Some things in life are too complicated to explain in several words, the Chinese tax system is definitely one of them. We’ll discuss different Chinese tax issues in future posts.
In the meantime, here are the basics that a foreigner working or running business in China should be aware of:
Individual Income Tax
Individuals who are domiciled in the PRC are subject to China Individual Income Tax on their worldwide income. If you do not domicile in the PRC but reside in the PRC for 183 days or more in a year for 6 consecutive years you may pay tax only on your PRC sourced income and nonPRC sourced income, the payment of which is borne by PRC establishments. You’ll be taxed on your worldwide income in the seventh year if you reside in the PRC for 183 days or more in that year.
“Comprehensive incomes” such as wages and salaries, personal services income, etc. are taxed at progressive rates, ranging from 3% to 45%. As a foreigner, you can claim a monthly deduction of RMB 5,000.
Some of your employment benefits in China, if provided by employer, can also be exempt from tax:
- housing costs
- home leave tickets of 2 trips per year to your home country
- relocation and moving costs
- reimbursement of certain meals, laundry, language training costs and children’s education expenses
Please note that this rule applies only until 31 December 2021.
Enterprise Income Tax
A company registered in China or a foreign company with effective management in China is considered a Tax Resident Enterprise (TRE) and will pay Enterprise Income Tax on worldwide income. A foreign company without effective management in China, but with a tax establishment there, pays tax on income derived from this establishment only. Non-TRE is also subject to tax only on income sourced in China.
Standard Enterprise Income Tax rate is 25% (lower rates e.g. 15%, 20% are available to certain enterprises and provinces).
Standard withholding tax rate on passive incomes is 10%.
Tax incentive policies
Chinese government proposes “industry-oriented” incentives aiming at directing investments into particular sectors and projects, among them, agriculture, infrastructure, high technology, environmental protection, etc. Under certain conditions tax holidays and reduced tax rates are available.
Value Added Tax
VAT is charged on sales or importation of certain goods and services in China. Applicable tax rates are 13%, 9% and 6%, depending on the nature of goods/services. However, if you are a small-scale taxpayer (with annual turnover below 5 million RMB) your VAT rate will be only 3%.
If you are a general VAT taxpayer, your input VAT incurred may be credited against output VAT.
Export of goods from China may be entitled to a refund of VAT paid on materials purchased in China. There is a formula for determining the amount of refund, however, many products do not obtain the full refund and still suffer different degree of export VAT costs.
You’ll be subject to this tax if you import or manufacture certain consumer goods, among them:
- alcoholic beverages
- gasoline and diesel and certain petroleum products
- motorcycles and automobiles
- golf equipment
- luxury watch
Tax rates vary and your tax liability is computed based on the sales amount and/or sales volume.
Tax Treaty Network
China has entered into 110 tax treaties with other countries and territories, including the United Kingdom, Hong Kong, France, Russia, etc. Contact us to find out if you or your company may benefit from preferential withholding tax rates.
Customs duty is levied on the importation of goods into China. It is collected by the customs authorities at the time of importation. In general, customs duty is computed based on the tariff code and the dutiable value of the goods.
Land Appreciation Tax
Charged on certain gains realised from real property transactions at progressive rates from 30% to 60%, based on the “land value appreciation amount” which is the consideration received from the transfer or disposition of real property less the “total deductible amount”.
Stamp tax, real estate tax, deed tax, resource tax, vehicle & vessel tax, city construction tax, education surcharges, arable land occupation tax, tobacco tax, etc.
Please contact us for more information on Chinese taxes.