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Business Taxes in China


Companies taxable in China are subject to the following taxes:

ENTERPRISE INCOME TAX - EIT

The EIT Law and its Implementing Rules (both effective since January 2008) adopt a territorial tax principle, under which companies residing in China are subject to tax on their worldwide income, while non-resident companies are only taxable on their Chinese source income.
 
Enterprises are considered as tax residents in China if they are established in China or if their effective place of management is located therein. For tax purposes, the place of effective management is defined as the place where the overall management and control over manufacturing, business operations, human resources, financial and properties of such entity is exercised.
 
Foreign companies are also taxable in China if they have a permanent establishment (“PE”) located therein. In such case, all income derived by such PE are subject to Chinese taxation.
 
EIT is levied at the standard rate of 25% on active income, while specific rates apply on the distributions of passive income to non-resident beneficiaries. As such, a 10% withholding tax is levied on dividends, interest and royalties remitted abroad, unless such rate is reduced under a Double Tax Agreement (“DTA”). Technical services fees paid to non-residents are also subject to EIT on a net-profit basis, as long as the related services are performed in China. In principle, such services shall be subject to EIT at the standard rate of 25%, but more often, documents evidencing related costs and expenses are absent or insufficient, and a deemed profit rate of 15% applies (unless lowered under a DTA).


TURNOVER TAXES

China imposes two (2) categories of taxes on the turnover of companies: (i) value added tax and/or (ii) business tax, depending on the nature of the transactions.
 

  • Value Added Tax (“VAT”) is considered a neutral tax, since it allows taxpayers to offset VAT incurred in relevant purchases (input VAT) from their VAT liability (output VAT). Today, VAT applies on the sale of goods, the provision of processing, repair or replacement services and the import of goods. In the future, it scope should be further extended, as the Chinese VAT regime is still under reform. A pilot program, launched in Shanghai in 2012 and expanded nationwide on August 2013, is aimed at progressively replacing business tax by VAT. So far, the reform includes transportation services, modern services (i.e. research and development, technology services, leasing of moveable and tangible goods, etc.), postal services and telecommunications. For general VAT taxpayers, standard VAT rates are 17% (leasing of moveable and tangible goods, processing, repair or replacement services, and imported goods), 11% (transportation industry) and 6% (services). For small-scale VAT taxpayers, the VAT rate is 3%. Specific rates apply to certain transactions (e.g. involving used goods). In addition, exports are generally zero-rated. Companies are required to register for VAT tax purposes with the local tax authorities upon their incorporation. VAT returns shall be filed each month and submitted before the 15th of the following month.
 
  • Business Tax (“BT”) is a non-recoverable tax. As opposed to VAT, BT is levied on gross turnover with no deduction permitted for tax paid when purchasing other goods or services.  It is imposed on the sale of immovable property, intangible goods, and certain services not submitted to VAT. BT rates range between 3% to 5% for most services and 5% to 20% on entertainment. Likewise VAT, companies shall register for BT tax purposes with the local tax authorities upon their incorporation. BT returns shall be filed each month and submitted before the 15th of the following month.

CONSUMPTION TAX

Consumption tax applies on non-essential and luxury goods, including alcohol, tobacco, cosmetic, diesel fuel, fireworks, jewelry, motorcycles, petrol, luxury watches, golf equipment, yachts, etc. Consumption tax rates range from 1% to 56%, levied on the sales value of the goods. Companies involved in the production or import of such goods shall register with the local tax authorities. Tax returns shall be filed each month and submitted before the 15th of the following month.


OTHERS
 
  • Stamp duties at varying rates apply to contracts, agreements and certain legal documents. Rates generally vary from 0.005% (for loan agreements) to 0.1% (for lease agreements, property insurance, warehousing and storage contracts).
 
  • Customs and excise duties include import and export duties, and are computed on the value of the goods and/or their volume. Preferential rates apply to goods originating from countries or territories (such as Hong Kong, Macau and Taiwan), which concluded special trade agreements with China.

October 2015

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