What tax system is used in China

The Chinese tax system The main taxes in China

When investing and doing business with and in China, there is very often the problem that the financial managers involved have insufficient practical experience in international tax collection. Cross-border payment flows from China to Germany are particularly problematic.

In order to ensure that the payment and repayment of loans, dividends, fees or distributions as well as the billing of the services provided run smoothly, the relevant transactions must be contractually and legally appropriate and approved in advance by the Chinese authorities. To do this, however, the German investor has to deal with the types of taxes in China. In this and the next edition of bdp we present the most important taxes and tax framework conditions in China.

Corporate income tax (CIT, enterprise income tax: EIT)

  • The corporate tax rate for companies based in China and permanent establishments * is 25%. In order to encourage and motivate businesses, numerous guidelines for reduced corporate tax rates have been issued in China. Of course, the companies must meet the requirements of this preference policy for this.
  • A corporation tax rate of 20% applies to companies not based in China, which is, however, reduced to 10% (for income originating from China) through a preferential policy.

Reduced CIT Rate for China Based Companies:

  • For high / new tech companies: 15%
  • For small profit businesses: Small businesses with low profits, with an annual taxable income of less than RMB 1 million and between RMB 1 million and RMB 3 million, are entitled to their tax based on only 25% and 50% of their taxable income, respectively Calculate income at a preferential corporate tax rate of 20%. This regulation is initially valid until December 31, 2021.
  • For companies in the funded areas in western China: 15%
  • For advanced technology service companies: 15%
  • For Funded Companies Established in Hengqin New Area in Guangdong Province, Pingtan Comprehensive Experimental Area in Fujian Province, and Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen City Qianhai: 15%
  • For third-party companies involved in pollution prevention and control: 15%. This ordinance applies from January 1, 2019 to December 31, 2021.
  • For subsidized industrial companies that are registered in the Hainan Free Trade Port and are substantially active (substantive business activities): 15%.
  • For integrated circuit design companies: 15%
  • For Key Software Enterprises and Integrated Circuit Design Enterprises: 10%

* Business premises:

A permanent office through which the business of a company is carried out in whole or in part.
According to the regulations of the DBA (double taxation agreement between Germany and China) on permanent establishments:
If a German company employs its employees or other persons commissioned by it for services, including consulting, or for several interconnected projects in China, only those services can be assigned to a permanent establishment that are for a continuous period of time or for total periods of more than 183 days be provided within 12 months.

Value Added Tax (VAT)

  • Sales tax is levied on the sale of goods or the provision of processing, repair and replacement services as well as on imported goods, transport services and so-called "modern" services
  • Tax rate: 13%, 9%, 6%, 3% and 0% (depending on the services)
  • Small businesses: pay 3% (unless otherwise stated).

No.

Tax categories

sentence

1

Sale or import of goods (except No. 9 -12)

13 %

2

Processing, repair and replacement services

13 %

3

Rental of property, plant and equipment

13 %

4

Rental of real estate services

9 %

5

Sale of real estate

9 %

6

construction industry

9 %

7

Transportation services

9 %

8

Transfer of land use rights

9 %

9

Animal feed, chemical fertilizers, pesticides, agricultural machinery and mulch films

9 %

10

Cereals, agricultural products, edible oils and table salt

9 %

11

Tap water, heat supply, air conditioning, hot water, gas, liquefied petroleum gas, natural gas, dimethyl ether, methane and carbon products for household use

9 %

12

Books, newspapers, magazines, audio-visual products and electronic publications

9 %

13

Postal services

9 %

14

Basic telecommunications services

9 %

15

Value-added services for telecommunications

6 %

16

Financial services

6 %

17

modern services

6 %

18

Services related to life

6 %

19

Sale of intangible assets (other than land use rights)

6 %

20

Export of goods

0 %

21

Cross-border sales of services and intangible assets under the State Council

0 %

General VAT tax payer

  • Companies with an annual turnover of more than 5 million RMB must register with the Chinese tax authorities as “general VAT tax payer”
  • The prerequisite, however, is a solid accounting system and the submission of correct tax documents
  • Even companies with an annual turnover of less than 5 million RMB can apply to be classified as general taxpayer (in order to reduce the sales tax burden through the input tax deduction).

Calculation method:

Sales tax = current output tax - current input tax
Output tax = sales volume x sales tax rate
Sales volume = sales volume including tax / (1 + sales tax rate)

Taxation for small businesses (small scale VAT tax payer)

Not eligible for input tax deduction
Annual sales ≤ 5 million RMB
Flat rate sales tax: 3%

Calculation method:

Sales tax = sales volume x sales tax rate (3%)
Sales volume = sales volume including tax / (1 + sales tax rate: 3%)

Additional taxes (surtaxes / additional taxes: AD)

Companies that have to pay sales tax, trade tax and consumption tax are also subject to the following tax surcharges:

  • City maintenance and construction tax: cities: 7%, districts: 5%, others: 1%
  • State education surcharge: 3%
  • Local education surcharge: 2%
  • Different surcharge rates in different regions

Stamp duty (SD)

Stamp duty is a tax levied on entities and individuals executing or receiving relevant documents within China.

Tax rate: 0.03%, 0.05%, 0.10%, 0.005% (depending on the contract)

No.

