China has a wide range of taxes, which can be broadly categorized into turnover taxes, including VAT, Consumption Tax and Business Tax; income taxes, including CIT and Individual Income Tax (IIT); property related taxes, including Real Estate Tax, Urban and Township Land Use Tax, and Land Appreciation Tax; and other taxes, such as Tariff, Stamp Duty, and Deed Tax.

An overview of the major taxes in China is provided as below.

1.                     CIT

On February 24, 2017, the newly amended Corporate Income Tax Law of the People’s Republic of China (the “CIT Law”) entered into force upon approval at the 12th National People’s Congress. According to the law, enterprises in China, consisting of resident and non-resident enterprises, are obliged taxpayers of CIT.

A resident enterprise refers to a company established in China in accordance with Chinese laws, or incorporated under laws of a foreign country (region) but with its management body operating in China. A non-resident enterprise means a company set up under laws of a foreign country (region) with its management body located outside China, which has establishments or offices within, or without China but with profits derived from the country.

Monetary and non-monetary profits constitute an enterprise’s total income which is the basis for calculating its CIT payable according to the following formula:

Gross Income – Nontaxable Income – Tax Exempt Income – Deductions – Allowable Losses Carried from Previous Years = Taxable Income

Taxable Income × Applicable CIT Rate = CIT Payable

·         Resident Enterprises

A resident enterprise is taxed on its incomes sourced from both within and outside the territory of China at a rate of 25%.

·         Non-resident Enterprises

A non-resident enterprise that sets up an organ or establishment within the territory of China shall pay its CIT at the rate of 25% on its incomes sourced within the territory of China and beyond but actually connected with the said organ or establishment.

A non-resident enterprise that has an organ or establishment within the territory of China, but generates its incomes with no actual connection to the said organ or establishment, or that has no organ or establishment within the territory of China, but has income sourced from China, shall pay its CIT at a lower rate of 20% (currently at a reduced rate of 10%) for the incomes sourced within the territory of China.

·         CIT Return and Payment

Under the CIT Law, a resident enterprise set up in China shall pay the tax to the local tax authority in the place where the company was registered, and if it was founded overseas, the tax shall be paid to the tax authority in the place where its management body in China is operated.

For a non-resident enterprise, the tax shall be paid to the tax administration in the place where its organ or establishment is run; for those with two or more organs or establishments in China, upon approval by the local tax authority, the income tax is allowed to be paid in a consolidated manner by the major organ or establishment which shall be responsible to supervise and manage the production and operation of other establishments or offices, and have complete account books and documents which accurately record the incomes, costs, expenses, profits and losses of each organ or establishment. CIT is levied on an annual basis from January 1 to December 31 of a calendar year.

An enterprise shall file a CIT return and pre-pay the tax on a monthly or quarterly basis, and settle the amount after the end of each tax year. To be specific, an enterprise shall, within 15 days following the end of a month or quarter, submit a CIT return and prepay the current tax to the tax authority, and within 5 months following the end of each tax year, file an annual CIT return to the tax authority for settlement. In case of corporate income denominated in currencies other than RMB, the enterprise shall convert the amount into RMB-denominated number for CIT calculation and payment.

·         Tax Incentives

According to the tax law, enterprises engaged in investment projects with the government support are eligible for tax breaks. Below is a partial list:

Table 1 Catalogue for CIT Incentives (2017 Version)

Source: Catalogue for CIT Incentives (2017 Version)

In addition to tax breaks, eligible enterprises enjoy lower CIT rates according to the tax law. For example, qualified new and high-tech enterprises, after certification by competent authorities, are eligible for a reduced rate of 15%; qualified small and low profit enterprises are entitled to a reduced rate of 20%; and in some economic zones, enterprises that fall within the local catalogue for CIT incentives enjoy tax reductions as defined by the zones.

·         Withholding Income Tax Deferral for Foreign Investors in China

To attract more foreign investment, China issued a policy in 2017 which provides foreign investors with a withholding income tax deferral incentive for their equity investments with profits distributed to them, and has expanded the applicable scope in 2018 from foreign investment projects that are in the encouragement category to all projects and fields that are not prohibited.

2.                     IIT

On August 31, 2018, the Amendments to the Individual Income Tax Law of the People’s Republic of China was passed by the Standing Committee of the 13th National People’s Congress and took effect from January 1, 2019. It was followed by the launch of the Regulation on the Implementation of the Individual Income Tax Law of the People’s Republic of China on December 18, 2018, which took effect with the new IIT law. An overview of the newly introduced IIT system is provided as below.

