China is one of the biggest markets in the world and is attracting more and more global investors to move into the China market. In order to run the business in a most cost efficient way, it is necessary for the foreign investors to understand all the potential relevant tax costs that would be incurred in China before making an investment decision. In addition, different type of investment activities will trigger different types of taxes. We provide below a brief introduction of the PRC taxation system.
The major taxes applicable to foreigners, foreign investment enterprises ("FIEs") and foreign enterprises ("FEs") doing business in China are as follows
Tax on income
- Corporate income tax ("CIT") - standard tax rate is 25%, but the tax rate could be reduced to 15% for qualified enterprises which are engaged in industries encouraged by the China government (e.g. New/high Tech Enterprises and certain integrated circuits production enterprises). Tax holiday is also offered to enterprises engaged in encouraged industries. Other CIT incentives are also available for tax resident enterprises in China.
- Withholding income tax on payments to non-residents - a concessionary rate of 10% is currently applicable to interest, rental, royalty and other passive income.
- Individual income tax ("IIT") - progressive rates range from 3% to 45%.
Tax on transactions (turnover tax)
- Value-added tax - applies to the sale of goods, except real estate properties, and the provision of labour services in relation to the processing of goods and repair and replacement services within China. The standard tax rate is 17% with certain necessities taxed at 13%.
- Consumption tax - applies to 14 categories of consumable goods, including tobacco, alcoholic drinks, cosmetics, jewellery, fireworks, gasoline, diesel oil, tires, motorcycles, automobiles, golf equipment, yacht, luxury watch, disposable chopsticks and wooden floorboard. The tax is computed based on sales price and/or sales volume.
- Business tax - applies to the provision of services (excluding processing services and repair and replacement services), the transfer of intangible properties and the sale of real estate properties in China. Tax rates range from 3% to 20%.
Tax on specific objective
- Land appreciation tax - a tax levied on the gains realized from real property transactions at progressive rates ranging from 30% to 60%. The gain is calculated based on the "land value appreciation amount", which is the excess of the consideration received from the transfer or sale over the "total deductible amount".
Tax on resource
- Resources tax - a tax levied on natural resources, generally on a tonnage or volume basis at rates specified by the Ministry of Finance. Taxable national resources include crude oil, natural gas, coal, other raw non-metallic minerals, raw ferrous metals, nonferrous metallic minerals and salt (both solid and liquid).
Tax on property
- Real estate tax - a tax imposed on the owners, users or custodians of houses and buildings at the rate at either 1.2% of the original value with certain deduction or 12% of the rental value.
Tax on behaviour
- Vehicle and vessel tax - a tax levied at a fixed amount annually on the owners of vehicles and vessels used in the China.
- Motor vehicle acquisition tax - 10% of the taxable consideration will be levied on any purchase and importation of car, motorcycles, trams, trailer, electric buses, cart and certain types of trucks.
- Stamp tax - a tax levied on enterprises or individuals who execute or receive "specified documentation" in China and the tax rates vary between 0.005% to 0.1%.
Tax levied by the Customs
- Customs duties - duties are imposed on goods imported into China and are generally assessed on the CIF (cost, insurance and freight) value. The rate of duty depends on the nature and country of origin of the imported goods.
Tax levied by finance department
- Deed tax - a tax levied on the transferees or assignees on the purchase, gift or exchange of ownership of land use rights or real properties, with the tax rates generally range from 3% to 5%.