Taxation in China is administered by the State Administration of Taxation. This government body establishes the tax laws in China and sets the tax rates for all companies. Foreign companies doing business in China need to comply with the Chinese tax system. Often it becomes overwhelming for the foreign businesses to understand the China tax system. This is the reason having a qualified and experienced China business lawyer by your side will simplify your operations in China.
Understanding China’s Tax System for Foreign Companies
Amid the COVID-19 crisis, from 1 May 2020 to 31 December 2020, the payment of corporate income tax of small and thin-profit enterprises can be deferred to the first tax filing period in 2021. As a foreign national, you are required to register with the State Administration of Taxation (SAT) as soon as you are eligible for taxation in China. According to the Greenback Expat Tax Services, income from employment is taxed monthly at a progressive tax rate that caps at 45%. Companies in special industries need to comply with the special regulations issued by the relevant government agencies.
The taxable base for a resident enterprise or a non-resident enterprise with an establishment or business site in China is taxable income.
Taxable income equals
- Gross income less non-taxable income
- Tax-exempt income
- Various deductions
- Net operating loss (NOL) carried over from previous years
In general, all expenses, costs, taxes, losses and other payments incurred by an organization are deductible to the extent of reasonableness and direct relevance to that enterprise’s income. As of January 1, 2018, the five-year limit has been extended to 10 years for new high-technology enterprises and for small and medium-sized scientific enterprises. Losses cannot be carried back.
The Corporate Income Tax (CIT) Law in China–
The Corporate Income Tax Law was drafted on the first of January 2008. In this law, domestically-invested enterprises and the other set for foreign-invested enterprises (FIEs) and foreign enterprises (FEs) has been merged together. CIT applies to what is officially called a tax resident enterprise (TRE) of China. This is deemed to be a company that is established in China or a foreign company that has its effective management located in China.
Businesses must register with the customs authorities if importing or exporting. The General Administration of Customs or GAC supervises the collection of customs duties, import VAT and import consumption tax, which are all directly attributed to the central fiscal revenue. It also oversees the operation of bonded zones.