The new IIT law revised the criteria for who shall pay IIT. A resident individual is an individual who is domiciled in China or who is not domiciled in China but has stayed in the aggregate for 183 days or more of a tax year in China. The Draft which provides a detailed definition of taxpayers stipulates that for an individual who is not domiciled in China and who has been present in China for less than five consecutive years, or who has stayed five consecutive years but has a single absence from China for more than 30 days, the individual may not pay IIT for non-China sourced income after the completion of relevant registration with in-charge tax authority.

A non-resident individual is an individual who neither is domiciled in China nor stays in China or who is not domiciled in China but has stayed in the aggregate for less than 183 days of a tax year in China. The Draft provides non-resident individuals an incentive policy that an individual who is not domiciled in China and who has been present in China for no more than 90 days, consecutively or cumulatively, in a tax year, will be exempted from paying IIT for the incomes sourced in China, but paid by overseas employers instead of China based establishments or office. A tax year starts from January 1 to December 31 of a calendar year.

·         Tax Rate

As stipulated in the new IIT law, comprehensive income and business income shall apply progressive tax rates; interests, dividends, bonuses, income from property leasing and transfer, and contingent income shall apply a proportional tax rate of 20%.

(i)   Comprehensive Income

Comprehensive income which includes wages and salaries, income from remuneration for personal services, author’s remuneration and royalties, is subject to a 7-grade progressive tax system at a tax rate from 3% to 45%. For income from remuneration for personal services, author’s remuneration and royalties, a deduction by 20% shall be allowed when calculating the comprehensive income. For income from author’s remuneration, a further deduction by 30% shall be allowed, so 56% of the actual income from author’s remuneration is effectively included in the comprehensive income for IIT purposes.

Although the new IIT tax law has not been fully implemented when the report is released, the standard basic deduction for calculation of taxable income is increased to RMB 5,000 per month on October 31, 2018 and the new comprehensive tax rate schedule has taken effect.

Table 2 IIT Rate Schedule (Applicable for Comprehensive Income)

(Note: The annual taxable income above equals the comprehensive income of a resident individual in a tax year less RMB 60,000, special and additional special deductions, and other statutory deductions.)

Source: Individual Income Tax Law of the People’s Republic of China

(ii)   Income from Business Operation

A 5-grade progressive tax system with a tax rate from 5% to 35% is applied for the income from production or business operation conducted by self-employed industrial and commercial households, and sole proprietorship and partnership enterprises, and income from contracted or leased operation of enterprises or institutions. The latest business income tax rate schedule is as follows:

Table 3 Business Income Tax Rate Schedule

(Note: The annual taxable income in the above table equals the gross revenue of each tax year less costs, expenses and losses.)

(iii)     Interests, Dividends, Bonuses, Income from Property Transfer and Leasing, and Contingent Income

A tax rate of 20% is applied in this category of income. For the income from property leasing, if the payment is less than RMB 4,000, a deduction by RMB 800 is allowed when calculating the taxable income; if the payment is more than RMB 4,000, the deduction is 20% of the payment. For the income from property transfer, a deduction of the net value of the property and a reasonable expense amount is allowed, while no deduction is allowed from the income from interests, dividends, and bonuses, and contingent income.

·         IIT Return and Payment

The IIT on comprehensive incomes of resident individuals is levied on a yearly basis by withholding and settlement, with withholding agents prepaying the IIT monthly; that of non-resident individuals will be paid by withholding agents on a monthly basis or when taxable income arises. The IIT on business operation is levied on a yearly basis with taxpayers prepaying each month or quarter. The IIT on other incomes is levied monthly or each time when taxable income arises, and prepaid by the withholding agents, if any.

·         Special Provisions on IIT for Expatriates in China

The following items received by expatriates are exempted from IIT:

a.    allowances for housing, meals, relocation, and laundry provided in a non-cash form or on a reimbursement basis;

b.   reasonable allowances for trips within China or beyond;

c.    allowances for home visits, language training, children’s education expenses, recognized by local tax authorities as reasonable exemptions;

d.   dividends and bonuses from foreign-invested companies;

e.   wages and salaries of national recognized foreign experts;

f.   dividends (bonuses) from the B shares or overseas listed shares including H shares of companies within China.

3.                     VAT