Foreign
companies that engage in business operations in China are required to
pay taxes according to the Chinese tax laws. The most commonly used
forms of business for foreign companies are the Representative Office
(Rep. Office) and the Limited Liability Company (LLC). The most
important tax categories for these forms of businesses are corporate
income tax and business tax. For industrial, commercial and trading
companies the value-added tax (VAT)
is a major tax liability as well. The main taxes for foreign businesses
in China and their methods of calculation will be discussed in this
guide.
2.1:
Tax Registration and Tax Entry
2.2:
Main Tax Categories for Foreign Enterprises
2.3:
Taxation of a Representative Office
2.4:
Tax Incentives
2.5:
Value-Added tax (VAT)
2.6:
Annual Audit and Annual Examination
2.7:
Profit Repatriation
2.1: Tax Registration and Tax Entry
After
the business license is received, a Representative Office or a Limited
Liability Company (LLC) must register at the relevant tax authorities
within 30 days time. This includes both the national taxation bureau
and its municipal branch; however, only one application has to be
handed in. Generally, the application process takes 10 working days.
Companies are not required to hire an authorized agent for this process
and can apply themselves. However, if the investor has used a
registration service provider for the registration of the Rep. Office
or a Limited Liability Company, this tax application service will often
be included in the service.
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2.2: Main Tax
Categories for Foreign Enterprises
Corporate income tax
Corporate
income tax is levied on income of LLC’s derived from production,
business operations and other sources within and outside China[1].
LLC’s have to pay this tax quarterly, and the applicable tax rate is at
25%. The method of computation is as follows:
Tax payable = [Total Annual Income – Expenses – Losses] x
Applicable
Tax Rate
[1] However, if a company is not registered in China, it only has
limited tax liabilities for all revenues generated from within China.
The applicable corporate income tax rate for this kind of company is
10%.
Business tax
The
business tax is a turnover tax paid on the revenue of certain services
such as communications and transportation (applicable tax rate of 3%),
construction (3%), finance and insurance (5%), posts and
telecommunications (3%), culture and sports (3%), entertainment
(5-20%), sales of buildings within China (5%) and other services[2]
(5%). Furthermore, there is an indirect tax surcharge on top of
business tax such as education
(3%), river maintenance (1%) and city construction (7-1%) (which raises
the effective tax rate from for example 5% to 5.55%). LLC’s are
required to pay this tax monthly. The tax
payable is computed as follows:
Tax payable = Business Turnover x Applicable Tax Rate
[2]
This last category includes hotels and travel agencies, restaurants,
rent agencies, advertisement companies, consulting businesses, etc.
Withholding Tax
Non-resident
enterprises are subjected to a 10% withholding tax at source.
Some scenarios where withholding tax applies include:
| - |
Dividend payment
to non-resident parent company |
| - |
Interest, rent,
royalties, management fees paid to non-resident foreign
enterprises |
| - |
Net capital gains
from transfer of shares or equity interest in
FIE-held enterprises |
| - |
From 1st September
2009, payment of contracted projects and services to
non-resident enterprises will be subjected to withholding tax |
The
payer is required to withhold the tax payable from the payment to be
remitted to the non-resident enterprise and submit it to the tax
authorities.
There are however several countries that have signed
tax treaties with China and offer reduced withholding tax rates.
Examples of such countries include Hong Kong, Singapore, Mauritius,
Barbados, Switzerland, etc. Foreign
investors may be able to enjoy these reduced tax rates if the local
entity is structured underneath a parent company located in one of
these countries. As of early 2009, however, China has issued a number
of anti-avoidance circulars that may require the parent company within
one of these jurisdictions to prove that it is a substantive business
before the local China entity may enjoy the benefits of these tax
treaties.
Stamp tax
Contracts
and related documents are subject to a stamp tax. Different tax rates
are applied to different types of contracts, for example the purchasing
and distribution contract will have a 0.03 % tax of the total revenue.
The stamp tax ticket will be attached to the contract when the contract
is signed.
Housing tax
A
housing tax of 1.2% of the purchase value of properties has to be paid
twice a year, in May and November. This tax only applies to owned
property.
