of ​​taxation throughout China.

She drafts tax bills and sets provincial tax collection plans. The PRC Ministry of Finance also issues from time to time circulars containing taxation issues. But collecting taxes at the local level is the responsibility of the Tax Administration.

The State Tax Administration and the Ministry of Finance, however, both have the power to make decisions on issues such as tax cuts, other tax incentives and exemptions.

But now let’s focus on something else, called individual income tax, which is a joint tax distributed between central and local governments.

  1. Income Taxes For Individuals.

The collection of personal income tax is currently regulated by the Law of the People’s Republic of China “On Personal Income Tax” as amended on 08/31/2018 and the Rules and Regulations for the Application of the Law of the People’s Republic of China “On Personal Income Tax” as amended on 12/18/2018 (last changes in these documents came into force on 01.01.2019).

The following individuals are considered as payers of income taxes:

  • Citizens of the PRC or foreign citizens permanently residing in the territory of the PRC for 183 days or more a year. These people must pay personal income tax on income received in the PRC and from abroad. It should be noted that in accordance with Article 6 of the Detailed Rules for the Application of the Law of the PRC “On Personal Income Tax”, foreign citizens residing in the PRC for 1 to 5 years are exempted from paying tax on income received abroad. These incomes are subject to declaration and tax payment starting from the sixth year of residence in the PRC if the foreign citizen has not lost the status of a tax resident in the PRC during this year.
  • Foreign citizens who are not tax residents of the PRC and who have been in the PRC for less than 1 year. These persons pay personal income tax on income earned in the PRC.

Regardless of the place of actual payment, the income received in the territory of the PRC includes:

  • income received as a result of the provision of labor services on the territory of the PRC in accordance with hiring, hiring, agreements, etc
  • income received as a result of leasing property for use by a lessee in the PRC
  • income received from the transfer (sale) of real estate, rights to use land or other property in the PRC
  • income received from permission to use patent rights in the PRC
  • income in the form of dividends, interest and royalties received from companies, enterprises, other economic organizations or individuals from the PRC.

Personal income tax applies to different types of income, which are subject to different applicable tax rates. The law identifies a different taxation procedure for the following types of income of an individual:

  • salary
  • income from self-employment and contracting
  • honorariums
  • labor income
  • income from granting the right to use patent rights (royalties), lease of property
  • transfer income
  • income from dividends, interest, distributions of profit, lottery winnings, other types of income

*Labor income (received wages, salaries, bonuses, annual bonuses, participation in the company’s profits, subsidies and compensations and other types of income received as a result of hiring or holding a position) are taxed at a progressive scale of rates from 3% to 45% minus minimum non-taxable minimum. At present, the amount of the minimum tax-free minimum for Chinese citizens and foreign citizens is 5,000 Yuan.

*Self-employed and contracting income is taxed at a progressive rate of 5% to 35%.

*Honorariums (income of an individual from publication in books and periodicals) are subject to taxation at a rate of 20% on the amount of the fee, after which a deduction of 30% of the amount of tax payable is made.

If the amount of the fee is less than RMB 4,000, a one-time deduction of RMB 800 is applied; if the amount of the fee is more than RMB 4,000, 20% of the received fee will be deducted.

*Income from the provision of labor services (income received by an individual in the field of design, installation, medicine, legal and accounting services, consulting services, advertising, translation, audio and video recording, technical, intermediary, agency services, etc.) is subject to taxation at the rate in the amount of 20% on the amount of income.

If the income is less than RMB 4,000, a deduction of RMB 800 will be applied. If the lump sum income is more than RMB 4,000, 20% of the income received will be deducted from the amount.

If the amount of income from a one-time provision of labor services is overestimated, additional collection of personal income tax is allowed, taking into account the separately established requirements of tax legislation.

*Income from the granting of the right to use patent rights (royalties), rent is subject to taxation at a rate of 20% on the amount of income.

If the income from the granting of the right to use the patent rights, rental property does not exceed 4,000 yuan, a one-time deduction of 800 yuan is applied; if the amount of income is more than 4,000 yuan, 20% of the income received is deducted from the amount.

*Income from the transfer of property is taxed at a rate of 20% on the amount of the income. The taxable amount of income when transferring property is the difference between the incomes received and the initial cost of acquiring the property, including rationally justified expenses.

*Income from dividends, interest, distributions of profits, lottery winnings and other types of income is taxed at a rate of 20% on the amount of income. When calculating the taxable amount of these types of income, a one-time deduction is not applied.

So, the tax rate in China is progressive depending on the size of the salary, there may also be some regional differences, and in some cases there is even the possibility of negotiating with the tax authorities. Now let’s see other taxes of Chinese tax system.

  1. Corporate income taxes.

This type of tax relates to all foreign invested enterprises and foreign companies earning income in China.

The tax is set annually within five months after the end of the year.

Quarterly payments of this tax are made based on this figure, however, when submitting quarterly reports. Any amounts paid in excess of the required tax amount will be refunded or credited in the following periods.

