November 9, 2021
The current tax system in China was established as a broad part of the 1994 financial reform in terms of scale and scope. Taxes are China's most important source of financial income. VAT, corporate tax, and income tax are the tax groups that generate the most income.
The tax year in China is from January 1 to December 31, but tax returns are usually filed monthly. For wage income, employers are obliged to submit temporary or final withholding statements to the tax office on a monthly basis. Tax returns for other income categories are filed monthly, annually, or on a transactional basis, depending on certain conditions.
The People's Congress passes China's major tax laws, and the State Council formulates implementing regulations. The Ministry of Finance and the State Tax Administration are tasked with ensuring the interpretation and enforcement of tax laws and regulations. In addition, the State Tax Administration is responsible for overseeing the implementation of tax collection at the local level.
Types of Taxes In China
In the tax system in China, there are 18 types of taxes, which can be divided into five categories according to their nature and function.
a) Taxes on sales:
It includes three types of taxes: value-added tax, excise duty, and customs duty. These taxes are based on the turnover or sales of taxpayers in the manufacturing, circulation, or service sectors.
b) Income taxes category:
Includes Business Income Tax (for domestic and foreign investment and venture businesses such as state-owned enterprises, collective undertakings, private enterprises, joint ventures, and joint-equity enterprises) and Individual Income Tax. These taxes are levied on the profits made by corporations and other economic organizations or on the incomes obtained by individuals.
c) Resource taxes category:
The resource tax consists of city and county land-use taxes. These taxes apply to natural resource beneficiaries or city and county land users. It aims to tax the paid use of state-owned resources and the profits made by taxpayers who have access to natural resources.
d) Real estate and other taxes:
It includes property tax, stone tax, stamp duty, title tax, vehicle purchase tax, and ship tonnage fee. Real estate valuation tax is calculated at rates ranging from 30% to 60% over the income from the sale or transfer of the real estate.
e) Special purpose tax category;
It consists of city maintenance and construction tax, farmland tax, land tax and regulation taxes on fixed-asset investment, tobacco tax, and environmental protection taxes. These taxes are applied to certain items for specific regulatory purposes.
Income Tax in China
Non-residents are non-residents and have resided in China for less than 183 days in a tax year. These people are only taxed on their earnings in China. Wages paid by foreign employers to non-domiciled persons working in China are exempt from tax if they stay for less than 90 days in a calendar year. As of January 1, 2019, the income of resident individuals is taxed progressively from 3% to 45%.
Annual Income Tax Tranches (2019)
• 36,000 (RMB) or less = 3%
• More than 36,000 Less than 144,000 (RMB) = 10%
• More than 144,000 Less than 300,000 (RMB) = 20%
• More than 300,000 Less than 420,000 (RMB) = 25%
• More than 420,000 Less than 660,000 (RMB) = 30%
Corporation Tax
All businesses (including foreign investment ventures, foreign ventures, and domestic enterprises) and income-generating entities within China are liable to pay corporate taxes, with the exception of sole proprietorships and partnerships.
- Tax resident enterprises: A business established in China or established outside of China, i.e., under the laws of a foreign country, but the actual management or control of the business is located in China.
- Tax resident enterprises pay corporate tax on income generated inside and outside of China.
Value Added Tax "VAT"
Value-added taxpayers are all enterprises, units, and persons engaged in the sale of goods, processing, repair and replacement services, sale of intangible assets, import of immovable assets and goods in the territory of the People's Republic of China.
The value-added tax rates applied in China are as follows:
- Sale or import of goods: 13%
- Agricultural products, water, gas, etc. sale and import of products: 9%
- Provision of repair, replacement, and processing services: 13%
- Property, plant, and equipment rental services: 13%
- Transportation, postal, basic telecommunications, construction services, leasing of real estate, sale of real estate, transfer of land use rights: 9%
- Value-added telecommunications services, financial services, consumer services, sale of intangible assets (excluding land tenure): 6%
- VAT rate on exports is 0%.
Taxpayers operating in the manufacturing and service industries between April 1, 2019, and December 31, 2021, are entitled to an extra 10% VAT discount for current periods.
Consumption Tax
The excise tax applies to certain categories of consumer goods, such as tobacco, alcoholic beverages, miscellaneous cosmetics, jewelry, fireworks, gasoline, diesel, and certain petroleum products, motorcycles, automobiles, golf equipment, yachts, luxury watches, disposable chopsticks, batteries, and plating materials applied to importers. The tax payable is calculated according to the sales amount or the sales volume related to the related goods.
Customs Duties in China
There is no customs duty, VAT, or any tax on exported products in China.
Customs duties are applied to imported products. As of January 1, 2020, the People's Republic of China had reduced customs duties on thousands of imported products. As of 2022, China will reduce customs duties for products imported from RCEP member countries such as Japan, Australia, New Zealand, Brunei, Cambodia, Laos, Singapore, Thailand, and Vietnam. Customs duty rates for products imported into China vary according to the country of importation and product group.
Engage a legal advisor to help you efficiently review your business contracts with distributor, suppliers, and other partners to make sure you are legally protected.
Contact us at inquiries@ChinaLawSolutions.com for more information.