Income Tax in China

When are tax returns due? That is, what is the tax return due date?

Monthly individual income tax returns are due by the 15th of the following month (but see discussion on compliance requirements).

Annual individual income tax returns are due by 31 March of the following year.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in China?  

Monthly returns:

For employment income, employers must file individual income tax withholding returns on a monthly basis and settle the tax payments by the 15th day of the month following the date of receipt of income. In practice, the due dates may be extended in certain locations. The same monthly filing requirement and due date applies for individuals who receive employment income but have no withholding agent in China. Such individuals must file an individual income tax return on a self-declaration basis.

Annual returns:

Beginning calendar year 2006, individuals of China domicile and non-domiciles who were full-year resident in China during the calendar year with annual income exceeding RMB120,000 are required to file annual individual income tax returns on self-declaration basis. Individuals have the legal obligation to file even if taxes have been duly withheld and paid on a monthly basis such that there is no additional tax liability accrued on the annual return.

Individual Taxation:

Individuals who have a 'domicile or place of abode' in China are subject to individual income tax (IIT) on their worldwide income. Foreign individuals and residents of Hong Kong, Macau, and Taiwan, who are normally considered as non-China domiciled individuals, are taxed in accordance with their physical presence in China

An individual is taxed in China on one's income by category. China's IIT law groups personal income into 11 categories. Each income category has its own tax rate(s), allowable deduction, etc.

The 11 categories of income are:

·        Employment income (i.e. wages and salaries).

·        Income from the operation of sole proprietorship.

·        Income from the operation of a business on a contract or lease basis.

·        Payment for labour services.

·        Author's remuneration.

·        Royalties.

·        Interest, dividends, and profit distribution.

·        Rental income.

·        Income from transfer of property.

·        Incidental income.

Other taxable income as determined by the Ministry of Finance of the State Council.

Personal income tax rates:

Employment income tax rates

Calculation of IIT on monthly employment income for wages and salaries is based on progressive tax rates (see the table below) using the following formula:

(Monthly gross taxable income x Tax rate) - Quick deduction

Monthly taxable income (CNY) (1)		Tax rate (%)	Quick deduction (CNY)
Grossed income	Net income
0 - 1,500	0 - 1,455	3	0
Over 1,500 - 4,500	Over 1,455 - 4,155	10	105
Over 4,500 - 9,000	Over 4,155 - 7,755	20	555
Over 9,000 - 35,000	Over 7,755 - 27,255	25	1005
Over 35,000 - 55,000	Over 27,255 - 41,255	30	2755
Over 55,000 - 80,000	Over 41,255 - 57,505	35	5505
Over 80,000	Over 57,505	45	13505

Notes:

1. Monthly taxable income after deducting the monthly standard deduction (see the Deductions section for more information).

2.  Where an individual's income tax liability is borne by the employer, the tax liability is calculated on a grossed-up basis (i.e. tax on tax).

Business income tax rates

Income earned by individuals from privately-owned businesses, sole proprietorship enterprises, or partnerships is generally subject to IIT at progressive rates from 5% to 35%, as follows:

Annual taxable income (CNY)	Tax rate (%)
0 - 15,000	5
Over 15,000 - 30,000	10
Over 30,000 - 60,000	20
Over 60,000 - 100,000	30
Over 100,000	35

Tax rates for income derived from labour services

Labour service income is income derived from independent service activities such as design, medical practice, legal practice, consulting, etc. For income derived from labour services, IIT is calculated based on progressive tax rates ranging from 20% to 40%.

Monthly taxable labour service income (CNY)	Tax Rate(%)
0 - 20,000	20
Over 20,000 - 50,000	30
Over 50,000	40

Tax rates for other personal income

A flat rate of 20% is applied on the remaining categories of income, including royalties, incidental income, author's remuneration, rental income, interest income, dividends, and capital gains, unless specifically reduced by circulars issued by the SAT.

