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China
The People's Republic of China, commonly known as China, is one of the most populous countries in the world, with over 1.3 billion people. Located in East Asia along the coastline of the Pacific Ocean, China is one of the largest countries in the world by land area. The capital of China is Beijing, and the official language is Mandarin Chinese.
VAT
13%
CIT
25%
SSC
38.7%
CIT = Corporate Income Tax
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SSC = Social Security Contribution (Employee + Employer)
Economy
For centuries, China stood as a leading civilisation, outpacing the rest of the world in technology, arts, and sciences. After World War II, the Communists, under Mao Zedong, established a socialist system. After 1978, Mao's successor, Deng Xiaoping, and other leaders focused on market-oriented economic development, and China began to generate significant and steady growth in investment, consumption, and standards of living.
Since then, China has generally implemented reforms in a gradual fashion. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China is also the largest trading nation in the world and the largest exporter and second largest importer of goods. A milestone was achieved in mid-2010 when China's economy was valued at USD 1.33 trillion and became the world's second largest economy, surpassing Japan and second only to that of the United States.
China's growth comes from both huge state investments in infrastructure and heavy industries as well as private sector expansion in light industries.
Exports had been China's major economic driver, but since the 2008 global financial crisis, which seriously affected the international markets of China export products, the Chinese government shifted the focus to stimulate investment and consumption in domestic markets.
Taxation
Taxation of individuals
Residents are generally subject to China individual income tax (IIT) on their worldwide income. Non-residents are generally taxed in China on their China-source income only.
An individual is taxed in China on one's income by category. China's IIT law groups personal income into 9 categories.
The 9 categories of income are:
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Employment income (i.e. wages and salaries).
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Remuneration for labour services.
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Author's remuneration.
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Royalties.
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Business income.
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Interest, dividends, and profit distribution.
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Rental income.
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Income from transfer of property.
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Incidental income.
Each income category has its own tax rate(s), allowable deductions, etc.
For residents, employment income, remuneration for labour services, author’s remuneration, and royalties are combined as 'comprehensive income' for aggregate tax calculation purpose on an annual basis. Income from the other categories is taxed separately by category on a monthly or transaction basis.
For non-residents, income from each of the 9 categories is taxed separately on a monthly or transaction basis.
Personal income tax rates
Comprehensive income tax rates
For residents, calculation of IIT on annual comprehensive income is based on progressive tax rates (see Table I below) using the following formula:
(Annual taxable income x Tax rate) - Quick deduction
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For non-residents, IIT on employment income, remuneration for labour services, author’s remuneration, and royalties is calculated by each category on a monthly or transaction basis at the below progressive tax rates
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Business income tax rates
Income earned by individuals from privately-owned businesses, sole proprietorship enterprises, or partnerships is generally subject to IIT at progressive rates from 5% to 35%, as follows:
Tax rates for other personal income
A flat rate of 20% is applied on the remaining categories of income, including incidental income, rental income, interest income, dividends, and capital gains, unless specifically reduced by the State Council.
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Social Contribution
Social security contributions to pension funds, medical funds, etc. are mandatory for Chinese employees. As of 15 October 2011, foreign individuals who hold a China work permit for working in China are required to make social security contributions in relation to pension, medical (including maternity), unemployment, and work-related injury according to the China Social Security Law. Monthly employer and employee social security contribution rates, applicable caps, etc. are governed by local rules, which may vary among the local jurisdictions. For example, contribution rates and caps applicable to local Chinese in Shanghai, Beijing, and Guangzhou are as follows:
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The employer is obligated to withhold the applicable social contributions of employees from payroll for onward payment, together with the employer's contributions, to the relevant local authorities on a monthly basis.
Taxation of legal persons
Tax resident enterprises (TREs) are subject to corporate income tax (CIT) on their worldwide income. A non-TRE that has no establishment or place in China is taxed only on its China-source income. A non-TRE with an establishment or place in China shall pay CIT on income derived by such establishment or place from sources in China as well as income derived from outside China that effectively is connected with such establishment or place.
Under the CIT law, the standard tax rate is 25%.
A lower CIT rate is available for the following sectors/industries on a national basis:
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Qualified new/high tech enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a new/high tech enterprise.
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Encouraged designated key software enterprises and encouraged designated integrated circuits (IC) design enterprises are eligible for a reduced CIT rate of 10% after the first five years of CIT exemption.
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Qualified technology-advanced service enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a technology-advanced service enterprise.
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For qualified small and thin-profit enterprises, the annual taxable income up to 3 million yuan renminbi (CNY) (inclusive) is subject to an effective CIT rate of 5% from 1 January 2023 to 31 December 2027.
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Qualified enterprises engaged in pollution prevention and control are eligible for a reduced preferential CIT rate of 15% from 1 January 2019 to 31 December 2027.
A lower CIT rate is available in specific regions for specific sectors/industries as follows:
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From 1 January 2011 to 31 December 2030, encouraged enterprises in the Western Regions are eligible for a reduced preferential CIT rate of 15%.
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From 1 January 2014 to 31 December 2025, encouraged enterprises established in the Qianhai Shenzhen-Hong Kong Modern Services Industry Cooperation Zone with operational substance are eligible for a reduced CIT rate of 15%.
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Encouraged enterprises established in the Guangdong-Macao Intensive Cooperation Zone in Hengqin with operational substance are eligible for a reduced CIT rate of 15%.
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From 1 January 2014 to 31 December 2025, encouraged enterprises established in the Pingtan Comprehensive Experimental Zone with operational substance are eligible for a reduced CIT rate of 15%.
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From 1 January 2020 to 31 December 2024, encouraged enterprises registered in the Hainan Free Trade Port with operational substance in the Hainan Free Trade Port are eligible for a reduced CIT rate of 15%.
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From 1 January 2022 to 31 December 2026, encouraged enterprises registered in the trial-run areas of Nansha (covering 23 square kilometres) with operational substance are eligible for a reduced CIT rate of 15%.
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From 1 January 2020, qualified enterprises engaged in substantial production or R&D activities in key industries, such as integrated circuits, artificial intelligence, biomedicine, civil aviation, etc., in the Lingang New Area of the Shanghai Pilot Free Trade Zone are eligible for a reduced CIT rate of 15% for five years commencing from the date of establishment.
Value Added Tax - VAT
The sales or importation of goods, the provision of services, and the sales of intangible properties and immovable properties are subject to VAT. For general VAT payers, input VAT can be credited against output VAT.
The applicable VAT rates for general VAT payers from 1 April 2019 are set out in the following table:
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For taxpayers that are eligible for the above zero rate, generally they may be entitled to a credit or refund of the input VAT incurred.
The VAT refund rate for exported services is the same as the applicable VAT rate. For exported goods, the VAT refund rates range from 0% to 13%. There is a prescribed formula for determining the amount of refund, under which full refund of input VAT is not available to many exported goods and the exporter will suffer different degrees of export VAT costs.
In addition, certain taxable activities, including a few types of sale of goods, services, and cross-border transactions, are applicable to the VAT exemption treatment. In that respect, the relevant input VAT incurred cannot be credited or refunded.
The rate for small-scale VAT payers is 3%. From 1 January 2023 to 31 December 2027, the VAT rate for small-scale VAT payers is reduced from 3% to 1%.
OUR PRESENCE IN CHINA
Our office in Shanghai can count on the support of a firm of Accountants and Auditors founded in 2015 made up of 6 Partners as well as a staff of 10 people who work daily in the areas of auditing, payroll processing, accounting, tax assistance and compliance.
