Quick Guide To Understanding Types of Taxation In China For New International Companies
China is booming with trade opportunities for international companies, regardless of their niche and industry. However, with the trade opportunities coming their way, international companies must abide by the country’s taxation system.
While it may initially seem complex and challenging to understand, working with professional tax services in China will ensure your company functions at its full potential. At the same time, all the tax-related processes are taken care of.
However, the tax system in the country is relatively simple to understand, so here’s everything you need to know:
Types of taxes in China that an international company needs to account for
- Corporate Income Tax (CIT)
These are the standard taxes applicable to the income—the statutory tax rate of 25%. The tax is applicable and valid for local and international shareholders. However, multiple incentives and policies can be utilized to gain deductions, ultimately lowering the overall amount to be paid in CIT.
Here are some particulars to know about CIT:
- If the organisation has an annual turnover under CNY 1 million, then the CIT will be calculated at only 12.5% of the overall turnover.
- If the organisation’s annual turnover exceeds CNY 1 million and is lower than CNY 3 million, then a 20% CIT rate is calculated on 25% of the overall income.
- Organisations operating in industries encouraged by the Government of China have a preferential CIT rate of about 15%. These industries include local research and development, software solutions, integrated circuit enterprises, etc.
- Value-added Tax (VAT)
VAT is the standard tax applied to transactions. It is usually calculated as a percentage of the amount invoiced to purchase goods or services. The standard rate for VAT stands at 13% for most sectors, but it can go as low as 6% for some.
If your organisation registers as a small-scale taxpayer, the applicable VAT will be 3%. There are two types of invoices: general VAT invoices and special VAT invoices. Depending on the extent of VAT reduction, the company can claim it with permission from tax authorities.
- Consumption Tax (CT)
It is a sales-based tax that applies to products that will jeopardise consumers’ health, for instance, tobacco, alcohol, cosmetics, passenger cars, boats, etc. These products can either be manufactured within the country or could be imported from other countries.
The rate at which the tax is applied depends on the type and nature of the product as well. It typically ranges from 1% to 56% on the sales revenue of these products. It is worth noting that some products will be exempted from consumption tax depending on the guidelines provided by the government of China.
- Stamp Tax
The stamp tax is applied to various licenses, accounting books and even contracts. The usual rate varies from 0.005% to 0.1% depending on the type of contract one is entering. The tax is commonly applied to installation and construction contracts, leases of property, transportation of goods, and storage of goods. The stamp duty tax is also applied to loan and finance leasing contracts.
- Withholding Income Tax
The tax is applied to interests, rentals, dividends, royalties and other forms of income from a Chinese source. The usual rate is 10%, which is calculated using the formula:
Tax Payable = Taxable Income X Tax Rate
In case the tax treaty mentions a rate lower than 10%, then the said rate (in the treaty) is applied. Working with a tax services provider can be incredibly beneficial in saving on taxes and being able to continue investing in the country.
Bottomline
Taxation in China is simple and highly specific to ensuring internationally participating organisations can leverage the benefits of setting up their workspace in the country.
Additionally, if you are unsure how to find your way around these taxes, it is highly recommended to take a step back to develop an understanding and proceed. Half-baked knowledge can jeopardise your efforts and cause unexpected delays in project launch, the process and completion.