Taxes on Corporate Income:

Tax resident enterprises (TREs) are subject to corporate income tax (CIT) on their worldwide income. A non-TRE that has no establishment or place in China is taxed only on its China-source income. A non-TRE with an establishment or place in China shall pay CIT on income derived by such establishment or place from sources in China as well as income derived from outside China that effectively is connected with such establishment or place.

Under the CIT law, the standard tax rate is 25%.

A lower CIT rate is available for the following sectors/industries:

·        Qualified new/high tech enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a new/high tech enterprise.

·        Integrated circuit (IC) production enterprises with a total investment exceeding 8 billion renminbi (CNY), or that produce integrated circuits with a line-width of less than 0.25 micrometre, are eligible for a reduced CIT rate of 15%.

·        Key software production enterprises and IC design enterprises are eligible for a reduced CIT rate of 10%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a key software production enterprise or key IC design enterprise.

·        Qualified technology-advanced service enterprises are eligible for a reduced CIT rate of 15%. An enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a technology-advanced service enterprise.

·        From 1 January 2016 to 31 December 2017, qualified technology-advanced service enterprises in the 15 innovative service development pilot areas (e.g. Shanghai, Tianjin, Guangzhou, Shenzhen) are eligible for a reduced CIT rate of 15%. This incentive is only available to enterprises that are mainly engaging in the prescribed technical services, and an enterprise has to fulfil a set of prescribed criteria and be subject to an assessment in order to qualify as a technology-advanced service enterprise.

·        Enterprises established in the Qianhai Shenzhen-Hong Kong Modern Services Industry Cooperation Zone are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the zone.

·        Enterprises established in Zhuhai’s Hengqin New Area are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the area.

·        Enterprises established in the Pingtan Comprehensive Experimental Zone are eligible for a reduced CIT rate of 15%, provided that the enterprise is engaged in projects that fall within the Catalogue for CIT Preferential Treatments of the zone.

·        For qualified small and thin-profit enterprises with annual taxable income of less than CNY 500,000, the CIT rate is reduced to 10% from 1 January 2017 to 31 December 2019.

·        From 1 January 2011 to 31 December 2020, encouraged enterprises in the Western Regions are eligible for a reduced preferential CIT rate of 15%.

Corporate Deductions:

Generally, an enterprise is allowed to deduct reasonable expenditures that actually have been incurred and are related to the generation of income.

Depreciation of fixed assets

Fixed assets with useful lives of more than 12 months must be capitalised and depreciated in accordance with the CIT regulations. Generally, depreciation is calculated by the straight-line method. Shorter tax depreciation life or accelerated depreciation may be allowed due to advancement of technology or suffering from constant vibration or severe corrosion. Production-nature biological assets, such as livestock held for breeding and commercial timber, also have to be capitalised and depreciated using the straight-line method.

Under the straight-line method, the cost of an item, less its residual value, is depreciated over the useful life of the asset. Residual value should be reasonably determined based on the nature and usage of the asset. The CIT law provides minimum useful lives for the following assets:

Assets	Years
Buildings and structures	20
Aircraft, trains, vessels, machinery, mechanisms, and other production equipment	10
Appliances, tools, and furniture etc. related to production and business operations	5
Means of transport other than aircraft, trains, and vessels	4
Electronic equipment	3
Production-nature biological assets in the nature of forestry	10
Production-nature biological assets in the nature of livestock	3

Accelerated depreciation

Shorter tax depreciation life or accelerated depreciation is allowed for particular types of fixed assets (e.g. fixed assets that need to be replaced more frequently due to advancement of technology, fixed assets that suffer from constant vibration or severe corrosion). Certain fixed assets acquired on or after 1 January 2014 by companies in certain specific industries may be expensed-off in one lump sum in the year of acquisition or be depreciated over a shorter appreciation life or under an accelerated depreciation method.

Where a shorter depreciation period method is applied, the minimum depreciation period cannot be less than 60% of the minimum depreciation period as prescribed in the CIT Law; where an accelerated depreciation method is applied, the double-declining-balance method or sum-of-years-digits method can be used.

