Cultural & Business Guide

Paying taxes


The Chinese accounting standards are unique because when they were established, the state was the sole owner of the majority of companies. Therefore, they were mainly created to calculate the inventory of each company. In 2005, Chinese government introduced a revised accounting law and more than 90% of the new Chinese Accounting Standards are taken from the International Financial Reporting Standards (IFRS).

The Chinese business license

There are eight most common forms of company registration in China, namely: State-Owned, Collectively-Owned, Private, Cooperative, Share-Formulated, wholly Foreign Owned Enterprise, Joint Venture, and Representative Office. Among these, the latter three forms are the ones associated with foreign companies. Until today, the most popular type of national Chinese company registration is still the state-Owned Enterprise (Government-Owned Corporation), although after the reforms of 1980s the market share of SOEs is decreasing every year. The most popular forms of private companies include Non-State Owned Enterprise, and for smaller private companies, an Individually Owned or Small Private Company can be formed. When you deal with a Chinese company, you should ask for a copy of the Chinese company’s business license, and double check if the license is authentic. This is the best way to protect your business from fraud, since it is possible to be dealing with a fake Chinese license holder!

The specificity of Chinese taxes

A foreign company must register with Chinese local and national tax bureaus within 30 days after its establishment in order to have its proper status recognized. Once the tax status is approved, general VAT taxpayers must register for VAT purposes with the tax bureaus. Please note that companies not resident in China are not required to register for VAT and a representative office shall apply for tax levying.

Under Chinese law, the financial statements of all businesses have to be audited by a certified public accountancy firm registered in the PRC. Foreign invested enterprises in China are required to prepare annual financial statements in accordance with commercial laws. These statements are the basis for calculating the taxable revenue and distributable profit, as well as other major documents of the annual combined audit/inspection.

In addition to the audit of financial statements, a foreign currency inspection has to be performed each year, since the enterprise has to be in accordance with relevant regulations regarding foreign exchange in the PRC. Each foreign invested company shall prepare numerous sets of documentation to participate in the annual tax clearance, and a combined inspection by various Chinese authorities.

The general rule about the Enterprise Income Tax (EIT) is that foreign companies with an establishment in China are subject to EIT for their activities in China, while foreign companies that do not have an establishment in China need to pay EIT on income derived from their activities in China. The standard EIT rate is 25%, but for high, new, and advanced technology service enterprises the rate is 15%, and generally speaking the Chinese law provides tax reductions for environmental friendly projects, investments in encouraged industries and in R & D.

Withholding tax rates has a wide range of exceptions, which vary depending on the country of origin of the business. In most cases the rate for European companies is 10%, but since it varies consistently, it is important to check. Non-tax resident enterprises are taxed only on China sourced income.

Chinese taxes: good to know

On January 1st, 2008 the current Chinese Enterprise Income Tax Law (EITL) came into effect to prevent unfair competition. Thus, from that moment on, Chinese and foreign enterprises refer to the same tax scheme.

Moreover, on August 1st, 2013, China’s new VAT reform was extended nationwide, covering sale and import of goods, as well as the provision of processing, replacement and repair services; other modern services, transportation services and leasing of tangible goods, which are now are also subject to VAT.

Please note that besides all the forms of foreign companies already mentioned above, also individuals such as foreign private investors, foreign expatriates in China and other categories of people doing business in China are all subject to tax in China. Moreover, you also need to pay tax on China sourced income i.e. internet, rent, royalties etc.

There are four main categories of taxes in China: taxes on turnover, taxes on income, taxes on property and transactions, and taxes on natural resources. Moreover, the following is a brief catalogue of Chinese taxes. Taxes on turnover include value added tax (VAT), business tax (BT), consumption tax (CT). Taxes on income comprise: enterprise income tax (EIT) - adapted for foreign enterprises, and individual income tax (IIT)-adapted for foreign individuals. It needs to be pointed out that purchase business tax is not deductible from sale business tax or sale VAT.

Urban real estate tax vehicle and vessel usage tax, stamp tax land, value-added tax, and contractual tax are all part of taxes on property and transactions. Additionally, resource tax, and land usage due are taxes and dues on natural resources.

In conclusion, Chinese taxation is a complex topic and legislation is constantly changing. To give an example, in order to avoid double taxation for business, the Chinese Government has launched a complex reform for unifying gradually the business tax and VAT system since 2012. So be aware that the new development of Chinese taxation is very beneficial to your business.

External links

Project 2014-1-PL01-KA200-003591