A business can’t operate smoothly without a clear understanding and regular payment of taxes and bills. Business China aims to assist foreign entrepreneurs in the running of their businesses in China without any hassle. We can help you learn tax legislation in China and provide you with end-to-end business solutions to fasttrack your way up the industrial ladder in China.
Being one of the world’s biggest economic markets, China attracts many global investors every year. To establish a successful business, however, foreign investors need to understand taxation in China before making an investment decision.
Since the Chinese government is making continuous efforts to promote economic globalization in the country, they keep making amendments in the tax policies to provide ease and convenience to foreigners. In this blog, we will provide an overview of corporate taxes in China in 2021 to help you comply with the legal tax requirements in the country.
Taxation in China
The State Administration of Taxation is a government entity that administers all the tax laws in China. They also set tax rates for the foreign and domestic companies operating in the country. However, tax collection and regular handling are conducted by local tax bureaus operating in the region the company is based.
Generally, taxation in China is similar for all cases. But, the rules may differ for certain conditions. For instance, sometimes the Chinese government provides tax incentives or lower CIT rates to some specific regions, special tax policies in a free trade zone. Sometimes, the government trials some tax policy changes in a specific region.
Tax reduction for foreign companies
The Chinese government makes frequent changes in tax rates and policies to improve the market for entrepreneurs. Over the past few years, several tax reduction laws have been approved to promote investments. According to a report, the VAT reforms effective during 2012 – 2016 delivered approximately 2.1 trillion Yuan tax reductions in the five-year duration.
VAT reforms significantly helped in the reduction of corporate tax burdens and the improvement of tax regimes. It helped the government to unify tax structures and set up a just and fair tax system in all regions.
Taxation for WFOEs in China
Wholly foreign-owned enterprises have played a key role in making China the world’s no. 2 economy. WFOEs have to pay the following taxes:
Tax related to the company’s income: This includes corporate income tax and withholding tax.
Tax related to sales and turnover: This includes consumption tax, real estate tax, stamp tax, and VAT.
Corporate income tax
Chinese business tax applies to the company’s profits at a 25% rate. This rate is equally applied to all companies operating in China, regardless of their nationality.
Previously, the charges were different for foreign companies, but as mentioned earlier, the Chinese government continuously strives to support foreign investors, which is why it equalized the rates in 2008 through reforms in income tax laws.
In China, CIT is recorded for revenue when it is earned or spent. The company has to pay CIT on a monthly or quarterly basis and is restored at the time of the yearly audit. CIT calculation is based on total income and allowable deductions. The allowable deductions for calculating the corporate income tax are listed below.
Business incentives, when compared to the net income, received
Charitable donations
Loss of assets
Deductions based on local tax incentives
Withholding tax
The non-resident companies need to pay a 10% withholding tax for the dividends and bonuses they earn from Chinese companies. However, if a company belongs to a country that has a double tax treaty with China, it can qualify for reduced withholding tax.
Capital gains tax
There are no specific policies for capital gains in China. All capital gains are regarded as normal company income and hence, they are accumulated in CIT calculations.
Value-added tax
VAT is a consumption tax on a company’s products and supplies when the value is added at any stage of the supply chain. China introduced this taxation in 1984, but due to its complexity, a major reform in VAT taxation was carried out from 2012 to 2016. However, in July 2017, the system was further improved. It covered all the services and goods with separate VAT levels — 6, 11, and 17. These rates were further reduced by the government in May 2018 to minimize the tax burdens on enterprises. The 17% VAT rate was reduced 16% and 11% VAT rate was reduced to 10%. This helped the government improve the international competitiveness of China’s VAT system.
VAT is generally the current output VAT less the input VAT, where, the output VAT refers to the value-added tax on the sales volume of taxable services and the pertinent VAT rate. Whereas the input VAT refers to the VAT amount a company pays when purchasing, repairing, processing, or replacing their services or goods.
Consumption Tax
Consumption tax is applied to the luxury goods or the goods a company manufactures or imports for sale. The tax rate may vary according to the sale value of the item. A company has to pay consumption tax on a monthly basis. Consumption tax rates range between 1% and 56%, depending on the value of the item. Tobacco and alcohol have the highest tax rates in China.
Real estate tax
When a company uses a property for commercial purposes they have to pay a real estate tax. This tax also applies to leasing a residential property. The annual tax rate is 1.2% of the original purchase value. However, most local governments offer a 10% to 30% reduction on real estate tax.
Stamp duty
Stamp tax is generally known as stamp duty. This tax is applied to a company’s licenses, accounting books, and contracts. Stamp duty is primarily charged on financial loans, sale & purchase contracts, property rights transfer, property leasing, and engineering and design contracts. The stamp rate tax is generally low and ranges from 0.005% to 0.1%.
Land value appreciation tax
A company has to pay a land value appreciation tax if it transfers the land use rights for the state-owned property. This tax is applied to any appreciation in land value that arises from the transfer of the property. The tax may range from 30% to 60% depending on the land value appreciation amount.
New structural tax and free cut measures applicable in 2021
The Chinese government made numerous tax policy adjustments in 2020. Although some have expired, a few of them are still effective. According to China Briefing, the State Tax Administration (STA) and the Ministry of Finance (MOF) announced some tax policy adjustments to maintain the economic progress of the country. Here are the key points of the current preferential CIT policy for low-profit businesses in China.
VAT reform
The government has extended the VAT tax cut to December 31, 2021. Small scale companies can, therefore, still entertain reduced VAT rates. That is to say, the VAT rate has been reduced to 1% for small businesses, however, the small-scale enterprises operating in China don’t have to pay VAT at all.
Domestic and foreign R&D centers can acquire a 100% refund of the VAT charged on the Chinese-made equipment used in their research.
To ensure the financial support of startups and small businesses, the government has exempted final institutions of VAT on their interest income. This will enable them to continue providing loans to small businesses and small-scale farmers.
CIT deductions and incentives
To promote investments in the country, the Chinese government offers various tax incentives to foreign and domestic enterprises. For instance;
A standard rate of 20% is applied to the low-profit companies, where the taxable income is less than 1 million Yuan.
Currently, China aims to acquire the position of global technological leader, therefore, the government largely supports high-tech companies in the country. Most high-tech companies operating in Shenzhen, Beijing, Shanghai, and, Guangzhou are only accountable for 15% of CIT.
Environmental protection and infrastructure projects can apply for a CIT exemption scheme through which they will be exempted from paying CIT for three years followed by a 50% reduction on the CIT for 3 years.
Want to start a business in China?
Every year thousands of people come to China to conduct their business. To avoid financial errors, businesses need to understand taxes and pay them on time.
That said, it’s quite understandable that the taxation laws in China keep evolving, therefore, many businesses find it difficult to keep up with the changes.
Need help?
Business China is an established firm in China, that aims to assist foreigners in successfully running their business in the country. We have a team of tax experts and accounting specialists who provide thorough consultancy and accounting services to new and established businesses in China. From bookkeeping to managing finances, we can help you in every step.
Besides, we also assist our clients in the establishment, registration, and effective management of their business in China. Our services include joint venture incorporation, company liquidation, branch office incorporation, import-export license services, representative office incorporation, FTZ company registration, and more.
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