China Tax Regulations and Your Business - Guide (Shanghai)

Chinese Tax and Your Business – What You Should Know
In This Article You Will Learn:

What Are the Basics of Taxation in China?
What Is Your Enterprise Income Tax?
How Do Withholding Taxes Affect You?
How Much Is Your Chinese Individual Income Tax?
How Does Chinese Business Tax Affect You?
What Are Rates of Chinese Value-Added-Tax For Expats?
Consumption Tax – How May It Affect Your Business?
Where Can You Learn More About Taxes in China?
What Are the Basics of Taxation in China?

Understanding the Chinese Tax Collection System – China Taxes – What Are They?
Over the past decades, China has made efforts to establish a modern, rational and efficient tax system that keeps pace with the transformation of a command economy into a market oriented economy. China has developed a two-tier system for levying taxes whereby certain taxes are collected by State Tax Bureau and others by Local Tax Bureau. Every tax levied in the PRC can be classified as a central tax, local tax, or a shared tax. Generally speaking, the State Tax Bureau is responsible for the levy and collection of the central taxes which constitute the revenue of the central government and the shared taxes which are revenue shared between the central and local governments. The Local Tax Bureau is responsible for the collection of local taxes which constitute the revenue for the local governments concerned. The State Tax Bureau will directly pay the portion of taxes shared by the local governments collected by it into the local government treasury. Introduction to major heads of taxes which may have implications on FIEs and foreigners is set out in section “Enterprise income tax” to section “Consumption tax” below.

Chinese Tax Rates and Your Business
What Is Your Enterprise Income Tax?

While the previous enterprise income tax laws made a distinction between domestic enterprises and FIEs and foreign enterprises, the new Enterprise Tax Law has introduced the distinction between “resident enterprises” and “non-resident enterprises”. Resident enterprises, including domestic enterprises, FIEs, and foreign enterprises registered abroad but effectively managed in China, are taxed on their worldwide income sourced in and outside China. Non-resident enterprises, including foreign enterprises established and effectively managed outside of China but which have establishments in China (such as representative offices), or which do not have any establishment in China but have income sourced from China, are taxed on income derived from China or connected to their establishment in China. The Enterprise Tax Law unifies the tax rate of resident and non-resident enterprises at 25%, lowered from the previous 33%.

Under the Enterprise Tax Law, enterprise income tax in China is calculated and payable based on the balance of the total income received by an enterprise in a tax year after deducting the tax-free income (e.g. governmental funding), the tax-exempted income (e.g. qualified investment income such as dividends and bonuses generated between resident enterprises), various deductible items, and the permitted remedies for losses of previous year(s). An enterprise’s total income refers to all monetary and non-monetary incomes generated from various sources and includes revenue generated from sales of goods and provision of services, as well as income derived from dividends, interest, rental and assignment of property, royalties, and revenue from donations.

How Do Withholding Taxes Affect You?

In general, income derived from China by a non-resident enterprise which has no establishment in China or income derived from China by a non-resident enterprise which is unrelated to its establishment in China is subject to enterprise income tax on a withholding basis at the rate of 10%. Such 10% withholding tax rate is applicable to rentals, royalties, capital gains, and dividends etc. which are sourced from China.

How Much Is Your Chinese Individual Income Tax?

Six Things You Need To Know to About Taxation In China
Chinese and foreign individuals are subject to the same IIT regime. IIT is computed at different tax rates depending on the type of taxable income. Income from salaries and wages is taxed at progressive rates, with a highest rate of 45%, whereas the tax rate for income from production and business activities of individual industrialists and income from contracting operations of enterprises and institutions ranges from 5% to 35%. Other taxable income, such as those from author’s remuneration, personal services remuneration, and royalties, is generally taxed at a flat rate of 20%.

Individual tax payers are allowed a standard deduction of RMB 3,500 per month for the IIT on wages and salaries. Expatriates enjoy a higher deduction of RMB 4,800 per month.

Table. Scale of IIT Rates for Expatriates

Monthly Taxable Income
(after deduction)

Tax Rate(%)

Not exceeding RMB Protected content

3

More than RMB Protected content RMB 4,500

10

More than RMB 4,500 to RMB 9,000

20

More than RMB 9,000 to RMB 35,000

25

More than RMB 35,000 to RMB 55,000

30

More than RMB 55,000 to RMB 80,000

35

More than RMB 80,000

45

Although IIT is payable by the employee, the employer generally has the obligation to withhold the IIT amount and pay it to the tax authorities. If the employer fails to withhold part of the income for IIT purposes, the employer will be imposed a fine up to 3 times of such payment.

An essential element in determining IIT liability is whether an individual is domiciled or resident in the PRC. Persons who habitually reside in China due to family or economic interest relationships or registration of permanent residency are considered to be taxpayers domiciled in the PRC. They are subject to IIT on their worldwide income. In most cases, a foreigner working in China is not deemed to be domiciled in China but only resident.

Individuals who are domiciled or resident to China are required to self-declare IIT if (i) they have an annual income of more than RMB120, 000; or (ii) they have earned wages or stipends from 2 or more sources within China; or (iii) they have income earned outside China; or (iv) they have acquired any taxable income without withholding agent; or (v) under other circumstances stipulated by the State Council. These individuals must file their taxes with a local tax bureau or through an approved tax agency within the specified time limit.

