Enterprise Income Tax (EIT)

Tax rate unification
From January 1, 2008, China began unifying the rates of corporation tax that different business entities were paying. This means that the preferential tax rates that foreign invested enterprises were paying are set to disappear and the standard tax rate will become 25% for all.

Phase-in period
For those enterprises current enjoying preferential tax rates, there will be a phase-in period as follows:
2008 – 18%
2009 – 20%
2010 – 22%
2011 – 24%
2012 – 25%

Tax losses carried forward
Tax losses under the Chinese EIT system can be carried forward for five years but they cannot be carried back.

Tax year
The calendar year is considered to be the tax year, and enterprises can only adopt their own accounting date with the approval of the tax bureau.

Tax filing requirements
• Accounts should be prepared in Chinese and kept for at least ten years.
• FIEs should file quarterly provisional income tax returns and make advanced payment of tax within fifteen days from the end of each quarter.
• An annual return together with audited accounts should be filed within five months after the tax year.
• Related party transactions should be made at arms length and should be disclosed in the EIT annual return. The tax authority can make tax adjustments if a transaction is considered to be non-arms length.

Individual income tax (IIT)

The following are considered to be income in China:
• Wages and salaries
• Income from individual household business
• Income from contracting for or leasing the operation of enterprises or institutions
• Income for personal services
• Income from author’s remuneration
• Royalties
• Interest, dividends and bonuses
• Income from lease of property
• Income from transfer of property
• Causal income
• Other income specified as taxable by the Ministry of Finance

Income tax rates and deductions
Income tax rates are progressive and range from 5% to 45%. Currently, domestic employees calculating taxable income, are entitled to a monthly deduction of RMB 2000 whilst for foreigners this deduction is RMB 4800.

Income tax for foreign workers
Foreign workers domiciled in China and receiving wages and salary from a foreign employer, will pay income tax according to the length of stay of the worker in China during the year. If the worker stays for:
1. Not more than 90 days – exempt from IIT.
2. More than 90 days but less than 5 years – income derived from working in China during the worker’s period of residence in China will be subject to IIT.
3. Over 5 years – After the sixth year, worldwide income will also be subject to Chinese IIT.

Filing requirements for IIT
IIT returns should be filed with the local tax office and tax should be paid on a monthly basis, within seven days after each month.

Withholding income tax
Typically applied to interest, rental, and royalties withholding tax to non-residents is levied on a concessionary rate of 10%.

Value Added Tax (VAT)

VAT applies on importation of movable goods, sale of movable goods and provision of processing and repairing services.

The applicable rates are as follows:
1. 17% - basic rate
2. 13% - Grains, edible plant oil, utilities, publications and certain agricultural products

Goods imported for export
Goods imported for eventual export (after they have been assembled into something else) may also receive a VAT tax refund. The amount of this refund will vary according to the type of goods.

Business Tax (BT)
Business tax applies for those individuals or entities providing services (other than processing and repairing), transferring intangible assets or selling immovable properties. The tax rates that apply vary from 3% to 20% depending on the nature of the services. The majority of services fall within the 3-5% band.

Consumption Tax (CT)
Certain items imported into China by individuals or entities are subject to further consumption taxation. These items include amongst others: Cigarettes and tobacco, liquor and alcohol, cosmetics, skin and hair care products, precious jewelleries, gasoline and diesel oil, motor vehicle.
Rates vary from 3% to 50% depending on the type of item and export sales are also exempt from CT.

Other taxes to watch out for
There are a range of other taxes that foreign entities should be wary of:
• Customs duty
• Land appreciation tax
• Resources tax
• Stamp duty
• Urban real estate tax
• Vehicle and vessels tax
• Deed tax