1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
China has a multi-level tax regime which reflects its complex economic and social structures. This regime encompasses multiple taxes which are collected and administrated by governments at different levels.
Specifically, China's tax regime consists of a number of taxes, including:
- value-added tax (VAT);
- enterprise income tax;
- individual income tax;
- consumption tax;
- tariffs;
- resource tax;
- property tax;
- land use tax;
- land value-added tax;
- stamp tax;
- vehicle tax; and
- vessel tax.
The collection and administration of these taxes are subject not only to unified regulations at the national level, but also to specific implementation at the local level. For example:
- taxes such as VAT and enterprise income tax are mainly collected and administrated by the central government; and
- taxes such as property tax and land use tax are more often the responsibility of local governments.
In addition, China's tax regime enshrines the principle of hierarchical management. The central government is responsible for formulating tax policies and regulations, while local governments conduct specific tax collection and administration:
- based on policies and regulations released by the central government; and
- informed by the actual situations in their respective regions.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
For resident enterprises in China, the taxes and tax rates can be broadly classified into three categories, as follows:
- Turnover tax: This encompasses:
-
- VAT, which is levied on the value-added amount realised by units and individuals that:
-
- sell goods;
- provide processing, repair or maintenance services; or
- import goods;
- city maintenance and construction tax, which is calculated according to law based on the taxpayer's actual VAT and consumption tax payments; and
- the education surcharge - an additional fee imposed on units and individuals that pay VAT and consumption tax.
- Income tax: This encompasses:
-
- enterprise income tax, which is levied on business income and other income derived by enterprises and other organisations that earn income within China; and
- individual income tax, which is levied on personal income, with enterprises required to withhold and remit it on behalf of employees.
- Other taxes: These include:
-
- stamp duty;
- resource tax;
- property tax;
- urban land use tax; and
- vehicle and vessel tax.
Depending on specific business operations and circumstances, enterprises may also be subject to taxes such as:
- consumption tax;
- land VAT;
- vehicle purchase tax; and
- deed tax.
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
Article 5 of the Enterprise Income Tax Law states that:
The balance after deducting the non-taxable income, tax-exempt income, various deductions as well as the permitted remedies for losses of the previous year(s) from an enterprise's total amount of incomes of each tax year shall be the taxable amount of income.
The taxable base of an enterprise is thus its total income in each tax year minus:
- non-taxable income;
- tax-exempt income;
- various deductions; and
- a permitted amount of losses in previous years made good.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
In China, the nature of taxable income affects its tax treatment, with different types of taxable income often following different tax regulations and preferential policies.
Asset income:
Dividend and bonus income:
- Individual income tax: For individual investors, the tax treatment of dividend and bonus income obtained from listed companies varies based on the holding period. For dividends from non-listed companies and dividends and bonuses paid by foreign-invested enterprises to foreign individuals, there may be different tax preferential policies or agreed tax rates.
- Enterprise income tax: Equity investment income such as dividends and bonuses among resident enterprises can be treated as tax-exempt income and excluded in the taxable income of the enterprise under certain conditions (eg, where the holding period exceeds 12 months).
Interest income on government bonds: Interest income on government bonds is generally treated as tax-exempt income and excluded from taxable income.
Fund income: Income obtained by individual investors from fund distributions, such as dividends and bonuses from stocks, is not subject to the withholding and payment of individual income tax if the fund is distributed to individual investors. However, when the fund obtains such income, it may already have been subject to the withholding and payment of relevant taxes by listed companies or others.
Trading revenue:
Income on stock trading: Income from the price difference obtained by individual investors through buying and selling stocks on the stock market is subject to individual income tax under the category of 'income on property transfers' at a rate of 20%. However, income from the price difference obtained by individual investors through buying and selling stocks of domestic listed companies is temporarily exempt from individual income tax.
Other trading income: Trading income from assets such as real estate, land and so on:
- is subject to taxes such as VAT, land VAT and deed tax, in accordance with relevant laws and regulations; and
- may also involve the payment of individual income tax.
1.5 Is the regime a worldwide or territorial regime, or a mixture?
China's tax regime is mixed, rather than being purely global or territorial.
From the perspective of enterprise income tax, China distinguishes between resident enterprises and non-resident enterprises, which reflects the principle of territoriality to a certain extent.
In terms of individual income tax, China implements a mixed tax regime that combines classified and comprehensive taxes. This means that the individual income tax regime:
- takes into account the nature and characteristics of income from different sources (eg, wages and salaries, remuneration for services, remuneration for manuscripts, royalties); and
- to a certain extent, considers the taxpayer's annual income.
Furthermore, China's tax regime involves multiple tax categories. The taxable objects and tax bases vary; but overall, they are uniformly implemented nationwide according to the tax laws and regulations. Therefore, China's tax regime also exhibits certain national characteristics from this perspective.
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
Pursuant to the Enterprise Income Tax Law and its implementing regulations, foreign-invested enterprises and institutions or premises established by foreign enterprises in China engaged in production and operation that incur annual losses may use the income of the following tax year to make up for such losses. If the income in the following tax year is insufficient to cover the same, the losses can be made up annually for up to five years.
If consolidated taxpaying enterprises establish multiple business institutions within China and each institution has its own profits or losses, they can use profits to offset losses. If there are still profits remaining thereafter, income tax will be paid at the rate applicable to any profitable business institution.
For overseas losses, pursuant to the Enterprise Income Tax Law and related regulations, when enterprises calculate and pay enterprise income tax on a consolidated basis, the losses of their overseas business institutions will not be deducted from the profits of domestic business institutions. However, the losses of overseas business institutions can be made up as regulated from the income of other projects or future years in the same country or region. This reflects China's adherence to the principle of 'source priority' in handling cross-border income tax affairs.
Overseas losses generally cannot be directly deducted from taxable income under the domestic tax regime, because:
- there are differences between domestic and foreign tax laws; and
- loss deduction rules are usually limited to domestic income in each country or region.
If there are overseas losses but domestic profits, resident individuals or enterprises must still declare and pay taxes in terms of the domestic profits. In the meantime, taxes paid overseas can be credited against domestic taxes; but the credit amount must not exceed the taxable amount calculated in accordance with domestic tax law for the taxpayer's overseas income.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
In China, the 'beneficial ownership' of taxable income is an important concept that involves various aspects of tax treatment, especially in relation to international tax treaties and cross-border tax administration.
Beneficial owner: A 'beneficial owner' is typically a person who has ownership and control over the income or the rights and property from which the income is derived. This concept is particularly important in relation to tax treaties, as it directly concerns whether residents of a contracting state can enjoy treaty benefits, such as tax incentives stipulated in articles on dividends, interest and royalties.
Tax treaties: According to relevant regulations of the State Taxation Administration, the identification of beneficial owner status is crucial to enjoy tax treaty benefits. If an applicant does not meet the criteria of a 'beneficial owner', it may not be eligible for the relevant tax treaty benefits. These criteria include, but are not limited to, whether the applicant:
- is obliged to pay the income to a resident of a third country; and
- has control or disposal rights over the income or property from which the income is derived.
Withholding at source and beneficial owner: Under the withholding at source system, the actual beneficiary is the taxpayer and the payer is the withholding agent. This means that when dividends, interest, rent, royalties and other income are paid, the withholding should be made on that beneficial owner as the taxpayer if the payer can identify the beneficial owner.
Anti-avoidance and beneficial owner: The concept of beneficial owner also helps to prevent the abuse of tax treaties and tax avoidance. By identifying the true beneficial owners, the tax authorities can more effectively crack down on tax avoidance through conduit companies, shell companies and similar entities.
Nominal or legal income owner: Although nominal or legal income owners may own a certain form of ownership or control, it is more important to determine who the true beneficial owners are. This is because only true beneficial owners should enjoy the corresponding tax treatment and bear related tax liabilities.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
The enterprise income tax rate varies based on the tax base.
