Chinese tax law

In China, the most important tax items for companies and employees are the corporate income tax, value added tax and the individual income tax, to which the progressive tax rate applies according to the income level.

For a long time, two-tiered tax system applied to different business transactions in China. On the one hand, deliveries of goods and assets were subject exclusively to value added tax (VAT), a sales tax with possible deduction of input tax, and on the other hand services were subject to the non-deductible business tax (BT). The difference between the VAT (deductible) and the BT (non-deductible) led to problems and confusions. To alleviate the weakness of this two-tiered system, a pilot project on value added tax was launched on 1 November 2012 in Shanghai, which was extended nationwide from 1 August 2013. Gradually, the taxation of various services (except for assembly and engineering services) was converted from BT to VAT. From 1 May 2016, the Chinese government has now completely abolished BT. Thus; deliveries of both goods and services are subject to deductible VAT, albeit with different tax rates. BT is no longer applicable.

Further relevant is the taxation on corporate profits generated in China. In addition to the 25% corporate income tax, foreign-invested companies had in the past been required to deduct a withholding tax of 10% on the profits to be distributed to shareholders abroad. The withholding tax was reduced to 5% in the course of the renegotiation of the German-Chinese Double Taxation Agreement ("DBA") in 2014. The new DBA came into force on 1.1.2017.

Also, a non-resident company (without a branch or a subsidiary in China) that has a so-called permanent establishment (“PE”) in China is subject to corporate income tax, both on the revenue it receives from within China and on foreign sourced revenues, which have a close connection to the PE in China. The tax rate is currently 25%.

A PE may, for example, be a place where the company does business, has an administrative unit, provides services over a period of time or maintains a production facility or a workshop. It is often overlooked but worth mentioning that performing assembly and testing services constantly for a long period of time to the equipment sold to China is considered as having a PE in China from the tax law perspective, therefore taxable.

Generally speaking, the Chinese government often uses tax instruments to adjust and shape its economy. Therefore impressive tax exemptions or benefits may sometimes be available, which shall not be neglected. It is advised to negotiate with relevant local authorities to make sure that all available tax exemptions, allowance or subsidies, etc., applicable to that specific project will be granted.

From an organizational point of view, it should be noted that there are two parallel tax offices, national and local tax offices; the national one has offices in each city. They deal with different types of tax; every company operating in China has to deal with both tax offices.

Our consulting services for the Chinese tax law include:

• Advice on tax regulations and various tax impacts when formulating the structure of the Chinese project
• Referring clients to professional and highly experienced tax consultants