Taxation Issues in China
By Klaus Koehler, Managing Director, Klako Group

Tax matters in China: faulty assumptions

Foreign investors often make faulty assumptions regarding tax matters in China. They believe that China's tax laws are straightforward and no help of experts is needed. However, there are various complex rules covering numerous aspects of Foreign Invested Enterprise's business activities in China. Hundreds and even thousands of tax rulings have been issued by the State Administration of Taxation (SAT). Although there are still loopholes in the system, foreign investors unaware of tax planning methods may face serious penalties or losses due to overpayment.

Another belief is that tax matters in China are negotiable. Foreign investors assume that they can negotiate with the relevant tax authority without any need to understand the SAT rulings. However, negotiations are only possible in cases where the SAT rulings are ambiguous, or where the matter is in fact within the tax authority's discretion to negotiate. It is very important to be aware of and follow the growing number of laws and regulations in the taxation field, since enforcement is being enhanced.

Relevant taxes for foreign invested enterprises in China

1. Value added tax occurs when a seller receives sales proceeds or taxpayers declare imported goods at customs.

2. Consumption tax occurs
- in the case of account sales: at the receipt of sales proceeds in the sales contract
- when sales proceeds have been received in advance: on the date of shipment
- when tax payers import goods: on the date of importation.

3. Resource tax occurs when income is received or goods are shipped.

4. Stamp duty occurs when a certificate is received or a contract is signed.

5. Foreign invested entity income tax is calculated on an annual basis but should be paid in advance quarterly within 15 days and should be declared within five months after the end of every year.

6. Individual income tax (IIT) is usually withheld by employers. In any other case, the individual should report in person. The tax should be paid and reported within the first week of every month.

8. Building tax should be paid as required by the local government, usually per quarter or half year.

7. Vehicle tax should be paid as required by the local government, usually per quarter or half year.

9. Land value added tax should be reported to the tax authority. Property certificates, land use certificates, sales contracts, valuation reports and other relevant information must be provided.

Tax rate on the income of foreign investment enterprises

The enterprise income tax rate charged to foreign investment enterprises and foreign enterprises for the income of their organizations and sites dealing in production and business operations in China is determined based on a tax rate of 30 per cent. With a local income tax rate of 3 per cent added, the total is 33 per cent.

Preferential tax rates and other tax breaks

There is a reduced income tax rate of 15 per cent for foreign investment enterprises in special economic zones or productive foreign investment enterprises founded in economic and technological development zones.
Productive foreign investment enterprises founded in the coastal economic open areas and in the special economic zones or economic and technological development zones of cities benefit from a reduced rate of 24 per cent.

A preferential rate of 15 per cent is available for foreign investment enterprises, which are founded in coastal economic zones, in the special economic zones or economic and technological development zones of cities, or in other regions designated by the State Council, and fall under the categories of energy, communications, harbor, docks or other projects encouraged by the State.

Royalties received by foreign investment enterprises or foreign enterprises from the supply of proprietary technologies used in scientific research, energy resources exploration, development of the communications industry, agricultural, forestry and animal husbandry production, and the development of important technologies are charged at a reduced rate of 10 per cent or even exempt if the relevant department of the State Council for taxation approves.

Tax benefits for FIE

Tax benefits for a FIE are limited to specific areas of investments. The FIE will benefit if the investment occurred domestically in one of China's central or western regions, and the FIE holds 25% or more of the registered capital in the invested company.

China's income tax system

There are two separate tax regimes in China, one for foreign invested enterprises (FIEs) and the other for domestic enterprises. FIEs are privileged with a tax rate of roughly 50 per cent of what domestic companies are charged, and have substantial incentives available before even having to pay any taxes. Even better incentive packages are offered to FIEs established in the five special economic zones (SEZs) and 49 other development zones, most of which are in the fast-growing coastal regions.

Extra tax incentives offered by some localities in China

Various local authorities have offered incentives lacking any regulatory basis to attract foreign investment. They generally exceed authorized levels or SEZ-type incentives. Since these incentives may be challenged by the central government in the future, it is important to be aware of their legality.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.