Income Tax For Foreign-Invested Enterprises and Foreign Enterprises

General Rules

There are two main categories of taxpayers for the payment of income tax by foreign-invested enterprises and foreign enterprises: 

i) the Foreign-invested enterprise category includes Sino-foreign equity joint ventures, Sino-foreign cooperative joint ventures and wholly foreign-owned enterprises.  Foreign-invested enterprises pay taxes on all income originating from their business in China and overseas if they have headquarters in the PRC.  

ii) the Foreign enterprise category includes foreign companies, enterprises and other economic organizations with branches in China which are engaged in production and/or business, or have income that originates from their business in the PRC, even without establishing branches in the PRC. Foreign enterprises pay taxes only on the income originating from their business in China.

A proportional tax rate of 33% is adopted for income tax for foreign-invested enterprises and foreign enterprises, of which 30% is central level income tax and 3% local level. In terms of dividends, interest, rentals, royalties and other income originating from domestic sources gained by the foreign enterprises without organizations or branches in China, 20% of the taxable income amount will is the standard.

Main Preferential Terms For Tax Deduction/Exemption

i) Those foreign-invested enterprises established in special economic zones, foreign enterprises involved in production and operation with organizations and branches in the special economic zones, and foreign-invested enterprises established in economic and technology development zones as manufacturers, only have to pay 15% of their taxable enterprise in income tax.

ii) Those foreign-invested manufacturing enterprises that have operated for ten years or more are exempt from enterprise income tax for the first and second year since the earning of profits and only have to pay 50% of their enterprises income taxes, since the third to fifth year since the earning of profits, however petroleum, natural gas, rare metal and precious metal resources exploration projects are an exception to this rule.

iii) If the foreign investors of foreign-invested enterprises use the profits earned by the enterprises to directly reinvest in the said enterprises, to increase the registered capital or use the said profits as investment capital to setup other foreign-invested enterprises and have operated such an enterprise for no less than 5 years, they will receive a rebate amounting to 40% of their duly paid income tax.

iv) The income tax amount that a foreign-invested enterprise has paid overseas on income that has originated from domestic (within China) sources will be deducted from that enterprise's income tax, but the deducted amount shall not exceed the total taxable amount of their income from overseas sources as calculated according to the Chinese law.

Personal Income Tax

Individuals with residence status in China (i.e. those individuals who live in China for family or economic reasons) or individuals without resident status who have lived in China for 1 year shall pay personal income taxes on all income from domestic and overseas sources.

Individuals who do not have resident status in China but have lived in China for more than 1 year and less than 5 years may only pay personal income tax on total income earned from working for an enterprise or company within China, if the relevant taxation authorities have approved.  Those who have lived in China for more than 5 years shall pay personal income tax on all incomes earned from both domestic and overseas sources since the 6th year.

Individuals who do not live in China PRC and without residence status in China, or those who have lived in China for less than 1 year and without residence status in China, shall pay personal income taxes for the income they have earned from within China.

Detailed taxable items and tax rates for personal income taxes are as follows.

For salaries there is a scale of tax ranging from 5% to 45%.

For incomes earned by individual industrial and commercial entities as well as the incomes earned from sub-contractual operation and chartering operations for enterprises and institutions the applicable tax rate is 5% to 35%;

For service industries, there is a three-tier rate of 20%, 30% and 40%;

For writers, their income is subject to a 20% proportional tax rate and a 30% deduction to the taxable amount, amounting to a real rate of 14%;

Royalty incomes, incomes earned from interest, dividends and bonuses, property lease incomes, property assignment incomes, occasional incomes and other incomes as defined by the finance sectors of the State Council to be taxable are taxed at a rate of 20%.

Value Added Tax (VAT)

General Rules

1) The companies and individuals engaged in the sale of goods or in providing services such as processing, repairing and/or supplying of spare parts and importation of goods within China are China's VAT taxpayers, who are divided into general taxpayers and small-scale taxpayers.

