Major Taxes

Like other countries in the world today, China adopts a compound tax system of multiple tax types. Under the current system, 18 types of tax are divided into the following categories according to the object of taxation:

Income taxes: enterprise income tax, individual income tax

Turnover taxes: value-added tax, consumption tax, tariff

Property taxes and act taxes: houseproperty tax, deed tax, vehicle and vessel tax, stamp tax, city and town land use tax, land value increment tax, tonnage tax, resource tax, urban maintenance and construction tax, vehicle purchase tax, farmland conversion tax, tobacco tax, environmental protection tax

Here’s an overview of the five major tax categories.

Corporate Income Tax

Enterprises and other organizations that have obtained income within the territory of China are responsible for payment of corporate income tax in accordance with regulations.

Enterprises are divided into resident enterprises and non-resident enterprises. Resident enterprises are enterprises which are set up in China in accordance with law, or which are set up in accordance with the law of a foreign country (region) but which are actually under the administration of institutions in China. Non-resident enterprises are enterprises which are set up in accordance with the law of a foreign country (region) and whose actual administrative institution is not in China, but which have institutions or establishments in China, or which have no such institutions or establishments but have income generated from inside China.

The statutory tax rate for resident enterprise income obtained both within and outside Chinese territory is 25 percent. For non-resident enterprises that have institutions or establishments within Chinese territory, the statutory tax rate of 25 percent applies to the income of those institutions or establishments obtained within the Chinese territory, as well as to the income obtained from outside Chinese territory but in actual relation to the institutions or establishments within China. For non-resident enterprises that have no institutions or establishments inside China, or that have institutions or establishments inside China but whose incomes have no actual relation to those institutions or establishments within China, it shall pay enterprise income tax on the incomes derived from China at the reduced rate of 10 percent (a lower tax rate agreed upon or tax exemption under applicable tax treaties, if any, shall be enforced).

Enterprise income tax is calculated according to the tax year, beginning on January 1 and ending on December 31 of the Gregorian calendar. Enterprise income tax shall be prepaid on a monthly or quarterly basis, and final settlement shall be carried out at the end of the year.

Individual Income Tax

On January 1, 2019, China established a comprehensive and classified individual income tax system that is fairer and more reasonable than its predecessor. It has further clarified the definition of and criteria for “resident individual”, adjusted and optimized the structure of tax rates, raised basic deduction levels for the income tax, set up special expense deductions, adjusted the tax reporting system, set up the credit mechanism, and  introduced the anti-tax avoidance clause for individuals.

An individual who is domiciled in China, or an individual who is not domiciled in China but has resided in China for an aggregate of 183 days or more within a tax year, shall be regarded as a resident individual. Income received by a resident individual from within China or overseas shall be subject to individual income tax in accordance with laws. In addition, according to the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China, for an individual who is not domiciled within the territory of China, if the person resides within Chinese territory for 183 days or more per year for less than six consecutive years, the person shall be exempted from individual income tax for incomes derived from outside the Chinese territory and paid by entities or individuals outside the Chinese territory after filing with the competent tax authorities; if an individual is absent from China for more than 30 days in any year in which he/she resides in China for 183 days or more, the consecutive years when he/she has resided in China for 183 days or more shall be counted anew.

An individual who is not domiciled in China and does not reside in China, or an individual who is not domiciled in China but has resided in China for less than an accumulated 183 days within a tax year, shall be regarded as a nonresident individual. Income received by a non-resident individual from within China shall be subject to individual income tax in accordance with laws. According to the Regulations for the Implementation of the Individual Income Tax Law of the People’s Republic of China, for an individual who is not domiciled within the Chinese territory, if he/she has resided within China for no more than 90 days in a tax year, his/her income that is derived within the territory of China and paid by an employer outside the Chinese territory but not borne by the employer’s institutions or establishments within the territory of China shall be exempted from individual income tax.

The individual income tax year begins on January 1 and ends on December 31 of the Gregorian calendar. For comprehensive income in excess of the specified amounts, seven-level progressive tax rates ranging from 3 percent to 45 percent shall apply; for income from business operation in excess of the specified amounts, five-level progressive tax rates ranging from 5 percent to 35 percent shall apply; for income from interest, dividends or bonuses, income from leasing of assets, income from transfer of assets, and incidental income, a flat tax rate of 20 percent shall apply. (A lower tax rate agreed upon or tax exemption under applicable tax treaties, if any, shall be enforced).