China's progressive tax rate regime means that as an enterprise's taxable income increases, the applicable tax rate will also change accordingly; but this is not directly linked to the balance-sheet size of the enterprise. The balance-sheet size primarily reflects an enterprise's assets and liabilities, while taxable income is calculated based on the enterprise's income minus relevant costs and expenses.
However, there is indeed a positive correlation between enterprise size and the actual tax rate.
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
Partnerships are not subject to enterprise income tax. Pursuant to the Enterprise Income Tax Law, sole proprietorships and partnerships are not subject to this law. Therefore, partnerships are subject only to individual income tax, which is paid by each partner separately.
As enterprise legal entities, trust companies are subject to enterprise income tax according to the law. The tax base for enterprise income tax is the taxable income of a trust company, which is the balance of its revenue for each tax year after deducting:
- non-taxable income;
- tax-exempt income;
- various deductions; and
- losses from previous years that may be carried forward and made up.
2 Special regimes
2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
China has a multitude of specialised tax regimes tailored to various industries, regions or economic activities.
Free trade zones and free trade ports:
Hainan Free Trade Port: Within the Hainan Free Trade Port, enterprises enjoy numerous preferential tax policies aimed at attracting foreign investment and promoting trade liberalisation, such as:
- tax exemptions on imported raw materials and equipment; and
- partial exemptions from enterprise income tax for certain service industries.
Other free trade zones: Free trade zones in Shanghai, Guangdong, Liaoning, Shandong, Beijing and other cities provide a series of tax incentives and special regulatory policies –including enterprise income tax reductions and tariff exemptions – to facilitate trade and investment.
Enterprise parks and tax preferential parks:
Tax havens: Several regions across China have established tax preferential parks (or tax havens), offering low tax rates, tax rebates and other preferential policies to attract businesses.
Approved parks for individual households: In double exemption tax parks for individual households, such as those in Hainan and Hangzhou, individual households with annual profits within a certain threshold are exempt from income tax and value-added tax (VAT).
Industry-specific tax incentives:
Funds and securitisation: Eligible fund companies and securitisation products enjoy tax incentives in China, such as reductions in or exemptions from income tax and business tax.
Oil and gas: Dedicated resource tax and mineral resource compensation fees are imposed on the oil and gas extraction industry to regulate revenue distribution from resource extraction.
Shipping and insurance: Shipping enterprises and insurance companies also benefit from certain tax incentives, including:
- tax exemptions on international shipping income; and
- pre-tax deductions for insurance reserves.
Real estate: Land value-added tax and deed tax are imposed on real estate development and sales, with tax reductions or exemptions for certain eligible housing types (eg, public rental housing).
Intellectual property: To promote technological innovation and IP protection, China offers certain tax incentives for transferring and using IP rights, such as reductions in or exemptions from related taxes and fees.
Other special tax regimes:
Poverty alleviation donations: Donations of self-produced, commissioned or purchased goods to targeted poverty-stricken areas by units or individual households are exempt from value-added tax.
Cultural undertaking construction fees: Reductions in cultural undertaking construction fees payable to both central and local governments are implemented according to policy regulations.
Tax support for scientific and technological innovations: Imports of scientific research, technological development and teaching supplies that cannot be produced domestically or that do not meet domestic performance requirements by scientific research institutions and technological development institutions are exempt from:
- import tariffs;
- import VAT; and
- consumption tax.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
The Enterprise Income Tax Law and its implementing regulations set out policy options for special tax treatment in case of a corporate restructuring. According to these provisions, special tax treatment is available if a corporate restructuring meets the following conditions, in which case recognition of gains or losses from the transfer of assets involved in the restructuring transaction can be deferred until a later period:
- Reasonable commercial purpose: The enterprise restructuring must have a reasonable commercial purpose, rather than primarily aiming to reduce, avoid or postpone the payment of taxes.
- Asset or equity ratio requirements:
-
- In equity acquisitions, at least 75% of the total equity of the target must be acquired; and
- In asset acquisitions, the acquired assets must be worth no less than 75% of the total assets of the transferring enterprise.
- Business continuity: The substantial business activities of the restructured assets must not change within 12 months of the restructuring.
- Shareholder and equity payment requirements: The equity payment amount involved in a restructuring transaction must be no less than 85% of the total transaction payment.
Other possible exemptions and incentives: In addition to special income tax treatment in case of an enterprise restructuring, exemptions and incentives are available in specific situations or industries:
- Special region or industry incentives: Free trade zones, high-tech enterprises and western development regions, among others, may offer tax reductions or exemptions.
- Asset transfers: When assets are transferred within a corporate group under specific conditions (eg, among 100% directly controlled resident enterprises or among resident enterprises that are 100% directly controlled by the same or identical multiple resident enterprises, with their equity or assets transferred at carrying value), special tax treatment can be selected, which does not recognise gains or losses.
- Internal equity transfers: In some cases, equity transfers between companies within a corporate group may involve tax exemption policies, but this typically depends on specific tax regulations and equity transfer details.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
Enterprise taxpayers must first select the appropriate tax categories for declaration, based on their specific business situations and legal regulations. Common tax categories include:
- VAT;
- enterprise income tax;
- individual income tax;
- stamp tax;
- city maintenance;
- construction tax and
- education surcharge.
Calculation of the taxable base: When calculating the taxable base, enterprise taxpayers should typically follow the methods stipulated by the tax laws. Generally, enterprise income tax can be calculated using either an income-based approach or a profit-based approach, while VAT is primarily calculated based on sales or value-added amount. The choice between the cash basis and the accrual basis relates more to the accounting treatment of an enterprise and usually requires adherence to the Accounting Standards for Business Enterprises or relevant accounting systems.
Small and micro-enterprises: The state often provides certain tax incentives for small and low-profit enterprises, such as reduced tax rates and exemptions from certain taxes.
Tax regime for specific industries: Certain industries and sectors may be subject to special tax arrangements – for example, high-tech enterprises and software enterprises may enjoy preferential policies such as:
- additional deductions for research and development (R&D) expenses; and
- tax reductions or exemptions.
In summary, Chinese enterprise taxpayers may choose different tax regimes or methods for calculating the taxable base under certain conditions, but specific choices must comply with national tax laws and policy guidelines. In the meantime, enterprises should follow best practices in terms of tax administration to ensure the legality and compliance of their tax behaviour.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
The tax rules are primarily governed by the Corporate Income Tax (CIT) law. Here are some key points regarding the taxation of such corporations:
- Currency Translation
-
- According to Article 33 of the Corporate Income Tax Law, where a taxpayer's记账本位币 (accounting currency) is different from the Renminbi (RMB), they must translate all income and expenses into RMB for tax reporting purposes. The translation should be done using the exchange rate on the last day of the tax year.
- Exchange Rate Fluctuations
-
- Gains or losses from exchange rate fluctuations are generally recognized when the transaction is settled. However, for accounting purposes, some temporary differences might be recognized in the period of occurrence.
- Permanent Establishment
-
- Non-resident enterprises with a permanent establishment in China are taxed on their income derived from China, which includes income in foreign currencies. They must also translate such income into RMB for CIT purposes.
- Taxable Income
-
- The taxable income of resident enterprises is calculated based on their worldwide income, while non-resident enterprises are taxed on their China-sourced income. The income, regardless of the currency in which it is received, must be translated into RMB.
- Tax Refunds or Adjustments
-
- If there are changes in exchange rates after a tax return has been filed, taxpayers may need to adjust their taxable income and may be eligible for a tax refund or required to pay additional tax.
- Withholding Tax
-
- For non-resident enterprises without a PE in China, a withholding tax is applicable at a rate of 10% on certain types of income, such as dividends and interest, which must also be calculated in RMB after conversion.