2) The two tax rates for these two levels of taxpayer are 1 7% and 13% respectively.  The calculation formula for their taxable amount is:

Taxable Amount = Taxable Amount for Period Sales Items - Taxable Amount for Period Purchased Items

If the period sales items taxable amount is less than the period purchased items taxable amount and insufficient for deduction, the insufficient part may be carried over for deduction.

3)The tax rate applicable to the small-scale taxpayers is 6%.  No purchased items taxable amount shall be deducted when calculating the taxable amount in this case.  The calculation formula is:

Taxable Amount = Sales Amount x Tax Rate

4)The taxable amount for the importation of goods by taxpayers shall be calculated based on the constituent taxable prices and the applicable tax rates.  No taxable amount shall be deducted in this case. The calculation formula for the taxable prices and taxable amount is:

Taxable Price = Dutiable Price for Custom Duty + Custom Duty + Consumption Tax

              Taxable Amount = Taxable Price x Tax Rate

5) The tax rate for the exportation of goods by the taxpayers is 0%, except for the cases as otherwise specified by the State Council.

Main Preferential Terms For Tax Deduction/Exemption

1) The following items exempt from VAT:

l         Imported instruments and equipment to be directly used for scientific researches, scientific experiments and education;

l         Imported equipment freely provided by the foreign governments and international organizations as an aid;

l         Equipment required to be imported for the use of processing trade, assembling trade and compensation trade;

l         Sales of their used goods;

l         Items in compliance with the categories of advantage industries and advantage projects run with foreign investment in the provinces, autonomous regions and municipalities in the middle and western regions in China and the equipment and technologies imported with  funds within the total investment amount;

l         Imported equipment with funds provided by the loan projects by foreign governments and international financial organizations;

l         Construction products produced with offscum according to the state regulations;

l         Equipment and technologies imported by the foreign-invested enterprises, foreign-invested R&D centers, high-tech and exportation-oriented foreign-invested enterprises duly established under the Encouraged category, with their own funds beyond the total investment amount, to be used in their technological renovation, within the approved production and business scopes;

l         Equipment and technologies imported with funds within the total investment amount for the foreign-invested projects and Chinese-invested projects encouraged and supported by the government for development;

2) The VAT tax rate for the mining and dressing products for metal minerals and non-metal minerals are adjusted from 17% to 13%.                                

3) The VAT tax rate for the crude oil and natural gas exploited from the Sino-foreign cooperative petroleum/natural gas fields is 5% and are taxed based on the real goods.  No taxable amount for purchasement items are to be deducted when calculating the VAT.  No taxes are to be returned when the said crude oil and natural gas are exported.

4) No VAT is to be paid for the gold production links.

 Resource Tax

General Rules

The taxpayers for resource tax are the enterprises, companies and individuals exploiting taxable mineral products and producing salt within the PRC.  Resource taxes are calculated and taxed based on the product categories and quantities. The calculation formula is

Taxable Amount = Taxable Quantity x Unit Tax Amount

The unit tax amount is applicable to the rate range taxable amount standard as detailed in Table 4-1. The specific applicable taxable amount is defined within the specified taxable amount range in accordance with the resource status of the taxable products exploited or produced by the taxpayers.

Table 4-1 Standard Ranges of the Taxable Amount for Resource Tax Items

Main Preferential Terms For Deduction/Exemption

1 ) If the taxpayer incurs significant losses from accidents or natural disasters and so forth during the course of exploiting or producing the taxable products, the people's government at provincial, autonomous region or municipality level shall reduce their level of tax or exempt them from tax according to the specific situation.

2) A 40% deduction is applicable to the taxable amount of resource tax for iron ores of independent mines, which means 60% of the standard taxable amount is the actual rate.

3) 40% of the standard taxable amount is applicable to the resource tax for iron ores of the mines of the metallurgical joint enterprises.

4) A 30% deduction is applicable to the resources tax for non-ferrous metal minerals, which means 70% of the standard taxable amount is the actual rate.