For foreign nationals, the following categories of income are temporarily exempted from the individual income tax: (1) dividends and bonuses obtained from foreign-invested enterprises; (2) wages and salaries that are paid to foreign experts in accordance with relevant regulations of China; (3) foreign persons who qualify as resident individuals may apply for tax exemptions on housing subsidies, language training fees, child education expenses, etc; or, they may opt to enjoy special expense deductions from the individual income tax from January 1, 2019, to December 31, 2021. Regarding item (3), once a foreign national chooses one or the other, he/she may not change that decision within the tax year. The validity period of preferential policies for foreign individuals such as allowances and subsidies will be extended to December 31, 2023.

Value-added Tax (VAT)

On May 1, 2016, China’s business tax was altogether replaced by the value-added tax (VAT). Those subject to the VAT include organizations and individuals that sell goods, provide processing, repair, replacement and marketing services, manage intangible assets or real estates, or import goods within the territory of China. Besides the rate of 0, there are three value-added tax rates, 13 percent, 9 percent, and 6 percent. For small-scale taxpayers, the VAT rate is 3 percent, except as otherwise provided. Customs is responsible for collecting VAT on imports. The assessable periods for VAT payment are one day, three days, five days, 10 days, 15 days, one month or one quarter.

From 2017 to 2022, China introduced a series of reform measures to simplify the rate structure and reduce VAT rates, with supporting policies including input deductions for domestic passenger transport services, additional deductions for production and consumer-oriented services, and the implementation of the VAT credit refund system. Since then, the efforts to enhance VAT credit refund have been stepped up. From April 1, 2022, newly added credits of micro and small enterprises and enterprises in manufacturing, research and technical services, electricity, heating, gas and water production and supply, software and information technology services, ecological protection and environmental governance, and transportation, storage, and postal services will be fully refunded on a monthly basis and outstanding VAT credits will be refunded in one lump sum. From July 1, 2022, the scope of such policies is extended to cover enterprises in the following industries: wholesale and retail; agriculture, forestry, animal husbandry, and fishery; accommodation and catering; resident services, repairs and other services; education; health and social work; and culture, sports and recreation.

Tariffs

For goods permitted to be imported and exported, the customs shall levy tariffs in accordance with relevant laws and administrative regulations. The taxpayers of tariffs on imported and exported goods are the consignees of imported goods and consigners of goods for export.

The following highlights import tariffs. In recent years, China has taken the initiative to introduce a series of new measures to reduce import tariffs. In 2018, China proactively reduced the most-favored-nation import tariff rate, making substantial tax reductions on pharmaceuticals, automobiles and auto parts, high-demand consumer goods, and certain industrial products. The tariff rate fell to 7.5 percent from 9.8 percent in 2010 on the whole. In July 2021, China fulfilled its tariff concession commitments under the expansion agreement of the WTO’s Information Technology Agreement, and the tariff was reduced to 7.4 percent on the whole. In addition, China imposes provisional tariffs lower than the most-favored-nation rates on certain imported goods. Since January 1, 2022, China has imposed provisional import tariffs on 954 items.

As of the end of May 2022, China’s agreements on the prevention of double taxation had covered 112 countries and regions. In addition, China has signed three multilateral tax conventions and 10 tax information exchange agreements.

Consumption Tax

Organizations and individuals engaged in the production, consigned processing and import of taxable consumer goods within the territory of the People’s Republic of China, as well as other organizations and individuals selling taxable consumer goods determined by the State Council, are responsible for paying consumption tax in accordance with laws. Commodities subject to the consumption tax fall into 15 major categories: cigarettes, liquor, high-end cosmetics, precious stones and jewelry, firecrackers/fireworks, petroleum products, motorcycles, cars, golf balls and golf equipment, luxury watches, yachts, disposable wooden chopsticks, solid wood flooring, batteries, and paints/varnishes. Consumption tax rates are either flax or lump-sum tax rates. The amount of consumption tax payable shall be calculated by the ad valorem, specific tax, or composite method (combining the ad valorem and specific tax methods). Customs is authorized to collect consumption tax on taxable imported consumer goods. Taxpayers importing taxable consumer goods must pay the applicable taxes within 15 days of the issuing of the Customs Consumption Tax Pay-In Warrant by Customs.

China’s competent department of taxation is the State Taxation Administration directly subordinate to the State Council. It is responsible for nationwide tax collection management. The Customs of the People’s Republic of China levies customs duties and other taxes and fees on goods allowed to be imported and exported, as well as inbound and outbound articles in accordance with laws. The General Administration of Customs administers all customs across China in a unified manner.