- Reporting and Compliance
-
- Enterprises must maintain proper books and records and submit tax returns in RMB, even if their functional or reporting currency is different. They must also comply with all relevant tax laws and regulations, including those related to currency translation.
*Tax laws and regulations are subject to change, and specific circumstances can affect the application of these rules.
2.5 How are intangibles taxed?
Under China's tax regime, intangible assets for enterprise taxpayers are primarily subject to VAT and enterprise income tax.
Value-added tax:
Taxation scope and tax rate: When selling intangible assets, enterprises need to calculate and pay VAT based on different situations.
If intangible assets are patented or non-patented technologies, they are usually exempt from VAT. (That said, specific policies may change over time, so readers should refer to the latest tax laws and regulations.)
If intangible assets are land use rights, the VAT is calculated and paid at a certain rate (eg, 11% in the past, but it should be noted that the latest tax rate may have been adjusted).
For the disposal of other intangible assets – such as trademarks, technologies and other beneficial intangible assets (eg, franchise rights, distribution rights, portrait rights, naming rights) – the VAT is generally calculated and paid at a rate of 6%.
If an enterprise is a small-scale taxpayer, the VAT should be determined using the simplified tax calculation method at a rate of 3%.
Enterprise income tax: When disposing of intangible assets, enterprises must include disposal income when calculating the tax base for enterprise income tax.
In the meantime, the amortisation expenses of intangible assets can be deducted when calculating the tax base. The straight-line method can be used for this purpose.
The amortisation period for intangible assets must be at least 10 years. However, if the intangible assets are invested or acquired and relevant laws or contracts stipulate a service life for them, they can be amortised in instalments according to the stipulated or agreed service life.
Amortisation expenses cannot be deducted for certain specific intangible assets, such as:
- self-developed intangible assets whose expenses have already been deducted from taxable income;
- self-created goodwill; and
- intangible assets unrelated to business activities.
Tax incentives: There are also some tax incentives for intangible assets in terms of enterprise income tax. For example:
- the additional deduction policy for R&D expenses allows enterprises to deduct their R&D expenditures at a certain ratio, thereby reducing taxable income; and
- eligible high-tech enterprises and technology-advanced service enterprises may also enjoy lower enterprise income tax rates.
2.6 Are corporate-level deductions available for contributions to pensions?
Pension contributions typically consist of individual contributions and employer contributions. Individuals must deduct pension expenses from their salaries at a certain percentage, while employers must contribute a higher percentage of pension funds for their employees:
- Employer contributions: Making pension contributions on behalf of employees is a social responsibility that employers must fulfil. These are used to fund the overall pension insurance fund; they do not go directly to individual employees and cannot be deducted from employees' salaries or other payables. However, they form part of the employer's financial expenditure, aimed at ensuring that employees receive pension benefits after their retirement.
- Individual contributions: Although individual contributions are deducted from employees' salaries, this deduction is handled by the employer on a withholding and remittance basis: the employer first deducts the individual's pension contributions from his or her salary and then pays both the individual's and the employer's contributions to the social insurance agency. In the process, the employer does not treat the individual contributions as its own income for the purposes of deduction, but rather fulfils its obligation as a withholding and remittance agent.
Relevant legal bases: Pursuant to Article 4 of the Social Insurance Law:
Employers and individuals within the territory of the People's Republic of China shall pay social insurance premiums according to law and have the right to inquire about payment records, records of personal rights and interests, and request social insurance agencies to offer social insurance consultation and other related services.
This provision clarifies the obligation of employers and individuals to pay social insurance premiums, emphasising the statutory and mandatory nature of the social insurance system. Therefore, when paying pension contributions for employees, employers must follow the statutory proportions and procedures and cannot deduct or reduce contributions arbitrarily.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
There may be some differences in tax and surcharge payments for enterprise taxpayers in different sectors, such as the banking industry; but not all differences manifest in the need to pay different or additional taxes.
VAT: Pursuant to the VAT and related regulations, financial services provided by the banking industry (eg, loans, deposits and settlements) are generally exempt from VAT. However, if a banking company renders certain non-financial services (eg, selling precious metals or providing consulting services), it may need to pay VAT in accordance with the regulations applicable to general taxpayers.
Enterprises in other industries – such as manufacturing, commerce and trade – must pay VAT based on their sales or turnover and the tax rate may vary by industry.
Enterprise income tax: The banking industry is subject to the same tax laws and regulations as other industries in relation to enterprise income tax.
Surcharges: Surcharges typically include:
- city maintenance and construction tax;
- education surcharge; and
- local education surcharge.
They are calculated based on a certain percentage of VAT or consumption tax as paid. Therefore, differences in VAT or consumption tax payments will also lead to differences in surcharge payments.
As most financial services are exempt from VAT, surcharge payments may be relatively low. However, if a banking company provides non-financial services which are subject to VAT, it must calculate surcharges based on the VAT as paid.
Tax policies for specific industries: The tax policies for the banking industry, as an essential part of the financial sector, may be influenced by financial regulatory policies and macroeconomic policies. For example, with a view to supporting the development of small and micro-enterprises or promoting economic restructuring, the government may impose specific credit policy requirements on the banking industry and guide its behaviour through preferential tax policies.
Other industries may also enjoy different tax incentives based on their specific business characteristics and policy needs. For instance:
- high-tech enterprises may enjoy lower enterprise income tax rates and additional deductions for R&D expenses; and
- industries such as agriculture, forestry and animal husbandry may enjoy specific reductions in or exemptions from VAT.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
China's tax regime does not directly include such surtaxes.
2.9 Are there any deemed deductions against corporate tax for equity?
Equity represents shareholders' ownership in a company and cannot be directly deducted against corporate tax. The payment of corporate tax (eg, enterprise income tax) is based on the company's taxable income, which is not directly affected by the holding or change in equity.
Enterprise income tax: When a company transfers its equity holdings and the income from the transfer exceeds the cost of acquiring the equity, the difference constitutes taxable income which is subject to enterprise income tax.
Stamp tax: Equity transfers in Chinese mainland are also subject to stamp tax, which is levied on the issue and receipt of legally binding documents in economic activities and interactions.
Tax deductions for equity investment: Although equity itself cannot be directly deducted against corporate tax, equity investments may indirectly affect a company's tax burden in certain situations, such as the following:
- Losses on equity investment: If a company incurs losses from equity investments and meets the conditions stipulated in the tax laws, such losses can be deducted before calculating enterprise income tax, thereby reducing the tax base.
- Tax preferential policies: For eligible equity investments (eg, venture capital and risk investment), the government may introduce corresponding tax preferential policies to support these investment activities. These preferential policies may include various forms of relief, such as tax reductions, tax credits and tax deferrals.
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
Tax treatment and accounting principles:
Depreciation treatment:
Capital assets (eg, fixed assets) are typically depreciated according to the tax laws. Depreciation is a cost allocation method that spreads the cost of an asset over its service life.
The selection of depreciation methods and the determination of depreciation periods are generally determined by the tax laws rather than simple accounting principles. For instance, in China, different types of fixed assets have specified minimum depreciation periods, such as:
- 20 years for houses and buildings; and
- 10 years for aircraft, trains, ships, machinery and other production equipment.
Enterprises must:
- calculate depreciation according to the methods (eg, straight-line method, accelerated depreciation method) and timeframes stipulated in the tax laws; and
- deduct depreciation expenses when calculating taxable income.
There may be differences between tax treatment and accounting treatment. Enterprises must comply with:
- accounting standards when preparing financial statements; and
- the tax laws when filing tax returns.
Therefore, when dealing with tax issues relating to capital asset investments, enterprises must understand and correctly deal with these differences to ensure tax compliance.
Capital asset investments:
Determination of investment costs: The cost of capital asset investments acquired through cash payments is merely the purchase price.
