An Overview of Tax Compliance in China

China’s tax system taxes individuals and Chinese companies. Individual tax ranges from 3 to 45% and a standard rate of 25% is levied as corporate tax. Preferential tax rates are levied on companies from certain industries, regions, zones, and small businesses. A standard VAT rate of 13%is levied on goods and services. For some goods and services, rates of 9% and 6% are levied. For small VAT payers, the tax rate is 3%.

Types of taxes in China

1. Income Tax: The residents of China pay taxes on their worldwide income while non-residents pay taxes on China-sourced income. The incomes of the residents are taxed at a progressive tax scale in the following manner:

Income of non-residents in the form of employment remuneration, remuneration for services, and copyright remuneration is taxable in the following manner:

Incomes such as rental income, interest, dividends, capital gains, and other income are taxed at a flat rate of 20%. However, interest on deposits in Chinese banks is not taxable.

2. Corporate Tax: Chinese companies pay taxes on the worldwide income whereas foreign companies pay taxes on the income arising in China. The standard rate of income tax applicable is 25%. There are preferential tax rates that are applicable for companies in certain industries, regions/zones, and small enterprises. Capital gains from the sale of assets are taxed at normal tax rates. Dividends received by one Chinese company from another Chinese Company are not taxable unless the dividends are from listed companies with a holding period of less than 12 months.

3. Value-Added Tax: VAT is applicable at a standard rate of 13%. For certain goods and services, it is also applicable at a rate of 9% and 6%. For small-scale VAT payers, the tax rate is 3%. VAT is also levied on the sale of tobacco, alcohol, and some other goods which is used for the construction and maintenance of the city. However, their rates vary depending on the location of the taxpayer. The VAT is 7% in urban areas, 5% in districts, and 1% in other areas. On the amount of VAT and consumption tax, a local education contribution of 2% and an education contribution at the rate of 3% is levied.

4. Withholding Tax on Income: While making payments for income such as dividends, interest, royalty, and withholding tax arising in China, withholding tax at the rate of 10% is withheld. The tax rates might be reduced according to the provisions of the double taxation treaties.
5. CFC Rules: If a Chinese company either solely or jointly with other Chinese tax residents controls a foreign company from a low-tax jurisdiction, then its undistributed profits can be included in the taxable profit of the Chinese Company. Control means if a company owns at least 10% of the voting shares of a foreign company and in total the Chinese residents own more than 50% of the shares whether directly or indirectly. However, if the CFC is from a highly taxed country then the profit from a CFC is not included in the taxable base of a Chinese taxpayer. A CFC’s profit arises mainly from active business operations or if the CFC’s profit is less than CNY 5 million.
6. Social Contributions: Social contributions are made to the medical fund, pension fund, unemployment insurance, occupational injury insurance, etc by the employer and the employee. The amount of contributions and the wage ceiling upon which it is imposed vary from place to place.
7. Property Taxes: Property Taxes are paid at the rate of 1.2% on the value of buildings used for commercial purposes. The rate of tax may be used by the local authorities. In cities, tax is paid on land plots determined by local authorities in CNY per square meter. Land tax is also payable on agricultural land not being used for the intended purpose. Further, tax on the sale of land rights or real estate is payable at a progressive rate from 30% to 60%.
8. Stamp Duty and transaction tax: Stamp duty is payable at the rate from 0.005% to 0.1% on certain necessary papers. A special duty is payable at rates generally ranging from 3% to 5% on transactions involving land rights and real estate.

Tax Returns

For employment income, the employer is required to file the provisional or final withholding IIT return with its tax authority every month. For all other categories of income, the tax return whether provisional or final is filed on a monthly, annual, or transaction basis. Certain types of residents have to file annual reconciliation tax returns on comprehensive income.

Tax Filing in China

The tax period in China is the calendar year i.e., from 1^st January to 31^st December. The tax filing period in China is from 1^st March to 30^th June of the year following the reporting year. There is no concept of joint tax in China, everyone has to file their taxes individually and are assessed individually. Taxes have to be filed timely. Extensions may be granted under special circumstances only.