Tax treatment of non-domiciliary individuals varies depending on the duration of their residency in China in a calendar year. Individuals who are not residents in China, or were residents in China for less than 1 year, are subject to tax only on their income derived within China. Residents who reside in China for at least 1 year are taxed on their worldwide income just as domiciled individuals. However, residents who have resided in China for more than 1 year but less than 5 years are exempted from IIT on foreign source income paid outside China. Residents for more than 5 years are subject to their worldwide income, irrespective of whether derived in or outside China. It should be noted that for the 5-year residency rule, any absence from China of 30 days or more on a single trip or for a cumulative period of 90 days or more on a number of trips within the same tax year will break the 5-year period. Directors and senior managers of FIEs in China are taxed on the income paid by the FIE, regardless of the length of their residence in China and even if the work is performed outside China. Whether the income paid to the directors and senior managers by a foreign enterprise abroad will be subject to IIT will depend on the length of residence of the directors and senior managers in China.

An expatriate who is physically present in China for more than 90 days in a particular calendar year, or, in the case of a resident of a country or region with which China has entered into a double taxation avoidance treaty or arrangement, more than Protected content within a time period stipulated in the relevant tax agreement, will be subject to IIT on the portion of the wages and salaries which is deemed China-sourced. A Hong Kong resident, for example, who spends more than Protected content in China over a period of 12 months, will be subject to IIT on the portion of his wages and salaries which is deemed China-sourced.

A foreign representative of a representative office is taxed as a resident in China irrespective of whether the representative actually resides in China. Therefore, the representative is taxed on the salary attributable to the services rendered in China.

How Does Chinese Business Tax Affect You?

Business tax is normally payable on the income derived from the provision of certain types of labour services, the assignment of intangible assets or the sale of immovable property. FIEs and foreign enterprises which engage in these taxable activities in China are also subject to business tax. The tax is levied on gross turnover, with deduction of expenses or costs only permitted in limited instances. Nevertheless, foreign enterprises (non-resident enterprises) may deduct the business tax amount from its taxable amount of enterprise income tax.

The applicable tax rates are as follows:

5%-20%

Applicable to entertainment business.

5%

Applicable to financial and insurance services.

5%

Applicable to services and assignment of intangible assets and sale of immovable property.

3%

Applicable to transportation, construction, post, and telecommunications and cultural and sports activities.

Exemptions from business tax are available for:

nursing services provided by nurseries, kindergartens, homes for the aged, and welfare institutions for the handicapped;
medical services provided by hospitals, clinics, and other medical institutions;
educational services provided by schools and other educational institutions, as well as services provided by students participating in work-study programs;
agricultural services, such as mechanical cultivation, irrigation, and drainage;
admission fees for certain cultural activities, such as those organized by memorial halls, museums, cultural centres, and art galleries;
admission fees for cultural and religious activities conducted at places of religious worship.
Reductions or exemptions from business tax are not dependent on the location of the FIE or its business activities.

What Are The Rates of Chinese Value-Added Tax For Expats?

Value-added tax (VAT) is levied on the sale of tangible movable property, the provision of processing or repair and replacement services and the import of taxable goods into China.

The principal applicable tax rates are as follows:

17%

The standard rate.

13%

Applicable to general daily necessities, publications, agricultural materials, agricultural machinery, and agricultural products.

6% *

Applicable to goods sold by small taxpayers and projects involving natural resources taxed on value added at each stage of a production cycle.
* Note that this tax rate will be reduced to 3% from 1 January Protected content .

5%

Applicable to oil and gas produced by Sino-foreign joint exploration projects.

0%

Applicable to agricultural products sold directly by producer, imported equipment for processing, assembly, or compensation trade, equipment used for scientific research, exports, etc.

VAT is levied and collected on the basis of the value added to the taxable goods and services at each stage of the production cycle.

VAT may be refunded in a number of circumstances. VAT paid on the inputs to manufacture goods which are subsequently exported may be partially refunded. A VAT refund is also available when goods are returned by the buyer.

Consumption Tax – How May It Affect Your Business?

Consumption tax is imposed upon manufacturers and importers of consumer goods, as well as businesses which entrust third parties to process such goods. The tax also applies to FIEs and foreign enterprises which engage in these taxable activities in China. The consumption tax is levied on 14 categories of goods, including tobacco, liquor and alcohol, cosmetics, jewellery, fireworks, processed oil, automobile tires, motorcycles, motor cars, golf and golf equipment, luxury watch, yacht, one-off wooden chopsticks, and solid wooden parquet. The rate of the tax varies and is sometimes expressed as a percentage of the sales value (with rates up to 45%) and/or as a fixed amount per volume of the product. For instance, the tax rate applicable to cosmetics is 30%, whereas the tax amount payable on diesel oil is RMB 0.1 per litre.

Unlike VAT, consumption tax is levied only when goods are imported from overseas or sold to the wholesaler, retailer, or directly to the end-user and not on any further on-sale of the goods thereafter. Taxable consumer goods used in the continuous production of other taxable consumer goods may be exempted from consumption tax. Goods manufactured for exports are generally exempted.

Where Can You Learn More About Taxes in China?

Contact Protected content to learn more.
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