Doing Business in China - Making the most of the free trade agreement

In this section:

› Hire local expertise
› The main taxes you need to know about
› Enforcement
› Tax exemptions and reductions

Hire local expertise

Because of the complexity and fast changing nature of China's taxation system you need to get expert local advice.

Using the services of a China-based tax consultant will ensure you comply with all the tax laws and that you can take advantage of any exemptions on offer. Many of the major international tax consultancy firms are in China. There are also many reputable Chinese firms.

For a list of tax consultancies in China contact New Zealand Trade and Enterprise.

The main taxes you need to know about

The information below is high level and for guidance only. You need to contact a tax expert to get advice that fits your own particular circumstance. The main taxes are:

• Corporate Income Tax (or Foreign Enterprise Income Tax) has a top rate of 25 percent (effective year of assessment, 2008) levied on an enterprise's net income after reasonable costs, expenses and losses.
  All foreign businesses operating in China are subject to this tax, including companies using agents and distributors and those with representative offices. Preferential rates of 20 percent are available to certain low profit ventures and 15 percent for new or high technological enterprises.
• Business Tax is a turnover tax levied on revenue generated from taxable services, the transfer of ownership of intangible assets, or the sale of immoveable property. It is payable by all enterprises and individuals doing business in China.
  Rates vary according to your industry:
  1. transportation, construction, engineering, post and telecommunications, culture and sports - 3 percent
  2. services (such as travel agency, warehouse, advertising services, etc), selling immovable properties, and transferring the possession of intangible assets - 5 percent
  3. finance, banking and insurance - 5 percent
  4. entertainment - 5 to 20 percent
  Note: these percentages are for reference only.
• Taxes on representative offices - representative offices have to pay tax even though they don't trade or earn income. Any remittances from New Zealand to fund the office are regarded as income. Relevant taxes are:
  1. Business Tax on the total monthly overheads
  2. Corporate Income Tax
  There are four representative office tax payment methods:
  1. Pay tax according to actual book keeping, such as law firm and accounting firm.
  2. Cost-plus method, which means the income of the representative office will be calculated according to the expenses spent in current period. Most representative offices use this method.
  3. Actual income method where the representative office declares income to the tax bureau if income is occurred. If no income, declare zero tax to the tax authority.
  4. Non-profit organisation where the representative office declares zero tax.
• Withholding Taxes - foreign enterprises taking profits out of China in the form of dividends are subject to a 10 percent withholding tax. This is levied on overseas companies providing services to China-based business.
  Foreign enterprises without establishments in China have to pay withholding tax based on income from:
  1. dividends
  2. royalties generated by providing patent rights, proprietary technology, trademark rights, copyrights and other such rights for use in China
  3. interest derived from inside China on deposits, loans, bonds, advance payments made provisionally on another person's behalf or on deferred payments
  4. rentals from assets leased to and used by parties in China
  5. earnings from assignment of assets in China, including buildings, structures and their auxiliary facilities and land use rights
  6. any other income derived inside China which may be deemed as taxable by the Ministry of Finance.
• Value Added Tax (VAT) is generally levied at 17 percent on all enterprises and individuals engaged in production, import and export, and commercial business in China. Reduced rates are applied to some activities such as agricultural production and if you are a small business.
• Consumption Tax is a tax on luxury goods, including alcohol, cosmetics, jewellery, yachts and wooden floor panels. It has to be paid by all enterprises that import, manufacture or process these goods. Rates range from 3 to 40 percent.
• Individual Income Tax (IIT) - foreign nationals living in China are subject to progressive tax rates from 10 up to 45 percent according to their income. IIT affects foreigners who live in China at least six months a year or who have a management role in a Chinese legal entity. Foreign residents who have spent less then five years in China are taxed on their China sourced income; after five years their global income becomes taxable. You must register with the tax bureau if you intend working in China.

Other taxes include an Urban Real Estate Tax (1.2 percent of original value of the property) levied on all owners of real estate and a Stamp Duty (0.005 to 0.1 percent) on contracts, property leasing, property insurance, certificates and licences and other specified documents.

The Hong Kong Trade Development Council has more detailed information on taxes, including computation. 

For information on customs duties, see Dealing with customs and other regulations.

Enforcement

Penalties for late payments, non-payment and other contraventions of tax laws can be severe, for example up to five times the amount due plus the original liability. Businesses also face having their licences withdrawn and assets seized in serious cases.

Tax exemptions and reductions

China offers a variety of tax breaks to attract foreign businesses, though many of these are being phased out.

Breaks include cut-rate duties, national and local income taxes offered in the Special Economic Zones, a small number of coastal cities and in hundreds inland cities with development zones.

There is also special treatment for specific industries favoured by the Chinese government such as electronics, communications, energy, construction materials, machinery, environmentalprotection and energy conservation.

A detailed list of the exemptions and reduction is available on the Hong Kong Trade Development Council website.