Tax Rates in China

As the Global Financial Crisis rumbles on, with certain reduced growth rates on the horizon for Europe and the United States, multinationals are looking elsewhere to achieve their business goals. Asia, a region riddled with wars and ineffective economic policies for much of the past century, has finally stepped into the front line of global trade and commerce. Like most things in emerging Asia, the tax world is dynamic. Many economies in the Asian region have reduced profit tax rates in recent years (including China). Here we look at the taxes most applicable to foreign businesses and individuals in China, i.e., corporate income tax, value-added tax, goods and service tax, standard tax on dividends and individual income tax. These rates are based on domestic laws and do not take into consideration reductions or exemptions provided by double tax treaties.

Corporate Income Tax 

The corporate income tax (CIT) rate for companies in China, both foreign and domestic, is 25 percent. There are some exception to this, for example, companies engaged in the encouraged industries in the Western region are eligible for a reduced CIT rate of 15 percent.

Resident enterprises are required to pay CIT on their income from sources within and outside of the PRC, while non-resident enterprises with establishments or places of business in the PRC are required to pay CIT on their PRC-sourced income derived from such establishments or places of business and on their foreign-sourced income effectively connected with such establishments or places of business. Foreign companies incorporated under foreign law and without effective management in China are required to pay tax only on income generated in China.

Industry-based tax incentives reward enterprises involved in the high or new technology sectors. Certain portions of entertainment, advertising and business promotion expenses, and certain R&D expenses are deductible from taxable income.

Tax losses incurred by an enterprise can be carried forward for a period of up to five years.

Value-added Tax

All enterprises and individuals engaged in the sale of goods; provision of processing, repair and replacement services; and import of goods within China are required to pay value-added tax (VAT).

There are two categories of VAT payers; general taxpayers and small-scale taxpayers. General taxpayers are taxpayers whose annual sales value exceeds the level for small-scale taxpayers set by China’s tax authorities. The VAT rate for general taxpayers is generally 17 percent, or 13 percent for some goods, while the VAT rate for small-scale taxpayers is 3 percent. General taxpayers can offset the full amount of input VAT paid on newly purchased machinery and equipment against VAT collected when they sell their products.

China implements a tiered system of VAT refunds against exports. Refunds are not permitted for products that are not encouraged exports, such as rare earths.

Withholding Tax

Under China’s CIT Law, the withholding income tax rate for non-tax resident enterprises receiving passive income from China was 20 percent. Under the CIT implementing rules, this was reduced to 10 percent for companies in all countries and jurisdictions. However, the withholding tax rate for dividends, interests and royalties can be lower for countries that have entered into double tax treaties with China.

Individual Income Tax

Income from wages and salaries is taxed according to seven progressive rates, ranging from 3 percent to 45 percent.

Monthly taxable income is calculated after a standard monthly deduction of RMB3,500 for local employees. For foreign individuals working in China (including residents of Hong Kong, Taiwan and Macau), the standard monthly deduction is RMB4,800.

Tax liabilities of foreigners depend on the period of time an individual spends in China and the income source. Individuals who spend fewer than 90 days in one calendar year in China are exempt from IIT if the income is paid by an overseas entity and the income is not attributable to a permanent establishment in China.

Residents of countries that have signed a double taxation treaty with China may stay in China for up to 183 days (instead of 90 days) without facing any tax obligations. When staying in China for more than 90 days but less than 183 days, these residents should register with tax authorities before their tax liability arises or when they file taxes in order to enjoy the tax treaty benefit.

If an individual is paid by a China entity, any income derived from working in China will be taxable. Individuals who stay in China for more than 90 days (or 183 days for those under double taxation treaties), but less than a year, are subject to personal income tax on their employment income derived from work performed in China – regardless of what entity pays these individuals.

Individuals who reside in China for more than one year, but less than five years, are subject to personal income tax on both China-sourced and foreign-sourced income borne by a China-based entity. Foreign individuals who reside in China for more than five years are taxed on their worldwide income.

Dezan Shira & Associates is a specialized foreign direct investment practice, providing business and legal advisory, tax, accounting, payroll and due diligence service to multinationals investing in the emerging markets of Asia. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 170 business advisory and tax professionals. For information or advice on establishing business operations in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.