5) No resource taxes are required for the crude oil and natural gas exploited by Sino-foreign cooperative petroleum/natural gas fields.

 Vehicle or Boat License Plate Tax

This type of tax only applies to foreign-invested enterprises, foreign enterprises, enterprises invested and established by the nationals and overseas Chinese from Hong Kong, Macao and Taiwan, overseas Chinese from Hong Kong, Macao and Taiwan and so forth. These taxpayers are the users of the vehicles or boats to be taxed. Boats that are taxed with tonnage by customs authorities, according to the relevant regulations, are exempted from this type of tax.

The taxable amount standards for the vehicle/boat license plate tax respectively are 'taxable amount standards for vehicle license plate tax' and 'taxable amount standards for boat license plate tax'.  The taxable amount standard for vehicle license plate tax refers to the quantity or net tonnage of the taxable vehicles, while that for boat license plate tax refers to the net tonnage or burdening tonnage of the taxable boats.

 
Stamp tax

Stamp tax refers to a tax levied on contractual documents that are established in the course of economic of accepted activities.

Those taxpayers liable for stamp tax are enterprises, companies and individuals who have established or accepted economic certification documents within China. The taxpayers for each type of contract are the contract establisher, that for property assignment credentials are the credential establishers, that for business accounting books are the establishers of the business accounting books and that for right and license certificates are the certificates obtainers.

There are 13 taxable items for stamp tax. The value, fees, incomes recorded in the taxable certification documents or the number of credentials shall be the basis for calculating the taxable amount. The stamp tax is to be calculated and paid based on the applicable tax rate or taxable amount standard according to the relevant tax law.

Deed tax

Deed tax in China refers to a type of tax levied on the assignee, when land or property rights ownership is being assigned.

The taxpayers of the deed tax are enterprises, collective enterprises, companies or individuals transferring land or property rights ownership within China.

The abovementioned transfer of land or property rights ownership includes the following actions:

a) transfer of state-owned land-using rights;

b) transfer of land-using rights (including sale, bestowal and exchange of such and excluding that of sub-contractual operations right of rural collective land);

c) Sale, bestowal and exchange of property.

Transfer of land or property rights ownership in the following ways is deemed to be the transfer of land-using rights or sale/bestowal of property, which are to be levied for deed tax:

a) Evaluation and investment as well as becoming a shareholder based on the land or property rights ownership;

b) Using the land or property rights ownership as repayment of debt;

c) Receiving of land or property rights ownership as a prize;

d) Receiving of land or property rights ownership by way of pre-purchase or prepayment for property construction fee for property to be built by raising funds.

e) The deed tax is applicable to the 3% to 5% ranges of proportional tax rates, with specific rates to be determined by the people's governments at provincial level within the specified ranges.

Urban real estate tax

Urban real estate tax is to be paid by the property owner, or by the pledge receiver for the property being pledged.   If the property owner or the pledge receiver is not in the same city or

the property right is yet to be acknowledged and the relevant lease/pledge disputes are yet to be settled, such tax shall be reported and paid by the entrusted custodian or the user.  At present, this type of tax is only applicable to foreign-invested enterprises, foreign enterprises, foreign individuals, overseas Chinese and nationals from Hong Kong, Macao and Taiwan.

Customs duty

Customs duty is a type of tax levied on goods and articles entering or exiting China's borders.  The taxpayers for customs duty are the consignees of the goods allowed to be imported, and the consignors of the goods who have requested the goods be exported.  The former shall pay import tariffs and the latter, export tariffs.

Import tariffs are categorized into normal tariff rate and preferential tariff rate.  The normal tariff rate is applicable to imported goods originating from countries or regions without reciprocal agreements signed with China, (excluding those that have been specially approved by the Tariff Rules Commission of the State Council).  The preferential tariff rate is applicable to imported goods originating from countries or regions with reciprocal agreements signed with China. The widely-adopted rate at present is the preferential tariff rate.

China adopts the preferential rate as its major import tariff rate and uses the differential tariff rate to reflect the nation's economic and foreign trade policies.