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China's tax laws and policies are made by the
National People's Congress and its standing committee, State Council, the
Ministry of Finance, State Bureau of Taxation, State Council Customs Duty
Regulation Commission, and General Administration of Customs. The main tax law
for foreign investors is Foreign Income Tax Law of the People's Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises, adopted
at the Forth Session of the National People's Congress and promulgated by the
Order No. 45 of the President of PRC on April 9, 1991. According to Article 5 of
the law, the income tax on enterprises with foreign investment and the income
tax which shall be paid by foreign enterprises on the income of their
establishments or places set up in China to engage in production or business
operations shall be computed on taxable income at the rate of 30%. Local income
tax shall be computed on taxable income at the rate of 3%.
Generally, China's tax policy toward foreign
invested enterprises grants preferential tax to the industries and regions that
are encouraged by China to receive investments. The income tax on enterprises
with foreign investment and foreign enterprises established in special economic
zones is levied at the reduced rate of 15%. In addition, foreign enterprises
that have been operating for more than 10 years may be exempt from enterprise
income tax in the first and second profit-making years and enjoy a 50% reduction
in the following three years.
Other taxes that may affect foreign businesses
include land-use tax, land value-added tax, housing tax, contract tax, stamp
tax, business tax, tax on urban maintenance construction, tax on the occupation
of cultivated land and tax on vehicles and ships. There are certain tax treaties
that offer foreign businesses operating in China some breaks. China has signed
agreements with 60 countries on avoiding double taxation and tax evasion, and 51
agreements of which have gone into effect by July 1999. The first income tax
treaty between China and U.S. known as the Agreement for the Avoidance of Double
Taxation and the Prevention of Tax Evasion (Sino-U.S. Agreement) was signed in
1984. The agreement aimed "to reduce double taxation of income earned by
residents of either country from sources within the other country. Another goal
of the agreement was to prevent avoidance of the income taxes imposed by the
taxing authority of either country". Under the treaty, China cannot tax
U.S. business income unless the business activities in China are
"substantial enough to constitute a permanent establishment or fixed
Foreign investors may also be exempt from
personal income tax on the after-tax profits (dividends, bonuses) they obtain
from the foreign-funded enterprise. Production and management equipment,
building materials and vehicles used for production and other goods imported as
part of the total investment may be exempt from import duties, value-added tax
and consumption tax. Moreover, in order to competing with other
provinces/regions, local governments often have their own incentives for foreign
investors. The following chart shows the existing taxes implemented in China.
Taxation System in China
Source: China Council for the Promotion
of International Trade
|Value-added tax, consumption
tax, business tax
||Enterprise income tax,
foreign-invested enterprise and foreign enterprise income tax, and
individual income tax
||Resources tax, and city and
town land use tax
||City maintenance and
construction tax, tilling land possession tax, fixed assets investment
orientation regulated tax, and land value-added tax
||Housing property tax, city
real estate tax, and inheritance tax (not yet collected)
||Car and boat use tax, car
and boat license tax, stamp tax, contract tax, securities trading tax,
slaughter tax, and banquet tax
||Agricultural tax, and
||Imported and exported
Tax. This consists of value-added tax,
consumption tax and business tax, three kinds in all. These taxes are collected
according to the sales income or business income obtained by the taxpayers in
the process of production, circulation or service.
2. Income Tax.
This includes enterprise income tax (applicable to domestic enterprises such as
State-owned enterprises, collective enterprises, private enterprises, joint
enterprises, and shareholding enterprises), foreign-invested enterprises and
foreign enterprises income tax, and individual income tax, three kinds in all.
These taxes are collected according to the profits or income obtained by
producers, managers or individuals.
Tax. This consists of resources tax and city
and town land use tax, two kinds in all. These tax are collected from those who
engage in resources development or use city and township land, and this will
realize the compensated use of the State resources and regulate the resources
differentiate income of the taxpayers.
Purpose Tax. This includes city maintenance
and construction tax, tilling land possession tax, fixed asset investment
orientation regulated tax and land value-added tax, in four kinds. These taxes
are set for special purposes and to regulate special objects.
Tax. This includes housing property tax, city
real estate tax and inheritance tax (not yet collected), three in all.
6. Act Tax.
This includes car and boat use tax, care and boat license tax, stamp tax,
contract tax, securities trade (not yet collected), slaughter tax and banquet
tax, in seven kinds. These taxes are collected on special acts.
Tax. This includes agricultural tax and
husbandry tax, in two kinds. These taxes are collected from enterprises, units
and individuals that have obtained agricultural income and husbandry income.
Duty. This is collected on merchandise and
products that enter into or go out of China.
Please note that the above taxes are not
necessarily to be collected from each enterprise, unit or individual.Generally
speaking, profit-making enterprises should pay enterprise income tax.
Enterprises producing consumption goods that should be taxed should pay
consumption tax. Businesses engaged in fixed asset investment should pay fixed
asset investment orientation regulated tax. In addition, enterprises should pay
stamp tax for their production, business account and contracts signed with
others, and enterprises owing houses and cars should pay housing tax and car use
Apart from tax, the State stipulated that there
are three non-financial administrative income items that should be collected by
the tax authority, which include additional education fee, mine use fee and
cultural undertaking construction fee. According to the stipulations of the
State Council, provincial governments may require the collection of social
insurance fee by tax departments. Check with a local attorney or accountant to
make sure how taxation system works in China.
Real estate related taxes in China include
Sales Tax, Land Appreciation Tax, Cultivated Land Usage Tax, Transfer Tax,
Property Tax, City and Town Land Usage Tax, Urban Construction Tax, Stamp Tax,
and Income Tax. In addition, the local government or service providers levy
various fees on real estate transactions. For instance, There are about three
categories of real estate fees in Shanghai. They are: 1. Transaction handling
and registration fees; 2. Public notary and land measurement fees; 3. Others
consisting of appraisal, broker, auction, and exchange fees. The following table
shows major residential real property transaction related taxes.
Property Transaction Related Taxes**
* Include Sales Tax, Urban Construction
Tax, Education Tax, Property Tax, and Income Tax.
(X = Multiply)
||Sales Price X 3%
||Up to 50% of the tax may be
subsidized by local revenue agency
||Contracted Price X 0.5%
||Contracted Price X 0.5%
||Sales Price X 5%
||Maybe refunded if the seller
bought another home within 6 months before or after the sale
||Contracted price X 1%
||Rental income X 10.5%
||Owner or Landlord
||For rent income over RMB
||Rental income X 7.5%
||Owner or Landlord
||For rent income below RMB
||Contracted price X 0.5%
||Sales price X 5%
||Party with income
||Maybe refundable if bought a
new home before or after the transaction
||The difference between the
two exchanged properties X 3%
||The Party who paid more money
||Maybe subsidized with 50%
** There may also have some fees associated with the transaction.
Source: Zhang Yongyu/Fang Chen, Practical Real Estate Handbook, Shanghai
Oriental Press, 1999.