For non-cash acquisitions – such as investor contributions, non-monetary asset exchanges or debt restructurings – the cost is the fair value of the asset plus related taxes and fees as paid.
Tax write-offs or other treatment: Tax write-offs of capital asset investments – which may refer to the tax treatment or write-off of capital assets – are not common in China. Capital assets are typically deducted for tax purposes through depreciation and other methods rather than direct write-offs.
If a capital asset is scrapped, destroyed or sold, the relevant enterprise must comply with the tax laws in terms of the respective tax treatment. For example, when selling capital assets, corresponding taxes (eg, value-added tax (VAT) and enterprise income tax) must be calculated and paid.
Special provisions: For certain types of capital asset investments – such as qualified technology transfers or research and development (R&D) expenditures – tax laws may provide for special tax treatment policies, including tax reductions and exemptions and additional deductions.
Enterprises must keep up to date with the latest changes and policy directions in tax laws in order to fully avail of these preferential policies and reduce tax risks.
3.2 Are there research and development credits or other tax incentives for investment?
China's tax regime offers R&D credits and various tax incentives to promote corporate technological innovation and R&D investment:
R&D credit policy:
Additional deduction of R&D expenses: The R&D expenses incurred by enterprises for developing new technologies, products and processes, if not capitalised as intangible assets but instead recorded as current losses and gains, can be deducted from taxable income based on:
- actual expenses as stipulated; and
- an additional 75% (or a higher percentage, subject to policy adjustments) of the actual amount incurred.
Expenses that result in an intangible asset can be amortised before tax at 175% of the cost of the intangible asset. This policy directly reduces the R&D costs of enterprises and encourages them to engage in scientific and technological innovation.
Accelerated depreciation of fixed assets: For fixed assets purchased by scientific and technological innovation enterprises, shortened depreciation periods or accelerated depreciation methods are allowed. This policy:
- helps enterprises to recover investment costs faster;
- improves capital utilisation efficiency; and
- promotes the investment of funds in scientific and technological innovation.
Investment tax credit: For enterprises investing in technological transformation projects that conform to national industrial policies, a certain proportion of the domestic equipment required can be deducted from their newly increased enterprise income tax in the year of purchase compared to the previous year. This policy aims to encourage enterprises to carry out technological transformation and upgrading, thereby enhancing production efficiency and product quality.
Tax incentives for high-tech enterprises: High-tech enterprises may enjoy a series of preferential tax policies, including enterprise income tax at a reduced rate of 15%. Furthermore, for newly purchased equipment and appliances within a certain period, if the unit value does not exceed a certain amount (eg, RMB 5 million), they can be included in the current costs and expenses for deduction when calculating taxable income, while eliminating the need for annual depreciation calculations.
Tax incentives for small and micro-enterprises: Eligible small and micro-enterprises may enjoy a reduction in or exemption from enterprise income tax. Specifically, enterprises with an annual taxable income below a certain threshold may pay enterprise income tax at a reduced rate.
Tax incentives for venture capital enterprises and angel investors: Venture capital enterprises and angel investors that make direct equity investments in technology-based startups for a certain period can deduct a certain proportion of the investment amount from their taxable income. This policy aims to encourage social capital to invest in and support technology-based startups.
3.3 Are inventories subject to special tax or valuation rules?
Inventories play a vital role in corporate operations, with their management encompassing not only accounting and financial management, but also the potential application of special tax or valuation rules.
Tax rules:
Input tax deduction rules: Under certain tax incentives, goods and raw materials purchased by enterprises during the tax-exempt period cannot be subject to an input tax deduction if they are used for the production and operation of tax-exempt products. However, if they are used for the production of taxable goods, an input tax deduction can be made by requesting a special VAT invoice. These rules directly impact on inventory costs and corporate cash flow.
Enterprise income tax policy: Although certain enterprise income tax incentives, such as an accelerated depreciation policy, do not directly target inventories, they affect the overall tax burden and funding arrangements of enterprises, thereby indirectly affecting inventory management and valuation.
Export tax rebate policy: For export enterprises, export goods in inventories may benefit from the export tax rebate policy. This requires enterprises to accurately account for and declare export goods in order to meet rebate conditions.
Valuation rules:
Accounting standards requirements: According to the Accounting Standards for Business Enterprises No 1 - Inventories, enterprises should use methods such as the following to determine the costs of issued inventories:
- first in, first out;
- weighted average; or
- specific identification.
The choice of these methods directly impacts on inventory valuation and corporate profits.
Inventory depreciation: Enterprises should conduct a comprehensive check of inventories at the end of the period. If the costs of inventories exceed the net realisable value, provision for inventory depreciation should be made. These rules require enterprises to regularly assess the value of inventories to ensure the accuracy of financial statements.
Valuation of special inventories: Certain special inventories - such as packaging materials and low-value consumables - have some characteristics of fixed assets but are generally accounted for as inventories. The valuation of these inventories may need to consider factors such as service life and degree of wear and tear.
Assessment methods: When assessing inventories, assessors will determine their value based on actual conditions and market demands, using methods such as the cost method or the market method. The selection and application of these methods should follow relevant assessment standards and norms.
3.4 Are derivatives subject to any specific tax rules?
The core issue to be resolved under the income tax regime is to determine the nature of gains from derivatives. In practice, countries mainly classify gains from transactions as ordinary income or capital gains and tax them accordingly.
Internationally, there are different methods for recognising the income tax base of derivatives:
- The principle of separate taxation treats derivatives as combination transactions and distinguishes between derivative transactions and underlying transactions; and
- The principle of inseparate taxation treats derivatives as a whole transaction for taxation purposes.
Derivatives often have multiple value indicators in transactions, such as intrinsic value and market value. Countries should consider which value to use as the tax base.
There are significant differences in the timing of derivative transactions, and the timing of the same derivative transaction is also selectable. Therefore, it is difficult to unify the taxation timing in the transaction process.
Countries apply different regulations in relation to VAT and business tax arising from derivative transactions. Generally, derivative transactions may involve:
- calculation of the output tax and input tax for VAT; and
- the collection of business tax.
In some countries, the issuance of derivative contracts may also be subject to stamp tax.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
The basis for non-resident corporate entities to pay tax in China primarily stems from the tax laws and regulations - in particular, the Enterprise Income Tax Law and its related Implementing Regulations.
Tax liability:
Establishment of institutions or premises: If a non-resident enterprise establishes an institution or premises in China, it must pay enterprise income tax on both China-sourced income and income sourced from outside China but related to its Chinese institution or premises. The tax administration of such non-resident enterprises is similar to that of resident enterprises - they must:
- set up accounting records in accordance with the Tax Administration Law and relevant laws and regulations;
- conduct accounting; and
- declare and pay enterprise income tax.
No establishment of institutions or premises: If a non-resident enterprise has no institutions or premises established in China, or if the income it earns is unrelated to such institution or premises, it must pay enterprise income tax on its China-sourced income. The tax rate is generally 20% but may vary depending on:
- the type of income; and
- the application of intergovernmental tax treaties.
Tax incentives: Certain income earned by non-resident enterprises in China is exempt from enterprise income tax, such as:
- interest income from loans provided by foreign governments to the Chinese government;
- interest income from concessional loans provided by international financial organisations to the Chinese government and resident enterprises; and
- other income approved by the State Council.
Non-resident enterprises with established institutions or premises may also enjoy corresponding tax incentives if they meet the conditions of the relevant tax incentive policies.
Tax declarations and payments: Pursuant to the Tax Collection and Administration Law and relevant regulations, non-resident enterprises must:
- truthfully handle tax declarations; and
- submit relevant tax-related information.
The declaration deadline and contents must accord with:
- the law;
- administrative regulations; and
- the provisions of the tax authorities.