Vehicle and vessel tax
Users
of vehicles and vessels are subject to payment of vehicle and vessel
usage license tax. Tax on vessels and trucks is levied according to
tonnage, while tax on passenger cars is levied according to the type of
vehicle and the number of seats. This tax has to be paid twice a year,
in May and November.
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2.3: Taxation of a Representative Office
As
Rep. Offices (excluding those engaged in business consulting, legal
matters, accounting etc.) are not allowed to generate revenue, their
tax base for corporate income tax and business tax is presumed on the
basis of their expenses. In China, a minimum presumed profit rate of
15% is used for calculation[3].
However, the tax base for the business tax is the amount of the
expenses incurred. To make this clear see the following example.
Formulas:
Presumed Income Amount =
Operations Expense /
[1 – Pres. Profit Rate 15% – Business Tax Rate]
Business Tax Payable = Income
Amount x
Business Tax Rate 5%
Corp. Tax Payable = Income
Amount x Presumed
Profit Rate 15% x Corp. Tax Rate 25%
[3] This method of calculating tax liability for
Representative Offices is applicable in Shanghai and Beijing. It is
possible that the minimum presumed profit rate could be determined on a
case by case basis.
Example:
The
result of this relatively complicated computation is an estimated 11%
tax on operation expenses, which can be used as a rule of thumb. Unlike
LLC’s, which pay their taxes on a monthly basis, Rep. Offices pay both
the business tax and the corporate income tax quarterly.
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2.4: Tax Incentives
Many foreign
companies, registered before March 16th
2007, enjoyed preferential tax treatment if they were located in
special economic zones or if they were involved in production-oriented
businesses. However, with the implementation of the new income tax law
from January 1st 2008, such preferential tax treatment is no
longer available, and companies currently enjoying reduced tax rates
will see their income tax rate gradually raised to the standard 25% by
2012.
However,
some tax incentives remain for certain industries and projects that are
encouraged by the state. Below are some examples:
|
Industries / Projects
|
Tax Rate
|
|
Certain Advanced and New Technology Enterprises
|
15%
|
|
Certain small-scale enterprises with low
profitability
|
20%
|
|
Income derived from
- certain agriculture, forestry, animal husbandry or fishery
projects
- certain investment in or operation of certain public
infrastructure projects
- qualified environmental protection and conservation projects
- certain technology transfer projects
- offshore outsourcing
|
Tax exemption or reduction
|
|
Enterprises located within certain ethnic
autonomous
regions (subject to approval from the People’s government of the
relevant regions).
|
Tax exemption or reduction
|
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2.5: Value-Added tax (VAT)
a. General and small-scale tax payers
The
Chinese tax system distinguishes between general and small-scale payers
of VAT (see chart below). Small-scale taxpayers are enterprises with
annual taxable value of sales below the prescribed limits, namely RMB
500,000 for manufacturing and service companies, and less than RMB
800,000 for those engaged in wholesaling and retailing. VAT has to be
paid on a monthly basis and special VAT invoices must be bought from
the tax bureau.
b.
General tax payers
The
actual amount of VAT payable by general VAT taxpayers is the excess
amount of output VAT over input VAT. There are two applicable tax
rates, a basic rate of 17% and a lower rate of 13%[4]. The formula is
as follows:
Tax Payable = Current Output VAT – Current Input VAT
Output VAT = Sales Volume x Applicable Tax Rate
If
the current output VAT is smaller than the current input VAT, the
amount that cannot be fully offset or deducted may be carried over to
subsequent tax period(s).
[4]
The sale and import of the following commodities are subject to the
lower VAT rate: grains, edible vegetable oil, drinking water, heating,
air-conditioning, hot water, coal gas, liquefied petroleum gas, natural
gas, methane, coal products for domestic use: books, newspapers and
magazines; feedstuffs, chemical fertilizers, pesticides, agricultural
machinery.
