Chinese tax law was long used by the central government as an instrument to promote and control foreign investment. On 1 January 2008, however, a standardized tax system entered into force which applies to both Chinese and foreign companies. We provide a brief overview of the most important taxes in China below.
The basis of assessment for the Enterprise Income Tax is the net revenue of the company from income generated in China. The Enterprise Income Tax rate is a uniform 25% for national as well as foreign-invested companies.
The Enterprise Income Tax law of 2008 introduced two new terms: “local business” and “non-local business”. A local business is subject to Chinese tax on all of its worldwide revenue. A non-local business is subject to Chinese tax on revenue generated in China and revenue generated worldwide that is connected with a permanent establishment in China (if the company has a permanent establishment in China).
Natural persons with their registered address in China (“residents”) are taxed on their worldwide revenue, irrespective of the source, and an employee posted to work in China who resides there for at least one entire tax year (= calendar year) is considered a resident.
On application to the Chinese tax authorities, residents staying in China between one and 5 years are only taxed on salaries in China that originate from sources within China or are borne economically by a Chinese company. Posted employees residing in China for more than 5 years are liable for tax on their entire worldwide revenue.
On the other hand, non-residents staying in China between 90 days and one year minus one day in a calendar year are only taxed on income from Chinese sources. If the person stays less than 90 days during the calendar year, only income borne by a Chinese company is taxable in China.
The 90-day period is extended to 183 days for citizens of countries that have a double taxation agreement with China. Consequently, if this person resides between 183 days and a year minus one day in a calendar year, he or she is only taxed on income from Chinese sources. And if this person stays less than 183 days, only income borne by a Chinese company is taxable in China.
Natural persons subject to Chinese income tax must register for tax purposes. This also applies to employees posted from abroad. The employer must submit monthly tax returns for employees (including posted employees) and pay the respective taxes.
Income from employed labor is subject to a progressive tax rate (5%-45%).
Employees posted from abroad are entitled to a monthly tax allowance of CNY 4,800.
VAT has applied to all shipments and services since 2012.
All companies and individuals active in China in the field of sales or import of goods or the provision of processing, repair or maintenance services are liable for tax, irrespective of their nationality. Small enterprises with a monthly turnover of under CNY 30,000 are exempt from VAT registration.
The basis of assessment for VAT taxation is the price of the goods or services. The statutory tax rate is 17%. Basic supplies such as basic foodstuffs, water, books, magazines and farming equipment are subject to a reduced tax rate of 13%. Software products and electronic publications are subject to special conditions.
For input tax deduction, the VAT paid or payable may be deducted. Goods from shipments that are not taxable or are exempt from tax are not subject to input tax deduction. As is the case in, for example, Germany, the requirement for input tax deduction is that VAT is stated on the receipt.
A consumption tax is charged for the production and import of particular luxury items (such as cosmetics, jewelry, cars, alcohol and cigarettes) in China. The tax rate varies from 5% to 45%. Export products are exempted from this tax.
Stamp duty applies upon contract conclusion for many transactions (e.g., sales contracts or mortgage agreements). The amount varies between 0.03% and 0.1%, depending on the type of document and the transaction. The taxpayer has to calculate the amount himself for contracts and apply the stamps to the document.
Withholding tax applies to companies registered abroad that receive revenue from Chinese sources (license fees, interest and dividends). Interest payments, for instance, are subject to a withholding tax of 10%, though double taxation agreements modify this amount for companies based in the affected countries.