OVERVIEW OF CHINA'S CURRENT TAX SYSTEM
Income Tax on Enterprises with Foreign Investment
and Foreign Enterprises
(1) Taxpayers
a. Enterprises with foreign investment include Chinese-foreign
equity joint ventures, Chinese-foreign contractual joint ventures
and wholly-foreign owned enterprises.
b. Foreign enterprises include foreign companies, enterprises
and other economic organizations which have establishments
or places in China engaged in production or business operations
or which, though without establishments or places in China,
have income from sources within China.
(2) Tax base
The enterprises with foreign investment with head office in
China pay income tax on their world-wide income. Foreign enterprises
pay income tax only on their income derived from sources within
China.
The income tax base for enterprises with foreign investment
and foreign enterprises is the taxable income which is the
amount remaining from its gross income in a tax year after
allowable deduction for costs, expenses and losses.
Any foreign enterprise which has no establishment or place
in China but derives income of profits, interest, rental,
royalties and other income from sources within China or which,
though it has an establishment or place in China, the said
income is not effectively connected with such establishment
or place, is taxed on the basis of the gross amount of such
income.
(3) Tax rates and calculation of the amount of tax payable
The income tax on enterprises with foreign investment and
foreign enterprises is 30% of the taxable income plus 3% local
income tax, totalling 33% rate. Any foreign enterprise which
has no establishment or place in China but derives income
of profits, interest, rental, royalties and other income from
sources within China or which, though it has an establishment
or place in China, the said income is not effectively connected
with such establishment or place, pays tax of 20% on such
income. The formula for computing the amount of tax payable
is:
Amount of tax payable = Taxable income ×Applicable tax
rate
(4) Main tax incentives
a. Tax exemptions or tax reductions may be granted to enterprises
with foreign investment of a production nature, export-oriented
enterprises with foreign investment, technologically advanced
enterprises with foreign investment, and enterprises with
foreign investment and foreign enterprises established in
the Special Economic Zones, the Economic and Technological
Development Zones, the Coastal Open Economic Zones and the
New and High-technology Industrial Development Zones specified
by the State.
b. The share of profits earned by foreign investors from their
invested enterprises may be exempted from tax. The foreign
investor who reinvests its share of profits from enterprises
with his investment directly into that enterprise by increasing
its registered capital or who uses the profit as capital investment
to establish another enterprises with foreign investment may
receive some tax refund.
c. The exemption from or reduction of local income tax for
any enterprise with foreign investment engaged in an encouraged
industry or project may, in accordance with the actual situation,
be granted by the People's Government of the relevant Province,
Autonomous Region or Municipality directly under the State
Council.
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