Primary types of taxation

The Tax System in China has undergone tremendous changes in recent years.the Chinese government is currently preparing for another round of tax reform, which is expected to take place in 2010. Keeping place with compliance obligations in such a rapidly changing regulatory environment can be a major challenge. You are advised to seek professional advice from CNBS regarding your particular circumstances.

A. Individual Income Tax

Individual income tax is levied on the incomes derived from sources both inside and outside China of individuals who have domicile in China, or although without domicile have resided for one year or more in China; and on the incomes derived from sources within China of individuals not domiciled or resident in China, or individuals not domiciled but have resided in China for less than one year.

Taxpayer and Tax Liability

• Resident taxpayers refer to Chinese citizens and foreign nationals residing in China. They are individuals domiciled in China (who, by reason of their permanent registered address, family or economic interests, habitually reside in China); or foreign nationals, overseas Chinese, and Hong Kong, Macau and Taiwan compatriots who have resided in China for a calendar year in a tax year. Resident taxpayers have unlimited tax liabilities and have to pay individual income tax to the Chinese government on incomes from global sources.
• Non-resident taxpayers refer to foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are neither domiciled nor resident in China; or foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are not domiciled in China and have resided in China for less than a calendar year in a tax year. Non-resident taxpayers have limited tax liabilities and are required to pay individual income tax to the Chinese government only on incomes from sources inside China.

Tax Rates

Income from wages and salaries is taxed at progressive rates ranging from 5% to 45%.

The following items are exempt from the Individual Income Tax:

Interest on government bonds;

State allowances and subsidies;

Social welfare, pension and other benefits;

Insurance indemnifications;

Income of foreign diplomatic personnel where tax-exempt under other Chinese laws; and Other income approved as tax-exempt by the State Council

Individual Income Tax is calculated on a monthly basis. A standard deduction of RMB4,800 is allowed to non-domiciliary with respect to wages and salaries. Other standard deductions apply to individual businessmen and income from personal services, author’s remuneration, royalties and income from the leasing or assignment of property. Individuals may deduct income tax paid outside China from the amount of Individual Income Tax payable on income from sources outside China. Donations to public welfare funds may also be deducted from taxable income.

B. Enterprise Income Tax

Income Tax on Foreign Investment Enterprises and Foreign Enterprises

A Foreign Investment Enterprise (FIE) is a PRC legal entity or unincorporated joint venture. An FIE may be an equity joint venture, a co-operative joint venture or a wholly foreign-owned enterprise (WFOE).

A Foreign Enterprise (FE) is a foreign enterprise-in other words, a company or other business organization formed under the laws of a country other than China. For example, a Hong Kong company with a representative office in China is an FE, as is a US company which has no PRC presence but derives PRC-sourced income from licences granted to Chinese licensees.

Under the Enterprise Income Tax Law, all FIEs and FEs are subject to a national tax imposed at the rate of 30 per cent on worldwide net income. In addition, a local income tax of 3 per cent of taxable income is levied by the local government, resulting in an effective tax rate of 33 per cent. In order to simplify tax administration, both taxes are assessed and collected concurrently.

There are a number of tax concessions for FIEs provided for under the Enterprise Income Tax Law and its Implementing Rules. Some of the more important of these are described as follows:

The national tax rate is reduced to 15 per cent for FIEs established in the Special Economic Zones (SEZs) of Guangdong, Fujian and Hainan Provinces. The reduced, 15% rate also apples to Foreign Investment Enterprises engaged in production and established in Economic and Technological Development Zones (ETDZs) approved by the State Council.

C.Value Added Tax (VAT)

The PRC Value Added Tax (VAT) applies to the sale and importation of goods in China, and also applies to processing and repair or replacement services carried out in China.

Sellers of taxable goods and services are required to collect VAT from purchasers at rates of 17 per cent for most goods, 13 per cent for certain staples, books and publications, and 17 per cent for processing and repair or replacement service. PRC Customs is required to collect VAT at the applicable rate at the time of importation of goods.

VAT payable on imports is calculated as follows:
Tax Payable = VAT Rate x (Dutiable Value of Goods + Applicable Customs Duty + Applicable Consumption Tax)
PRC Customs is required to collect VAT at the point of entry on behalf of the taxation authorities. Importers or their agents must pay tax within seven days of issuance of a duty-and-tax-payment certificate by Customs.

Sellers must charge purchasers VAT on the total RMB purchase price of goods including all commissions, late payment interest, packaging and other fees, but excluding the applicable VAT itself, Consumption Tax and any transport department fees. Taxpayers concurrently dealing in goods and services with different tax rates are required to separately calculate the relevant sales amount or pay tax at the highest applicable rate.

Sellers must remit VAT to the tax authorities according to the following formula:
VAT Payable for Current Taxable Period = VAT Paid on sales During the Period – VAT Paid on Purchases of Domestic and Imported Goods During the Period.

D.Business Tax

The Business tax is payable by non-VAT payers. The Business Tax is payable at varying rates by enterprises which provide services, sell immovable property or assign intangible assets.
Business Tax applies at the following rates:
3 per cent of the price of services in the areas of transport, construction, posts and telecommunications, culture and sports;
5 per cent of the price for most other services, finance and insurance, the assignment of intangible assets and the sale of immovable property; and
5 per cent to 20 per cent of the price as set by local authorities, of the price for entertainment.
Foreign representative offices are subject to Business Tax on deemed income at a flat rate of 5 per cent.

Business Tax is calculated at the applicable rate on the full price received by the seller or service provider, including all charges. Specific methods of calculating the taxable amount apply to transportation enterprises, tourism enterprises, construction contractors that subcontract, enterprises trading foreign exchange, securities or futures enterprises, and financial institutions that lend. Where sellers or service providers concurrently engage in activities subject to different rates of Business Tax, they are required to calculate separately the different tax items, or pay at the highest applicable rate. Tax liability arises on receipt of full payment or a payment voucher for the taxable service or immovable or intangible assets.
Local tax authorities will set payment periods for individual taxpayers of five days, ten days, 15 days, one month, or per transaction, depending on the amount of tax payable.

E. Other taxes

Real Estate and Land Appreciation Tax
Stamp Tax
Vehicle and Vessel License Tax
Deed Tax
Various fees and administrative charges assessed by local authorities

Overview