Tax items

tax rate

1

Purchase and sales contract

0.03 %

2

Processing contract

0.05 %

3

Construction project, survey and design contract

0.05 %

4

Construction and installation project contract

0.03 %

5

Lease (property)

0.10 %

6

Freight transportation contract

0.05 %

7

Storage contract

0.10 %

8

Loan agreement with a bank or other financial institution

0.005 %

9

Property insurance contract

0.10 %

10

Technology contract

0.03 %

11

Transfer of ownership document

0.05 %

12

Business book: capital account book

0.05 % *

Business book: operating books

CNY 5 for each book **

13

Licenses / certificates about rights

CNY 5 for each certificate

* Application of the tax exemption at half the amount
** Application of the tax exemption in full

Environmental erotection tax (EPT)

The environmental protection tax has been in force since January 1st, 2018. According to the actual situation of the company, it is determined by the tax office and the office for environmental protection

Property tax

When concluding a rental contract, the tenant has to pay 12% property tax if the contract stipulates that the property tax is to be borne by the tenant. It is levied on the rental value of the rental property according to the following formula: Tax liability = rental income x 12%

If you own the property, it is levied on the residual value of the property according to the following formula: Tax liability = Taxable = Residual value of the property x (1 - (10% ~ 30%)) x 1.2%

Property tax for cities and municipalities

When signing a lease, it can be a land use tax related to renting or personal use. If the contract stipulates that this is borne by the tenant, the tenant must pay this property tax for rental.
Formula: tax payable = tax rate (according to land class) x property area.

Property tax is also due for own land use rights according to the formula: tax to be paid = tax rate (according to land class) x property area

Customs duty

Customs duties are levied on goods that are allowed to be imported into China according to the import and export quotas. However, export duties only apply to a few export goods. The recipient and owner of the imported goods are obliged to pay the customs duties in accordance with the customs tariff numbers (HS codes).

Calculation method:

Duty = the dutiable value of the imported goods x the duty rate

Dutiable value of imported goods = transaction value of goods + purchase costs (including freight, insurance and other service charges)

Individual income tax (IIT) since 01/01/2019

Resident wages and salaries

step

Annual Taxable Income (RMB) *

Tax rates

Fast Calculating Deduction (RMB)

1

<= 36.000

3%

0

2

36.001-144.000

10%

2.520

3

144.001-300.000

20%

16.920

4

300.001-420.000

25%

31.920

5

420.001-660.000

30%

52.920

6

660.001-960.000

35%

85.920

7

> 960.000

45%

181.920

Note: The annual taxable income shown in this table refers to the total income of individual residents in accordance with the provisions of Article 6 of the Individual Income Tax Act. The amount of income in each tax year is reduced by RMB 60,000 and special deductions and other deducted balances determined by law.

Foreign taxpayers resident in China can only choose between asserting tax exemption benefits under the old guidelines or the additional special deductions under the new guidelines. Once set, this cannot be changed in the current tax year. The deadline for using the old guidelines ends on December 31, 2021. After that, only the new guidelines will apply.

Resident Personnel Compensation, Author's Fee, and License Fee

step

Annual Taxable Income (RMB) *

Tax rates

Fast Calculating Deduction (RMB)

1

<= 20.000

20%

0

2

20.001-50.000

30%

2.000

3

> 50.000

40%

7.000

Note: Non-residents receive wages or salaries and calculate the taxable amount on a monthly basis and according to this tax table.

Definition of the taxpayer

“Resident in China” is anyone who habitually resides in China because of their permanent residence, family, or economic interests.


residential status

definition

Tax liability

Residents
natural people

Natural persons residing in China or natural persons who are not resident in China, but who have lived in China for a total of 183 days or more within a tax year.

Worldwide
income

Non-resident natural persons

Individuals who are not domiciled in China and have not lived or resided in China, or individuals who are not domiciled in China but have lived / resided in China for less than 183 days in total within a tax year.

China income only

Transfer pricing

Transfer prices refer to prices charged between affiliated companies for intra-group transactions of goods, services, intangible assets, etc.
According to the State Administration of Taxation, any resident company that is subject to actual taxation and any non-resident company that has branches or offices in China and files and pays corporate income tax on an actual basis must provide documentation at the same time as the annual amount of the related transactions reached certain thresholds. The problem with transfer pricing is often that there is no up-to-date documentation.
As a foreign-owned company subject to the Chinese tax administration, forward-looking transfer pricing management is essential in addition to compliance with the relevant regulations.


documentation

Scope of services of the company

Main document (master file)

1. The company has conducted cross-border transactions with related parties this year and the group of companies that includes the ultimate holding company that consolidates the company's financial statements has created a master file.
2. The total annual amount of related party transactions exceeds RMB 1 billion.

Local file
(local file)

1. The amount of property, plant and equipment transfer exceeds 200 million RMB (in the case of toll processing activities, the amount is calculated based on the prices of the annual import and export customs declaration).
2. The amount of financial asset transfer exceeds 100 million RMB.
3. The amount of transfer of ownership of intangible assets exceeds 100 million RMB.
4. The total amount of other related party transactions exceeds 40 million RMB.

Special file
(special file)

1. If companies conclude or implement cost-sharing agreements, a special booklet on cost-sharing agreements must be created.
2. If the indebtedness of a related party of a company is above the standard ratio and it is therefore necessary to explain compliance with the arm's length principle, a special document on undercapitalization must be prepared.

The team at bdp China has many years of practical experience in how to do business in and with China. We are happy to assist you on your way to the Far East.

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