Foreign enterprises with their head offices in China are taxed on their worldwide income. Tax credit is allowed for income taxes paid to other countries on certain incomes. Other foreign enterprises doing business in Shanghai and non-resident enterprises are taxed on income derived from China source only.
There are two systems of tax authorities in China, namely, National Tax Bureau and the Local Tax Bureau. In general, the National Tax Bureau is responsible for assessing and collecting taxes for enterprises and corporations, while the Local Tax Bureau is responsible for individual income taxes and property taxes.
MAJOR TAXES ON FOREIGN ENTERPRISES
Foreign enterprise taxpayers can be classified into (1) Foreign investment enterprises, which include equity joint ventures, cooperative / contractual joint ventures and wholly foreign-owned enterprises and (2) Foreign enterprises, which include Permanent representative offices and branches.
Foreign invested enterprises and foreign enterprises doing business in China are liable to the following types of taxes:
1. Income Tax
2. Transaction Tax : Value added tax, Consumption tax, Business tax
3. Other taxes: Vehicle and vessel license tax, Stamp tax, Property tax, Deed tax
In addition, custom duties are levied on imports and exports and individuals working in China are liable to individual income tax.
TAXABLE INCOME ¡V income tax
There is in general no distinction between profits for accounting purposes and tax purposes, since all accounts have to be prepared according to various legislations on accounting. However, for certain categories of expenses, for example entertainment and traveling, there are maximum amounts allowable and for certain categories of expenses, for example depreciation, organization expenses, strict line shall apply.
The tax year is calendar year but a foreign enterprise may apply to the tax authorities to adopt its own fiscal year as the tax year.
Income Tax Rate
The current income tax rate is 30% and local income tax is 3%, making a total of 33%.
Foreign enterprises engaged in manufacturing in Shanghai pay income tax at a reduced rate of 24%. Those established in the economic and technological development zones of Shanghai and Pudong New Area pay income tax at a reduced rate of 15%. In some areas, tax holidays still apply to foreign enterprises engaged in preferred industries.
Fixed assets with a useful life of one year or more may be depreciated. Fixed assets with cost less than RMB2,000 can be written off immediately. Straight-line method shall be applied according to the law. There are regulations providing the minimum useful lives for different categories of assets. Residual value should not be less than 10 %.
Operating loss for enterprises carrying on business in Shanghai can be used to set-off taxable profits in the future years for up to five years.
(1) Value Added Tax
Enterprises engage in the business of selling commodities, repair and maintenance services or import and export business in China are subject to value added tax. The standard rate for value added tax is 17%, but the rate for certain basic commodities such as grain, cooking oil, running water, forage, fertilizer, pesticide, and farming machinery is 13%.
(2) Consumption Tax
Production, processing and importation of the following 11 commodities in China are subject to consumption tax: tobacco, alcoholic drinks or alcohol, cosmetics, skin and hair care products, jewellery, fireworks, gasoline, diesel, automobile tire, motorcycle and motorcar. Consumption tax is calculated in accordance with quantity (e.g. gasoline) or according to the fixed scheduled rates (e.g. the rate for motorcar with its engine cylinder capacity under 2,200ml is 8%).
(3) Business Tax
Enterprises engage in transportation, post and telecommunication, finance and insurance, construction. art, sports, entertainment, and services, or transfer of intangible assets and immovable properties are subject to business tax. Business tax rate is 3% or 5%. But the tax rate for entertainment sector is 10% or 15%.
TAXABLE INCOME ¡V Other taxes
These taxes are levied on the taxpayers according to a fixed schedule. The scheduled rates may be amended from time to time, for current information, please check with the relevant Authorities
(1) Vehicle and Vessel License Tax
Vehicles owned and used by foreign invested enterprises are subject to Vehicle and Vessel License Tax
(2) Stamp Tax
Stamp taxes are levied on contracts made in China in respect of purchases and sales, processing contracting, engineering project, asset leasing, transportation, storage and warehouse, loan, asset insurance, technology contract, transfer of property rights, accounting ledger, royalty license. The minimum rate of a stamp tax is 0.005% and the maximum is 0.1%. royalty license and accounting books (not including wage records) taxed on per piece basis, at RMB5.
(3) Property Tax
(a) The tax is levied at an annual rate of 1.2% on the original value of the real estate, after 20% is deducted therefrom.
(b) The tax rate is 12% if it is levied on the rental income.
(c) Newly constructed houses, which are built or purchased by the foreign-invested enterprises in Pudong New Area and Economic and Technological Development Zones, shall be exempt from real estate tax for 5 years as of the month of completion of construction or purchase.
(4) Deed Tax
Purchaser or acquirer of land and building is subject to deed tax. The transfer of ownership of land and building refers to:
(a) The granting of land use right by the state (not including the transfer of management right of the rural collective land);
(b) Transfer (including selling, bestowal and exchange) of land use right;
(c) Sale and purchase of buildings;
(d) Bestowal of buildings
(e) Exchange of Buildings.
(f) The current tax rate is 3-5%.
Foreign enterprises without a permanent establishment in China are subject to a withholding tax of 20% on its profits, interests, rentals, royalties and other income sourced in China. Double tax agreements (DTA) may reduce the rate.
Withholding tax on Profit, Interest, Rental and Royalty
A 20% withholding tax shall be levied on the income derived from profits, interests, rentals, royalties and other sources in China by foreign enterprises that have no establishments in China. However they enjoy a reduced withholding tax rate of 10% in Shanghai.
Other types of concession and preferential treatment in terms of income tax reduction or exemption may be granted upon approval of municipal government in accordance with current policies on enhancement of industry and development.
Dividends from foreign investment enterprises are excluded from the taxable income of another foreign investment enterprise.
Dividends paid to foreign shareholders (individuals or corporation) at present are not subject to income tax or withholding tax.
For tax purposes, there is no distinction between capital gains and other types of revenue received in China. Therefore, foreign shareholders are subject to foreign enterprises income tax on capital gains at 20% (withholding tax) from the sales of their investments in foreign investment enterprise. No indexation allowances will be taken into account.
Taxation on Partnership and Joint Venture
Partnership is uncommon in China, but cooperative joint venture (CJV), which is not a legal entity on its own, is widely used in China. A CJV is not a legal entity and its partners carry unlimited liabilities. The foreign partner of a CJV is taxed on its share of pretax profits according to rules applicable to a foreign enterprise.
Double Taxation Treaty
China maintains over 60 DTAs with its trading partners. In general, China adopts a mixed model of OECD and UN, with emphasis on the right to tax when the income is derived from or in China.