Business Taxes in China

Tax is never an easy topic for businesses but it is too essential to be ignored. For a Canadian
company, it is of great importance to understand its tax liabilities when doing business in
China. Canadian companies are recommended to seek professional advice at an early stage in
their China business planning in order to avoid any violation of the local laws and regulations
and to take advantage of any tax relief or exemptions which the business may be eligible for.
Tax revenues in China are collected and split between central and local government. The State
Administration of Taxation (SAT) is the highest tax authority in China and it has SAT offices at
the provincial and city levels responsible for collection of value added tax (VAT), consumption
tax, business tax, corporate income tax and other specialized taxes. There are also local tax
bureau offices reporting to the local governments and responsible for collecting business tax,
individual income tax, and other specialized taxes. In addition, imports and exports are
subject to customs duties, and notably, VAT and consumption tax which are collected by the
General Administration of Customs and its subsidiaries around the country.
Every company has to register with both the SAT and the local tax bureau, and Customs as
required. Given the complexity of the taxation structure, tax regulations can be interpreted in
different ways by different offices and officials, even among the different districts of the same
city. Different offices in different regions may have different interpretations towards tax
regulations released by the central government, and their implementation efforts may vary.
Check with local tax administrations or reputable service providers for the latest tax policy in
the location where you are based.
Major taxes that Canadian companies should be aware of include corporate income tax,
business tax, withholding tax, value-added tax and consumption tax. General information
about each tax can be found below.

Corporate Income Tax

Generally speaking, the corporate income tax is a tax against profits. In the past, there used
to be two different corporate income taxes applied for domestic enterprises and foreign
invested enterprises. Enacted on 16 March, 2007, the Corporate Income Tax Law unified the
treatment of the corporate income tax for domestic and foreign enterprises. As a result, the
income tax rate for both domestic and foreign enterprises is now 25%. Small companies can
pay a reduced rate of 20% in certain cases.
The new Corporate Income Tax Law offers tax incentives to certain enterprises in the hightech, infrastructure, agriculture, environmental protection and energy saving industries. The
tax rate can be reduced to 15%. Enterprises need to be qualified by relevant government
authorities to benefit from the tax incentives.
From January 1, 2010, representative offices are subject to corporate income tax on their
taxable income, as well as business tax and VAT. ROs are required to keep proper accounting

records and declare their taxable income to tax authorities within 15 days at the end of each
quarter. Failure to be compliant with the regulations will result in penalties.

Withholding Tax
The withholding tax is a tax levied on China-derived income that non-resident enterprises
make by providing services to companies based in China. Taxes will be deducted at the source
from your gross invoice amount. The Chinese companies who you deal with and who remit
the fund to your overseas bank account have the responsibility to withhold the amounts and
pass to the tax bureaus. The withholding income tax rate for non-tax resident companies is
10%.
Income subject to withholding taxes include: income from sales of goods, income from
services provided, income from technology transfer, dividends and profits, income from equity
investment, interests, rentals, royalties and income from donations.

Value-added Tax (VAT)

VAT applies to all enterprises and individuals engaged in the sales of tangible goods,
provisions of processing, repairs and replacement services, and import of goods in China.
Except the import VAT which is collected by Chinese Customs on behalf of the SAT, the VAT
revenue is shared between the central government and local governments (75% vs. 25%). In
January 2009, Chinas VAT regime shifted from production-based to consumption-based,
which means in most cases companies can offset the VAT amount paid on newly purchased
machinery and equipment against VAT collected when they sell their products.
The VAT rate is generally 17% or 13% for some goods. For small-scale taxpayers the VAT
rate is 3%.
From January 1st, 2011, Shanghai formally launched the pilot program to replace the
business tax (BT) with VAT in the transportation industry and certain modern service sectors.
The effort marked Chinas first step towards resolving the issue of duplication taxation on
goods and services. Beijing has officially submitted its application to the Ministry of Finance
and the State Administration of Taxation and is expected to participate in the pilot in the near
future.

Business Tax (BT)

Business tax is a tax applied to all enterprises and individuals engaged in providing taxable
services, transferring intangible assets or selling immovable properties in China. Business tax
is collected by the local tax bureau every month. Business tax rates vary from industries.
Industry - Tax Rate
Communications and transportation - 3%
Building work - 3%
Financial and insurance business - 3%

Post and tele-communication - 3%

Culture and sports - 3%
Entertainment - 5-20%
Services - 5%
Transfer of intangible asserts - 5%
Sales of immovable properties - 5%
Note that the business tax is not levied on dividends paid overseas.
Consult with a professional service provider, particularly if your business is involved in selling
both goods and services, since it is more complicated to justify whether your business is
subject to business tax or VAT.

Consumption Tax
Consumption tax mainly applies to luxury goods and non-necessities, products which could be
harmful to health or environment (e.g. tobacco, alcohol, fireworks), high-energy consumption
and high-end products, non-renewable and non-replaceable petroleum products. Consumption
tax rates can vary from 1% to 45%.

Other Specialized Taxes

Besides the tax categories mentioned above, there are a number of taxes that may be
applicable to foreign enterprises or expatriates when doing business in China, including urban
construction and maintenance taxes and education surcharge, land appreciation tax, vehicle
and vessel usage license plate tax, stamp tax, deed tax and custom duties.
If you have any questions or would like to learn more about the services offered by the Trade
Commissioner Service in China, please feel free to contact us.

Footnotes
Footnote 1
Small-scale taxpayers refer to those with sales volume less than RMB500,000 for
enterprise engaged primarily in the production of goods or the provision of taxable
services, and RMB800,000 for enterprises engaged in the wholesaling or retailing of
goods.
Footnote 2
As stipulated by Enterprise Income Tax Law by the Peoples Republic of China, nonresident enterprise refers to an enterprise established in accordance with the law of
a foreign country (region) whose actual administration institution is located outside
the territory of the Peoples Republic of China but with organizations or
establishments within the territory of the Peoples Republic of China; or without

organizations or establishments within the territory of the Peoples Republic of China

but which have income derived from the territory of the Peoples Republic of China.
Footnote 3
VAT exceptions include: self-produced agricultural products sold by agricultural
producers, contraceptive medicines and devices, antique books, importation of
instruments and equipment directly used in scientific research, experiment and
education, importation of materials and equipment from foreign governments and
international organizations as assistance free of charge, articles imported directly by
organizations of the disabled for special use by the disabled, and sale of goods which
have been used by the sellers.