Non-resident enterprises with established institutions or premises within China must pay their taxes in full and on time as approved by the tax authorities. If taxes are not paid within the prescribed period, tax authorities may impose late fees according to the law.
Tax compliance tips: Non-resident enterprises with established institutions or premises in China must adhere to tax policies and regulations to ensure that tax payments are made in accordance with the law.
A sound accounting management system should be established to ensure clear and accurate accounting.
Non-resident entities should actively cooperate with the tax authorities in terms of inspections and audits, while truthfully providing relevant information and explanations.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
Payments made by corporate taxpayers to non-residents may be subject to withholding tax or consumption tax in accordance with Chinese tax laws and regulations. The primary scenarios for such taxes include the following.
Withholding tax: Payments made by corporate taxpayers to non-residents - such as dividends, interest, rent, royalties and technical service fees - may all involve withholding tax.
Dividends, interest and royalties: These are typically withheld at an agreed tax rate, which may vary depending on any applicable tax treaties.
For instance, non-resident enterprises earning dividends, interest and royalties in China are generally subject to a 10% withholding income tax. However, if China has concluded a tax treaty with the country of origin, the applicable tax rate may be that stipulated in the treaty.
Technical service fees and other labour fees: For technical services, consulting, design and other labour services provided by non-resident individuals or enterprises in China, the payer must also withhold income tax in accordance with the tax laws and regulations.
The specific tax rates and deduction methods may vary depending on the nature of the labour services and the applicable tax regulations.
Consumption tax: In general, payments made by corporate taxpayers to non-residents do not directly involve consumption tax. Consumption tax is typically levied on units and individuals that produce, commission the processing of or import taxable consumer goods. However, if a non-resident sells taxable consumer goods in China and those goods are consumed in China, consumption tax may be payable.
Where taxable services (eg, certain types of labour services) are provided by non-residents, if they fall within the scope of consumption tax and the recipient is located in China, they may be subject to consumption tax. However, this scenario is relatively rare and specific tax policies vary according to service type and tax regulations.
4.3 Do double or multilateral tax treaties override domestic tax treatments?
China's domestic tax laws are the basic legal norms that regulate the distribution relationship between the state and various economic units, as well as individual citizens; they constitute an essential part of the national legal system. The formulation and implementation of tax laws are subject to the constraints and guarantees of the Constitution.
Double or multilateral tax treaties aim to avoid international double taxation while providing tax incentives to residents of contracting states. These incentives are generally eligible only to residents of one or both contracting states.
Under normal circumstances, tax treaties take precedence over domestic tax laws, in order to ensure their effective implementation.
However, where a taxpayer's transactional arrangements constitute tax law abuse, specific anti-avoidance provisions in domestic tax laws may take precedence over tax treaties. This is to prevent taxpayers from exploiting loopholes in tax treaties to avoid tax.
Furthermore, if China's controlled foreign company (CFC) legislation conflicts with any tax treaties to which China has acceded and this conflict is deemed to constitute an abuse of that tax treaty, the domestic CFC legislation may take precedence.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
In the absence of a tax treaty between China and a foreign country, the availability of unilateral foreign tax relief or credit will depend on several factors, as follows.
Foreign tax policies: First, whether foreign tax relief or credit is available will primarily depend on the tax policies of the relevant foreign country. Some countries may unilaterally offer tax relief or credit on income or investments from other countries to attract foreign investment or promote international trade. This may be temporary or long term, depending on the country's economic policies and diplomatic strategies.
Unilateral tax relief agreements: Even if there is no tax treaty between China and a foreign country, in certain cases the two countries may enter into similar tax incentive arrangements through unilateral tax relief agreements.
Domestic tax laws and regulations: Under China's domestic tax laws, enterprises or individuals earning income from foreign countries must generally pay taxes according to China's tax laws and regulations. However, under certain circumstances, China's tax laws and regulations also allow for tax relief or credit on income earned from foreign countries.
Unilateral tax relief under special circumstances: In exceptional cases, some countries may unilaterally grant tax relief or credit on income or investments from China based on:
- humanitarian considerations;
- diplomatic relations; or
- other special factors.
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
Whether inbound corporate entities have seen an improvement in their asset base in terms of taxation is a complex issue, as it is influenced by multiple factors. While the general environment for foreign-funded enterprises in China is continually improving, whether there has been a specific improvement in asset base depends on the company's operational status and its own efforts. Therefore, inbound corporate entities should:
- closely monitor market dynamics and policy changes;
- strengthen internal management and operational innovation; and
- continuously enhance their competitiveness and profitability.
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
According to the Provisional Regulations on VAT, the sale of goods or the provision of labour services within China is subject to VAT according to the law.
The disposal of state-owned assets essentially constitutes the sale of goods or the provision of labour services and is therefore subject to VAT. The tax rate varies depending on the type of state-owned assets disposed of and specific regulations.
Enterprise income tax: Enterprise income tax is levied on business income and other income derived by enterprises and other organisations that earn income in China.
Proceeds from the disposal of state-owned assets constitute corporate income and are thus subject to enterprise income tax. Enterprises must pay enterprise income tax on their taxable income at a general rate of 25%, although preferential tax rates may also apply.
Stamp tax: Equity transfers of non-listed companies that do not involve stock transactions constitute a transfer of property ownership and are subject to stamp duty according to the property transfer document.
Change of domicile: Changing a company's domicile does not directly incur new taxes or expenses, but it may affect the company's tax registration and tax liability. For example, on changing its domicile, a company must promptly report to the tax authorities and modify its tax registration accordingly. Furthermore, if the change of domicile results in cross-regional operations, cross-regional tax-related matters may also be involved.
5 Anti-avoidance
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
Article 47 of the Enterprise Income Tax Law clearly stipulates that if an enterprise reduces its taxable income or income through arrangements that have no reasonable commercial purpose, the tax authorities are entitled to adjust them in a reasonable manner.
Article 120 of the Implementing Regulations of the Enterprise Income Tax Law further clarifies the meaning of 'no reasonable commercial purpose': essentially, this means that the main purpose of the arrangement is to reduce, avoid or delay the payment of taxes.
Implementation measures for special tax adjustments: On 8 January 2009, China officially promulgated the Implementation Measures for Special Tax Adjustments (Trial), marking the establishment of a legislation-led anti-avoidance system. The measures outline specific implementation methods for special tax adjustments, covering:
- related declarations;
- contemporaneous documentation;
- transfer pricing management;
- advance pricing arrangements;
- cost sharing agreements; and
- controlled foreign company (CFC) regulations.
Other relevant tax laws: The Tax Administration Law and the Provisional Regulations on Value-Added Tax also contain provisions on anti-avoidance. For instance, Article 36 of the Tax Administration Law mandates that transactions between enterprises and their affiliates adhere to the arm's-length principle; otherwise, the tax authorities reserve the right to make reasonable adjustments.
The role of case law: Although China's anti-avoidance rules primarily exist in statutory form, case law plays a complementary role in judicial practice. When adjudicating anti-avoidance cases, the courts will refer to previous cases and judicial interpretations to ensure consistency and fairness in legal application. However, the influence of case law in this regard is relatively limited compared to that of statutory law.
5.2 What are the main 'general purpose' anti-avoidance rules or regimes, based on either statute or cases?
In China, the main 'general purpose' anti-avoidance rules or regimes include the following:
- Enterprise Income Tax Law: Article 47 of the Enterprise Income Tax Law, implemented in 2008, introduced the 'reasonable business purpose' criterion for identifying anti-avoidance arrangements, marking a crucial advancement in China's anti-avoidance legislation. This serves as the foundation for the general anti-avoidance rules, empowering the tax authorities to adjust tax arrangements that are deemed to lack a reasonable business purpose and to be intended to achieve tax benefits.
