China: Domestic Taxation
Domestic Corporate Taxation
This page was last updated on 26 July 2019.
Companies that are domiciled in China pay tax on their worldwide income. Non-domiciled companies with a permanent establishment in China only pay tax on their China-sourced income, including 'effectively connected' income. Foreign-owned companies normally qualify as non-resident, although if there are Chinese partners the situation may be complex.
With regard to tax rates, under a 2008 reform China has unified the income tax treatment of domestic and foreign enterprises with the new enterprise income tax law (‘New Law’). The New Law, which became effective 1 January 2008, provides for a 25% statutory rate that applies to both domestic and foreign-funded enterprises and, subject to transition relief, enterprises that have enjoyed preferential treatment. Many foreign-funded enterprises will face higher rates due to the new unified rate and the loss of tax holidays and certain other incentives, but new and high-technology enterprises may still benefit from a 15% rate.
Also included in the New Law are international taxation concepts wholly or partly new to China: the determination of residence under the ‘managed or controlled’ concept; controlled foreign corporations; cost-sharing agreements; thin capitalisation; and deemed paid foreign tax credits. The New Law also strengthens transfer-pricing administration. The New Law only provides a framework of general tax provisions. Important details on the definition of numerous terms were left to detailed implementation regulations and supplementary tax circulars.
In addition to the loss of tax holiday and reduced rate benefits, some withholding tax rates also increase under the New Law. Foreign-funded enterprises being taxed at 15% (or nil) usually benefit from a five-year transition to adjust to the new tax rate.
China has a large number of taxes - around 25 - although companies are not subject to all of them. The most important taxes for a manufacturing operation are likely to be value added tax; industrial taxes, and enterprise income tax.
Foreign investment enterprises include equity joint ventures, cooperative or contractual joint ventures and entities wholly owned by foreigners. A foreign investment enterprise is subject to tax on its worldwide income.
In April 2019, China reduced its standard VAT rate from 16% to 13%; the reduced rate of 10% was also reduced, to 9%. In addition, the VAT refund system was expanded, incentives were provided for VAT credits and a 10% ‘super deduction’ was applicable to certain industries.
In January, 2010, the MoF, acting through the SAT, issued a circular to clarify corporate tax provisions with regard to income earned abroad.
According to the circular, if the tax paid abroad cannot be accurately verified, then the tax paid in the related country (region) should not be deducted from tax payable in the current period, nor deducted from the annual tax amount. The circular clarifies terms that have been effective since 1 January 2008.
Item 5 of the circular stipulates that corporate pre-tax income earned abroad should be calculated in accordance with Article 7 of the Implementation Rules of the Enterprise Income Tax Law and the amount of income tax payable for income earned abroad is as defined in Article 78 of the Implementation Rules.
The Circular also defines the amount of income tax that is deductible on income earned abroad as the tax payable and actually paid for the enterprise income earned abroad. The Circular specifies six types of taxes that do not fall into the category of deductible corporate income tax on income earned abroad.
A formula is given for businesses to calculate the amount of deductible tax. Two conditions are outlined in which taxation authorities approve the use of some simple methods for calculating the amount of income tax paid for income earned abroad.
Corporate tax on income earned from Hong Kong, Macao and Taiwan is levied according to the circular. If a tax treaty exists between Chinese government and the relevant foreign country prescribing rates that differ from the circular, the treaty rates prevail. The circular also lists 15 countries with much higher statutory tax rates than China's, such as the USA, France and Japan.
In February, 2010, China's Ministry of Finance and the SAT issued a further Circular on the same subject. The Circular sets forth the specific method for determining the amount of actually allowable overseas income tax as well as upper limits for tax credit by country for the current period, SAT announced on 11 February.
The Circular further clarifies that such foreign taxes cannot be carried forward to subsequent years for deduction and exemption. In April, 2010, China's State Council released new guidelines for foreign investment in China which include tax incentives and easier procedures, especially in the lesser developed 'West Delta' region.