c. Small-scale tax payers
VAT
payable by small-scale taxpayers is calculated by a simple method on
the basis of the overall sales value and the tax rate without deduction
of input VAT. This means the input VAT borne by small-scale VAT-payers
(through purchasing goods from general taxpayers) is not refunded by
the tax authorities. Furthermore small-scale taxpayers do not have to
pay VAT on the value of exported goods. The applicable tax rate is 3%
for commercial as well as manufacturing enterprises). The formula is as
follows:
Tax
payable = Sales Volume * 3% / (1+3%)
d. Consumption tax
Consumption
tax is payable on the sales value of certain consumer goods. This
includes 11 general items: cigarettes, alcohol, cosmetics, fine
jewelry, precious stones, firecrackers, gasoline, diesel oil, motor
vehicle tires, motorcycles, and small motor cars. The applicable tax
rates range from 3% to 50% and the tax is paid on top of VAT. The
producers include the tax in the price of the products meaning that the
tax is ultimately borne by consumers. Retailers and wholesalers are not
required to pay consumption tax when they trade goods of this category.
Also consumption tax is fully rebated for exported goods.
e. VAT on exports
Generally
the value of exported goods is exempt from VAT and consumption tax.
Companies can apply for the tax rebate at the relevant tax authorities
after the goods have left Chinese territory and if all payments are
completed within three months after the end of the year. The official
customs declaration must be attached to the application. Small-scale
VAT paying companies can not apply for the tax rebate and are only
exempt from VAT when they export goods. The formulas for
calculation of the rebate amount are as follows:
Tax Payable =
Domestic Output VAT – [Input VAT for Total Purchases – Non-Refundable
VAT]
Non refund VAT =
Export Sales x [VAT Rate – Refund Rate]
Note
that the rebate rate for certain goods can be smaller than the VAT
rate, which means that the full amount paid as VAT on exported goods
will not be refunded. To understand the process of the VAT rebate
calculation, see the following example. The VAT and the rebate rate are
17%. The tax payable is negative meaning that it will be refunded.
Example:
f. VAT on imports
There is a
tax on imported goods, which is calculated as follows:
Tax Payable = VAT Rate x [Dutiable Value
+ Customs Duty +
Consumption
Tax]
The dutiable value of imported goods includes the
purchase price and the transport and insurance cost. See the example
with the VAT rate of 17%, a consumption tax rate of 3% and the customs
duty of 12%:
Example:
|
A
|
B
|
C
|
D
|
|
Dutiable Value
|
Customs Duty
A x 12%
|
Consumption Tax
[A + B] x 3%
|
Tax Payable
(A +B + C) x 17%
|
|
120,000
|
14,400
|
4,032
|
23,533
|
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2.6: Annual Audit and Annual
Examination
Both
Rep. Offices and LLC’s are required to be audited on an annual basis.
The annual audit has to be filed before the end of March of the
following year. The Annual audit of Rep. Offices and LLC’s must be
conducted by a firm of Certified Public Accountants (Chinese or foreign
JVs) registered in the PRC under PRC regulations. LLC’s must also
undertake an annual examination whereby they submit various
certificates and financial documentation to local authorities for their
inspection.
The
chart below summarizes the obligations of both the Rep. Office and the
LLC with respect to payment dates and deadlines.
Tax Timeline:
|
|
Rep. Office
|
LLC
|
|
Tax Registration
|
within 30 Days After License Approval
|
|
Income Tax
|
Quarterly
|
Quarterly
|
|
Business Tax
|
Quarterly
|
Monthly
|
|
VAT & Consumption Tax
|
N/A
|
Monthly
|
|
Housing &
Vehicle Tax (deduct Stamp Tax)
|
May & November
|
|
Annual Audit & Clearance
|
End of May
|
|
Annual Examination
|
End of June
|
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2.7: Profit Repatriation
Foreign
companies may only distribute and repatriate profits back to their
investors after completion of the annual audit, the settlement of their
relevant income tax liabilities and all losses are made up, which were
carried forward from previous years. In addition, the
WFOE must set aside a minimum 10% of after-tax profits into a reserve
fund until the accumulated reserve fund reaches 50% of the registered
capital. The remaining part is distributable profits from which the
board of directors may declare dividends to the investors in proportion
to their contribution to the registered capital. Once the accumulated
reserve fund threshold of 50% is reached and maintained, the FIE may
repatriate all profits to their home country. The mandatory reserve
fund ensures that a portion of the profits are being re-invested into
the FIE.
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