- Implementing Regulations of the Enterprise Income Tax Law: Article 120 of the Implementing Regulations of the Enterprise Income Tax Law sets out further implementation details for the general anti-avoidance rules.
- General Measures for Anti-avoidance Administration (Trial): Issued by the State Taxation Administration and effective since 1 February 2015, these measures outline the procedures for the tax authorities to administer the general anti-avoidance regime, including:
-
- case initiation, investigation and closure; and
- dispute resolution.
- They also define:
-
- the characteristics of anti-avoidance arrangements; and
- the methods through which the tax authorities can make adjustments.
- Implementation Measures for Special Tax Adjustments (Trial): Alongside the 'reasonable business purpose' criterion, the economic substance principle serves as an additional component for identifying tax avoidance under these measures. Together, they establish the standards for evaluating and adjusting anti-avoidance behaviour.
These rules and regimes work in concert to prevent and combat tax avoidance, ensuring tax fairness and effectiveness. They encompass both statutory provisions and their practical application by the tax authorities in specific cases. Under these rules, the tax authorities can scrutinise and adjust tax avoidance arrangements made by enterprises and individuals, thereby safeguarding the country's tax interests.
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
The main anti-avoidance rules include the following:
- General Anti-avoidance Rules: According to Article 47 of the Enterprise Income Tax Law and Article 120 of the Implementing Regulations of the Enterprise Income Tax Law, the tax authorities may make special tax adjustments for tax avoidance arrangements that lack a reasonable business purpose and seek to realise tax benefits. These rules aim to prevent enterprises from reducing their tax liability through arrangements that are devoid of a legitimate commercial rationale.
- Transfer pricing rules: China has implemented detailed transfer pricing rules that require transaction prices between multinational corporations to comply with the arm's-length principle, which assumes that the prices are determined as though the parties to the transaction were independent third parties.
- CFC rules: These rules target foreign companies that are controlled by Chinese residents or enterprises. If these companies lack a reasonable business purpose and their primary objective is tax avoidance, their income may be deemed to be that of Chinese tax residents and thus subject to taxation in China.
- Thin capitalisation rules: These rules limit the ability of enterprises to reduce their tax liability through excessive borrowings relative to equity. If the debt-to-equity ratio exceeds the prescribed standard, the excess interest expenses may not be tax deductible.
- Anti-hybrid rules: These rules aim to prevent enterprises from exploiting differences in tax regimes across countries for tax avoidance purposes, such as through hybrid financial instruments (which exhibit characteristics of both debt and equity) aimed at obtaining tax benefits.
- Restrictions on loss relief or interest deductions: China's tax laws impose limitations on loss relief and interest deductions to prevent enterprises from reducing their tax burdens through unreasonable loss relief or interest deductions.
- General Measures for Anti-avoidance Administration (Trial): Issued by the State Taxation Administration, these detail how the tax authorities administer the general anti-avoidance regime, including:
-
- case initiation, investigation and closure; and
- dispute resolution.
These rules and measures constitute the core of China's anti-avoidance legal framework, aimed at ensuring tax fairness and preventing tax base erosion. The tax authorities apply these rules to review and adjust corporate tax arrangements in order to ensure tax legality and rationality.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
In China, special ruling processes allow enterprises to communicate with the tax authorities regarding specific tax issues or desired domestic or cross-border tax treatment, as follows:
- Advance pricing arrangements (APAs): These allow enterprises, together with their related parties, to negotiate and reach agreement with the tax authorities in relation to the pricing principles and calculation methods for connected transactions in future years. This helps enterprises to determine the tax treatment in advance, thereby reducing tax uncertainty.
- General Anti-avoidance Administration: Under the General Measures for Anti-avoidance Administration (Trial), the tax authorities may make special tax adjustments to tax avoidance arrangements implemented by enterprises that lack a reasonable business purpose and seek to obtain tax benefits. These include:
-
- re-characterising all or part of the transactions involved in the arrangement; and
- disregarding the existence of a party for tax purposes.
- Special tax adjustments: The Implementation Measures for Special Tax Adjustments (Trial) provide a framework for the tax authorities to manage special tax adjustment matters, including:
-
- transfer pricing;
- APAs;
- cost-sharing agreements;
- CFCs;
- thin capitalisation; and
- general anti-avoidance.
- Mutual agreement procedures: In cross-border transactions, if an enterprise believes that tax adjustments by the tax authorities will result in international double taxation or are inconsistent with an applicable tax treaty, it may initiate a mutual agreement procedure. The State Taxation Administration may consult with the tax authorities of the contracting party to the tax treaty to avoid or eliminate the risk of international double taxation.
These procedures:
- provide enterprises with a mechanism to ensure the predictability and consistency of tax treatment; and
- give the tax authorities a tool to ensure the correct implementation of tax policies and prevent tax base erosion.
Enterprises may utilise these procedures to plan their tax strategies and engage in constructive dialogue with the tax authorities.
5.5 Is there a transfer pricing regime?
China has a well-established transfer pricing regime which encompasses a series of regulations and guidelines aimed at ensuring that the pricing of transactions within multinational enterprise groups adheres to the arm's-length principle. The key components of China's transfer pricing regime are as follows:
- Related Declaration and Contemporaneous Documentation: According to Announcement 42/2016 of the State Taxation Administration on Improving Related Declaration and Matters Related to Contemporaneous Documentation, enterprises must report their transactions with related parties and prepare corresponding contemporaneous documentation, including:
-
- a master file;
- a local file; and
- a country-by-country report.
- These documents require detailed disclosure of information on:
-
- connected transactions;
- value chain analysis; and
- transactions with other group members.
- Transfer pricing methods: The tax authorities require enterprises to adopt pricing methods that comply with the arm's-length principle when conducting connected transactions. This typically involves analysing comparable uncontrolled transactions to determine the appropriate transaction price or profit level.
- APAs: These allow enterprises, together with their related parties, to negotiate and reach agreement with the tax authorities in relation to the pricing principles and calculation methods for connected transactions in future years. This helps enterprises to determine the tax treatment in advance, thereby reducing tax uncertainty.
- Transfer pricing investigations and adjustments: If the tax authorities consider that an enterprise's connected transaction pricing does not conform to the arm's-length principle, they may conduct a transfer pricing investigation and make adjustments to ensure compliance with the regulations.
- Value chain analysis: The tax authorities emphasise the importance of value chain analysis in transfer pricing, particularly when considering special geographical factors and intangible asset contributions.
- Implementation of the Base Erosion and Profit Shifting (BEPS) Programme: China actively participates in and implements the BEPS Programme promoted by the Organisation for Economic Co-operation and Development, aimed at strengthening transfer pricing rules and combating international tax avoidance.
- Informatisation management: In light of technological advancements, the tax authorities are promoting informatisation in transfer pricing management to enhance efficiency and accuracy.
- International cooperation: The tax authorities collaborate with their counterparts in other countries through bilateral and multilateral agreements such as tax treaties and the exchange of country-by-country reports in order to enhance global tax transparency.
Collectively, these measures constitute the legal framework for China's transfer pricing regime, aimed at preventing BEPS and ensuring tax equity. Multinational enterprises operating in China must adhere to these regulations to ensure that their transfer pricing arrangements are compliant.
5.6 Are there statutory limitation periods?
The statutory deadlines for the recovery of tax payments are set out in the Tax Administration Law and its implementing rules, as follows:
- Non-payment or underpayment of taxes: In case of the non-payment or underpayment of taxes by taxpayers or withholding agents, the tax authorities may request payment of the taxes as owed within three years, but no late payment fees may be imposed.
- Non-payment or underpayment of taxes due to calculation errors or other mistakes by taxpayers: Where a non-payment or underpayment of taxes is caused by non-intentional mistakes such as calculation errors made by taxpayers or withholding agents, the tax authorities may recover the taxes and late payment fees within three years; under special circumstances, this period may be extended to five years.
