A Synopsis of the Tax System in the PRC (part 1)

Background
When a sourcing project gets to a certain size, it often makes sense to set up a permanent presence on-the-ground in China to help manage the supply chain.  This series of blog posts covers some of the key areas of consideration when it comes to setting up in China.

Taxation

The PRC levies a wide range of taxes including income taxes (corporate income tax an individual income tax), turnover taxes (value added tax, business tax and consumption tax), taxes on real estates (land appreciation tax, real estate tax and urban and township land-use tax) and other taxes such as deed tax, stamp duty, custom duties, motor vehicle acquisition tax, vehicle and vessel tax and resource tax. There is no capital gains tax as such in the PRC. Gains on the sale of fixed assets are taxable as ordinary income.

Enterprise Income Tax (“EIT”)

The current EIT law took effect from 1 January 2008 and introduced a new concept-Tax resident enterprise (“TRE”). TRE refers to an enterprise established according to the Chinese Law or an enterprise established according to foreign law but with its effective management located in China.

TREs are subject to EIT on worldwide income, but tax credits may be available under dual tax treaties for income tax paid in other countries. All TREs should pay income tax on the income obtained from production, business operations and other sources. The standard EIT rate is 25%. A lower tax rate is available for qualified small and thin-profit enterprises (20%) and for qualified new/high tech enterprises (15%).

Foreign enterprises (i.e. those foreign companies without a separate legal presence in the PRC such as a representative office) must pay income tax on the income they obtain from production, business operations and other sources, where such income is derived from inside the PRC.

Written for CSIC by Sophie Mao
China based lawyer at www.Chibridge.net