The tax is calculated in RMB. The tax is calculated based on the gross profit for the year less costs, expenses and losses.

The tax rate is 30% for enterprises registered in China. For those businesses that are not registered in China, the rate is 20% (often referred to as “withholding” tax), and in the absence of accounting records in China, this tax is often calculated based on the total amount of the contract.

There are also 15% and 24% tax rates that apply to foreign-invested enterprises established in some special areas of China and engaged in certain activities. Under this tax, enterprises with foreign investments engaged in certain types of activities may be granted tax holidays for up to five years.

  1. Business Taxes.

One of the compulsory contributions to the tax system is the business tax.

It represents payments for the implementation of economic activities.

This tax is paid only by enterprises with foreign investment. There is no single business tax rate.

The amount of the payment directly depends on the type of activity of the enterprise. Business taxes in China are paid monthly.

So, if an organization is engaged in transport, then it is obliged to pay 3 percent of the total monthly profit. If the main activity of the organization is construction or engineering work, then the tax in 2020 will be 3 percent.

When providing financial services, the company will need to pay about 8 percent to the state budget. If the organization is engaged in telecommunications, cultural or sports activities, then the tax is 3 percent.

When providing various types of services, selling real estate and acquiring intangible assets, the tax will be 5 percent. If the organization is a representative of the entertainment industry, then it is required to pay from 5 to 20 percent of its income monthly.

  1. VAT and Consumption taxes.

The main components of the tax system are consumption tax and VAT. Value added tax, called VAT, is levied exclusively on the sale of goods of various groups and some services.

The interest rate for this tax is 17 percent. Consumption tax is payable exclusively on the purchase of goods that require a special license. These include cigarettes, alcoholic beverages and others. The consumption tax rate directly depends on the type of product. On average, it ranges from 3 to 50 percent.

Although the tax is ultimately paid by the end user, it is collected at all stages of production and sale. The obligation to pay VAT arises immediately upon invoicing (not after payment), which means that VAT may have to be charged even though there is a possible bad debt.

Some free trade zones reimburse part of the VAT for goods sold outside the zone, however, this practice is not encouraged by the Central Government, and therefore, the existence of such a benefit may soon be terminated.

  1. Taxation of representative offices of foreign companies.

The two most common mistakes made by representative offices of foreign companies is the assumption that all the necessary documents have already been drawn up from the moment of receiving the registration certificate of the representative office, and that since the representative office cannot engage in trade and other economic activities, it is not obliged to pay taxes. Both of these thoughts are wrong.

The representative office must, after receiving the registration certificate, also register with the tax office, which issues a certificate of tax registration.

It is understood that the representative office receives income in the form of funds provided to it to cover its expenses in China. This income is subject to taxation, and in this case business tax and tax on profits of foreign enterprises apply.

The dealership must file these taxes on a monthly or quarterly basis (there are some regional differences depending on the location), even if the dealership is tax-exempt. Failure to comply with this obligation may result in serious sanctions and the closure of the representative office.

In general, the amount of taxes levied on the representative office is about 10% of the expenses incurred by it.

  1. Main tax incentives.

Newly constructed buildings are exempt from tax for three years starting from the month of completion of construction.

Reconstructed buildings, the cost of restoration of which exceeded 1/2 of the cost of new construction of a similar object, are exempt from tax for two years starting from the month of completion of the restoration work.

Other benefits may be provided by the relevant local authorities.

This tax is paid by organizations and citizens who own and operate vehicles and (or) watercraft on the territory of the PRC.

The tax base for motor vehicles is their number or net tonnage, the tax base for watercraft is their net tonnage or the total tonnage of the vessel. The tax amount is determined separately for motor vehicles and watercraft. Various tax rates also apply:

For motor vehicles: 60-320 yuan for passenger transport, 16-60 yuan per ton for freight transport, 20-80 yuan for motorcycles, 1.2-32 yuan for non-motor vehicles.

For watercraft: 1.2-5 yuan per ton for motorized vessels, 0.6-1.4 yuan per ton of cargo for non-powered vessels.

  1. Sanctions for violations of tax legislation.

No government likes tax evasion, and China is no exception to this rule.

Fines for late payments, tax evasion, and other violations (ignorance is no excuse) can be severe – often up to five times the amount owed, with the underlying obligation being repaid as well. In cases of clear violation of the law, licenses may be withdrawn and funds confiscated.

If you have any doubts about the correctness of calculating and paying taxes, immediately seek professional help, because this issue is one of those where it is best not to allow confusion.

The money spent on good advice is much less than the amount of fines and other sanctions.

9. Other mentions

Your exact tax rate can vary depending on your nationality. If you are from one of the countries which imposes tax on worldwide income, like the United States and Eritrea, you may still have to pay taxes back to your home country.

Further Reading

How can you get money out of China in 2020-2021? The article below looks at this issue.

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