- Tax evasion, refusal to pay taxes or tax fraud: In case of tax evasion, refusal to pay taxes or tax fraud, the tax authorities' recovery of unpaid or underpaid taxes, late payment fees or tax fraud proceeds is not subject to the above time limits.
- Non-payment or underpayment of taxes due to failure to file tax returns: If taxpayers fail to file tax returns, resulting in non-payment or underpayment of taxes, the tax authorities may refer to the provisions in the second point above, generally within three years, which can be extended to five years under special circumstances.
- Special tax adjustments for connected transactions: According to Article 123 of the Implementing Regulations of the Enterprise Income Tax Law, if business transactions between an enterprise and its related parties do not comply with the arm's-length principle, or if an enterprise implements other arrangements without a reasonable business purpose, the tax authorities are entitled to make tax adjustments within 10 years of the tax year in which such transactions occurred.
- Tax arrears: Where tax arrears have arisen, the tax authorities may pursue the recovery of taxes according to law until they have been fully collected and paid into the state treasury. No unit or individual is exempt and there is no time limit within which the tax authorities must pursue tax arrears.
These regulations ensure the timely and accurate collection of taxes while also affording taxpayers a certain degree of legal protection. Specific deadlines for tax recovery may be adjusted based on specific circumstances and changes in relevant laws and regulations.
6 Compliance
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
In general, corporate tax returns must be submitted and the relevant taxes paid within 15 days of the end of each month or quarter.
General deadlines: For most types of taxes - such as value-added tax (VAT) and enterprise income tax (prepaid) - the deadline for filing and paying taxes typically falls on the 15th day of each month.
Special circumstances: In case of special circumstances requiring an adjustment to the filing and payment deadlines, the local tax authorities must report to the State Taxation Administration in advance for record-keeping purposed and promptly notify taxpayers accordingly.
Other matters needing attention: Taxpayers must comply with the stipulated deadlines for filing tax returns and paying taxes. Failure to do so may result in legal consequences such as fines.
Taxpayers may utilise online channels such as e-tax bureaux for filings and tax payments, to enhance efficiency and convenience.
6.2 What penalties exist for non-compliance, at corporate and executive level?
Non-compliance with the tax regulations at both the corporate and executive levels can incur serious and multi-layered penalties, as primarily enforced under relevant laws and regulations, such as:
- the Criminal Law; and
- the Law on the Administration of Tax Collection.
Corporate penalties:
Administrative penalties:
- Fines: Companies may face fines ranging from 50% to five times the amount of unpaid or underpaid taxes.
- Late payment fees: Companies must also pay late payment fees for overdue tax payments.
- Tax administration measures: The tax authorities may take measures such as tax preservation and compulsory execution, including sealing, detaining, auctioning or selling corporate assets to cover tax liabilities.
Criminal penalties: If corporate tax evasion constitutes a crime - for example, where a large amount of tax is evaded, accounting for over 10% of the tax base - the corporate taxpayer may face criminal liability, although this generally falls on directly responsible executives and other directly liable personnel.
Executive penalties:
Administrative penalties: Executives, as directly responsible personnel, may be subject to administrative penalties such as warnings and fines for corporate tax violations.
Criminal penalties:
- Tax evasion: Executives who evade taxes by means of false tax declarations or non-declaration through deception or concealment involving a large amount which exceeds 10% of the tax base may face up to three years' imprisonment or criminal detention, along with fines. For substantial amounts exceeding 30% of the tax base, the penalties may range from three to seven years' imprisonment, along with fines.
- Other related crimes: Crimes such as fraudulently obtaining export tax rebates or illegally purchasing VAT invoices may also result in criminal penalties for executives.
Other consequences: Executives may also face penalties from industry regulators, such as:
- revocation of professional qualifications; or
- a prohibition on serving as a corporate executive.
Tax violations may severely damage a company's reputation and credibility, thus impacting its business development and market position.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
China has an international tax information reporting system which incorporates country-by-country reporting. This is primarily reflected in China's support for and participation in international tax cooperation, including the implementation of international tax information exchange standards such as the Common Reporting Standard (CRS).
As a CRS participating country, China has committed to and implemented related international standards. By exchanging non-resident financial account information with other participating countries, China has enhanced tax transparency in a bid to curb cross-border tax evasion. This kind of information exchange typically involves country-by-country reporting, whereby financial institutions must report to relevant tax authorities the financial account information of their clients as held in various countries. The tax authorities then exchange this information with other countries.
Specifically, Chinese financial institutions must conduct due diligence on their non-resident clients according to CRS requirements, while collecting and reporting their financial account information. This information includes:
- the account holder's identity;
- income information about account balance, interest, dividends and capital gains; and
- transaction information about account opening, closure and changes.
Financial institutions must submit this information within the specified timeframe to the State Taxation Administration, which will then exchange it with other CRS participating countries.
In addition, China has concluded bilateral or multilateral tax treaties and tax information exchange agreements with other countries and regions, further strengthening international tax cooperation and information exchange. These agreements and treaties provide a legal basis and institutional guarantee for China to conduct tax information reporting and exchange with other countries.
7 Consolidation
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
In China, the question of whether tax consolidation is allowed based on tax liability, payment or both involves multiple aspects of tax policy and administration.
China has no specific tax policy in this regard. Tax policies are typically formulated based on factors such as tax categories, taxpayers and tax deadlines, rather than simply based on tax liability or payment behaviour for consolidation purposes.
While there are indeed concepts and practices related to tax consolidation, these usually apply in specific circumstances, such as:
- consolidated taxation for enterprise groups; and
- tax credits under cross-border tax treaties.
In such cases, tax consolidation may be considered in order to:
- avoid double taxation;
- optimise resource allocation; and
- improve tax efficiency.
Consolidated taxation for enterprise groups: In certain scenarios, China may allow eligible enterprise groups to engage in consolidated taxation to optimise resource allocation and tax administration. This typically requires close financial and operational ties within enterprise groups and should lead to improved tax efficiency. However, consolidated taxation is not based solely on tax liability or payment but requires the satisfaction of a series of conditions and procedures.
Tax credits under cross-border tax treaties: China has concluded tax treaties with many countries to avoid double taxation in the case of cross-border activities. Pursuant to these treaties, taxpayers may enjoy tax credits or exemptions under certain conditions. Although this involves tax consolidation or reduction, it is not a direct consolidation based on tax liability or payment behaviour.
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Corporate taxpayers in China are exposed to several indirect taxes - including, among others:
- value-added tax (VAT);
- consumption tax; and
- customs duties.
VAT: VAT is levied on the value added during the production and distribution of goods and services. When enterprises sell goods or render services, they must collect VAT from buyers and then pay it to the tax authorities.
VAT is an indirect tax that can be passed on to consumers, with enterprises transferring the tax burden by increasing the sale prices of goods or services.
VAT is a central pillar of China's tax regime, contributing over 60% of total tax revenue. The collection of VAT helps to prevent double taxation and promotes the circulation of goods and services.
Consumption tax: Consumption tax is levied on specific consumer goods and consumption behaviours. Enterprises must pay consumption tax as regulated when producing or selling taxable consumer goods.
Like VAT, consumption tax is an indirect tax that can be passed on to consumers, with enterprises incorporating the tax into the price of goods.
Consumption tax mainly applies to specific consumer goods, such as:
- tobacco;
- alcohol;
- cosmetics;
- jewellery;
- precious stones; and
- fireworks.
As these goods are often considered luxury goods or socially harmful goods, consumption tax is imposed to guide consumption and regulate social distribution.
Customs duties: Customs duties are levied on imported and exported goods. They serve as an important trade protection measure, restricting the import of foreign goods and encouraging the export of domestic goods through taxation.