At a press conference in Beijing, deputy director of the National Development and Reform Commission, Zhang Xiaoqiang, and Vice Minister of Commerce, Ma Xiuhong, launched new rules to encourage foreign investment towards the high-end manufacturing, hi-tech and eco-friendly sectors and to central and western China.
However 'environmentally unsound and energy-gorging projects in industries running at overcapacity' are to be discouraged.
Inward investment may also qualify for support under China's stimulus package for 10 key industries (a RMB4 trillion (USD586bn) package announced in November 2008). Companies in the "encouraged" category, would benefit from lower land prices.
Multinational companies will be encouraged to establish regional headquarters, R&D centres, purchase centres, financial management centres and other functional departments in China.
By the end of 2010, imports for scientific and technological development at foreign R&D centres may qualify for exemption from tariffs, value-added tax, and goods and services tax, according to the regulations.
Foreign companies are especially encouraged to increase their investment in China's central and western regions, known as the 'West Delta', particularly in eco-friendly and labour-intensive businesses. The 'West Delta' comprises Chongqing Municipality, Sichuan Province and Shanxi Province. Existing tax incentives for qualifying foreign companies will continue for new investment in this region, and, in addition, existing foreign investment in China's coastal regions will be supported in moving west.
690,000 foreign companies have invested in China, creating 45 million jobs, said the Ministry. China has topped the list for attracting inward investment for the last 17 consecutive years, and by the end of 2009, had secured USD945.4bn in inward investment during this period.
On 20 February 2010, the SAT issued the ‘provisional measures for tax collection and administration for foreign-enterprise representative offices’, applying retroactively from 1 January 2010. The measures apply to all ROs, bringing their treatment into line with that of other corporate forms and making the continued use of the RO format much less attractive.
In June, 2010, the government introduced a 'Resource Tax' of 5% on coal, gas and oil production in Xinjiang province. In July the tax was extended to 12 more of its western provinces in an effort to inject finances in the poorest regions of the country, which are badly in need of investment in infrastructure and jobs. Among the biggest projects earmarked by the Chinese government are 13 solar power projects.
The new tax is levied on the selling price of the commodities rather than based on volumes produced. This is expected to increase tax revenues substantially.
China has reduced corporation tax for companies in the western regions for encouraged businesses by 10%, to 15%, from January 2011 to 31 December 2020 in a further attempt to provide incentives to businesses in the region.
The western regions of China are very rich in natural resources but in terms of wealth, they are years behind the affluent and booming eastern coastal regions of the country. The government has stated that it wishes to begin to close the divide between east and west and no doubt it also hopes that the injection of revenues in the western regions may placate those living in these remote areas of the country, where some civil unrest has reared its head in recent years, notably in Xinjiang province in 2009.
In August 2010, the SAT issued a public notice in relation to the corporate income tax treatment of corporate restructurings to clarify certain technical and procedural matters that had been left unclear in a circular released in April 2009.
The Public Notice seeks to resolve issues associated with Circular 59 published the previous year which discouraged corporate restructurings because of uncertainty of tax treatment.
The Public Notice elaborates on the definition of “equity consideration” and the documentation requirements for various types of corporate restructuring. It also elaborates on the continued availability of tax incentives after corporate mergers and de-mergers.
Other issues covered in the latest public notice include the importance of “fair value” of assets and liabilities and the necessity of valuation reports from recognized professionals, explanation of procedures for adoption and approval of special tax treatment, adjustments after breaches of special tax treatment criteria, the definition of “reasonable commercial purposes” as a prerequisite for special tax treatment; and transitional requirements for corporate restructuring which took place in 2008 and 2009. The Notice is effective for restructurings taking place since 1 January 2010.
The Chinese social security system is currently undergoing change. As from 1 May 2019, the maximum employer contribution for pensions was reduced from 20% to 16%. The phased reduction of unemployment and industrial injury contributions, which are currently at 1% in some provinces and 3% in others, is to be continued and extended. Other changes are scheduled to follow.