As they affect the prices of imported and exported goods, customs duties indirectly impact on consumers' purchasing power and consumption behaviour. They are also a significant source of national fiscal revenue.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
The transfer of interests in a corporate entity - whether through the transfer of corporate equity or the entire company - typically necessitates the payment of certain taxes and fees. The specific types and amounts of such taxes and fees will depend on various factors, including:
- the nature of transfer;
- the tax categories involved;
- statutory tax regulations; and
- the specific circumstances of both the transferor and the transferee.
The potential taxes and fees that may be incurred during the transfer of interests in corporate entities include the following.
Enterprise income tax: This is levied on production income, business income and other types of income of domestic enterprises and business units. Where corporate equity or the entire company is transferred and the transferor is a company, the income derived from the transfer is subject to enterprise income tax.
The tax rate and calculation method are generally based on the difference between the transfer price and the company's net assets or the tax basis of the equity being transferred. In China, the standard rate of enterprise income tax is 25%, although eligible small and low-profit enterprises and high-tech enterprises may enjoy lower tax rates.
Individual income tax: If the transferor is an individual, the income derived from the transfer of corporate equity is subject to individual income tax. The taxpayer in this context is the individual shareholder and the tax rate will depend on specific tax regulations.
Income from property transfer is subject to a proportional tax rate of 20% - that is, individual income tax will be calculated and paid at a rate of 20% based on the balance of the income from the transfer of equity minus the original value and reasonable expenses.
Stamp duty: Stamp duty is levied on the issue and receipt of legally binding documents in economic activities and interactions. In the process of the transfer of corporate equity or the entire company, a transfer contract or an agreement is a necessary legal document and is thus subject to stamp tax.
The rate of stamp duty typically depends on the value of the contract. In China, both parties to an equity transfer contract must pay stamp duty at a rate of 0.05% of the contract value.
Other taxes and fees: In addition to the primary tax categories mentioned above, other taxes and fees may be incurred in the event of a corporate transfer, such as:
- deed tax, which may be levied under specific circumstances, such as when land or building rights are used as capital contributions or for capital expansion; and
- land VAT, which may be levied when real estate is transferred with a statutory appreciation.
The taxpayers and tax rates for these taxes and fees vary depending on local tax regulations.
Top tips: Our top tips in this regard are as follows:
- Consult professionals: Due to the complexity and variability of the tax issues involved in corporate transfers, both the transferor and the transferee should consult professional tax advisers or lawyers to ensure compliance with relevant tax regulations and accurate tax calculations.
- Clarify tax responsibilities: Before executing a transfer contract, both parties should:
-
- fully understand and assess their respective tax obligations; and
- clearly stipulate their respective tax responsibilities in the contract.
- Special considerations for cross-border transfers: When conducting cross-border corporate transfers, both the transferor and the transferee should attach particular importance to local tax regulations and tax treaties to avoid unnecessary risks and costs arising from tax differences.
9 Trends and predictions
9.1 How would you describe the current tax landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The tax environment in China has changed significantly in recent years, including in the following respects:
- Optimisation of the tax regime: China has a multi-tiered and multi-category tax regime, which includes taxes such as:
-
- enterprise income tax;
- value-added tax (VAT);
- individual income tax; and
- consumption tax.
- In recent years, tax reforms have sought to:
-
- optimise the tax structure;
- reduce the tax burden on enterprises and individuals; and
- promote high-quality economic development.
- Digital tax administration: In line with the development of information technology, the tax authorities have accelerated the digital transformation. The application of digital tools such as electronic invoices, online declarations and an intelligent tax regime has:
-
- improved the efficiency and transparency of tax collection and administration; and
- reduced compliance costs for taxpayers.
- Adjustment of tax policies: The government is continually introducing various preferential tax policies to support the development of specific industries, such as:
-
- high-tech enterprises;
- environmental protection enterprises; and
- the digital economy.
- Meanwhile, a preferential tax structure has been optimised to:
-
- ensure the precision and effectiveness of policies; and
- drive the transformation and upgrading of the economic structure.
- Strengthened international tax cooperation: In light of the globalisation of Chinese enterprises, tax policies have placed greater emphasis on alignment with international tax rules. For example, China has taken steps to:
-
- actively participate in the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Programme;
- drive the exchange of cross-border tax information;
- prevent double taxation; and
- promote international tax fairness.
New developments and legislative reforms that may affect the tax environment in China in the next 12 months include the following.
Further VAT reforms: There may be continued efforts to:
- expand the VAT regime reforms;
- improve the VAT invoice management system; and
- enhance the efficiency of tax collection and administration.
Additionally, adjustments to VAT rates for specific industries may be made to promote economic development.
Individual income tax: There are indications that the government may revise the law on individual income tax by:
- adjusting the tax rate structure;
- increasing the exemption threshold; or
- expanding the scope of special additional deductions.
The aim is to better reflect changes in residents' income levels and consumption demands and thus reduce the tax burden on middle and low-income groups.
Introduction of green tax policies: Along with heightened environmental protection requirements, it is anticipated that more tax policies relating to environmental protection - such as carbon tax and environmental protection tax - will be introduced to promote the green economy and environmental protection. These policies aim to guide enterprises and individuals towards more environmentally friendly production and consumption behaviour.
Improved tax rules for the digital economy: In light of the rapid development of the digital economy, the tax authorities may introduce specific tax regulations on cross-border e-commerce, digital services and similar activities, with the aim of:
- better regulating tax collection;
- ensuring tax fairness; and
- preventing tax base erosion.
Updates to international tax agreements: New bilateral tax agreements may be concluded and existing agreements updated in order to:
- strengthen tax cooperation with major economies;
- prevent double taxation; and
- facilitate cross-border investment and trade.
10 Tips and traps
10.1 What are your top tips for navigating the tax regime and what potential sticking points would you highlight?
Top tips:
- Maintain compliance awareness:
-
- Stay updated on and abide by the latest tax laws and regulations.
- Ensure that corporate and individual tax declarations and payments are compliant.
- Avoid fines and legal risks arising from violations.
- Optimise tax planning:
-
- Engage in reasonable tax planning.
- Fully leverage government tax incentives.
- Legally reduce tax burdens and enhance financial efficiency.
- Tax optimisation can be achieved through structural optimisation, cost rationalisation and other means.
- Strengthen financial management:
-
- Establish sound financial records and internal control regimes to ensure the accuracy and completeness of all tax-related data, thereby facilitating tax audits and declarations.
- Conduct regular financial audits to identify and rectify potential issues.
- Leverage professional resources: Hire professional tax consultants or accounting firms to:
-
- obtain professional tax advice and services; and
- avoid errors stemming from inadequate professional knowledge in terms of complex tax issues.
- Stay informed of policy changes: Closely monitor changes and trends in tax policies, and promptly adjust corporate or individual tax strategies in response, to adapt to the new tax environment.
Potential challenges:
- Frequent changes in tax laws: China's tax laws and related policies are revised frequently and thus require enterprises and individuals to keep track of the latest tax developments and adapt to such changes, which can complicate compliance efforts.
- Cross-border tax complexity: As enterprises become increasingly international, cross-border tax issues such as transfer pricing and cross-border tax treaty application arise, posing complex challenges that necessitate a deep understanding of international tax rules.
- Digital economy: Tax collection and administration in the digital economy are still evolving and relevant regulations are yet to be fully developed. Therefore, enterprises in this sector may face uncertainties and compliance risks in their tax arrangements.
- Tax audits and inspections: As the intensity of tax audits and inspections by the tax authorities is increasing, enterprises must be prepared and ensure the authenticity and completeness of their tax information to avoid penalties due to audit findings.
- Regional differences in tax policies: There may be differences in tax policies across China, particularly in terms of tax incentives and implementation details. In this regard, enterprises must understand and adapt to the tax regulations of different regions to avoid compliance issues arising from inconsistencies in policy interpretation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.