Amortisation of intangibles and goodwill

A deduction is allowed for amortisation of intangible assets, such as, but not limited to, patents, trademarks, copyrights, and land use rights. Generally, intangible assets have to be amortised over a period of not less than ten years. For an intangible asset obtained through capital contribution or assignment, it can be amortised according to the useful life prescribed in the laws or agreed in the contracts, if any. However, acquired goodwill is not deductible until the invested enterprise is entirely transferred or liquidated.

Organisational and start-up expenses

Organisational and start-up expenses are tax deductible fully in the first year of operation.

Research and development (R&D) expense

For R&D expenses incurred for new technology, new products, or new craftsmanship, an extra 50% of the actual expenses incurred are also tax-deductible as an incentive.

From 1 January 2017 to 31 December 2019, the extra 50% deduction is increased to 75% for qualified small and medium-sized technology enterprises.

Asset loss

Asset loss (including bad debt loss) may be deductible in the tax year during which such loss is incurred, provided that supporting documents are submitted to and accepted by the in-charge tax bureau before annual income tax reconciliation filing.

Interest expenses

Interest on loans generally is tax-deductible. For interest expenses on borrowings from non-financial institutions by a non-financial institution, the portion that does not exceed the commercial rate is deductible. The tax deduction of interest paid to related parties is subject to the thin capitalisation rule under the CIT law.

Reserves and provisions

Provisions for asset impairment reserves (e.g. bad debt provisions) and risk reserves generally are not tax-deductible unless otherwise prescribed in the tax rules. Financial institutions and insurance companies may deduct certain provisions and reserves subject to the caps specified in the relevant tax circulars.

Contingent liabilities

The CIT law does not specifically address the deductibility of contingent liabilities. According to the general principle of the CIT law, contingent liabilities are liabilities that an enterprise has not actually incurred and thus shall not be tax-deductible.

Charitable donations

Charitable donations are tax-deductible at up to 12% of the annual accounting profit. Non-charitable donations, as well as sponsorship expenditures that are non-advertising and non-charitable in nature, are not deductible.

Wages and staff welfare expenses

Reasonable wages and salaries of employees incurred by an enterprise are tax-deductible. Directors’ fees are also tax-deductible. As an incentive to encourage the hiring of handicapped people, 200% of the actual salary expenses paid to handicapped staff are deductible.

Basic social security contributions, including basic pension insurance, basic medical insurance, unemployment insurance, injury insurance, maternity insurance, and housing funds, that are made by an enterprise in accordance with the scope and criteria as prescribed by the state or provincial governments are deductible.

Commercial insurance premiums paid for investors or employees shall not be tax-deductible unless it is paid for safety insurance for workers conducting special types of work.

Staff welfare expenses, labour union fees, and staff education expenses are tax-deductible at up to 14%, 2%, and 2.5% of the total salary expenses, respectively. For qualified enterprises, the cap for tax-deductible staff education expenses is increased to 8% of the total salary expenses.

Entertainment expenses

Entertainment expenses are tax-deductible up to the lesser of 60% of the costs actually incurred and 0.5% of the sales or business income of that year. The excess amount must not be carried forward to and deducted in the following tax years.

Advertising expenses and business promotion expenses

Advertising expenses and business promotion expenses are deductible at up to 15% (30% for certain enterprises in the cosmetics, medicine, and beverage industries) of the sales (business) income of that year unless otherwise prescribed in the tax regulations. Any excess amount is allowed to be carried forward and deductible in the following tax years. Advertising expenses and business promotion expenses incurred by the tobacco industry are entirely not tax-deductible.

Fines and penalties

Fines, penalties, and losses arising from confiscation of property are not deductible for CIT purposes.

Taxes

CIT payments and surcharges that are imposed on overdue taxes are not deductible for CIT purposes.

Net operating losses

Tax losses can be carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted.

Payments to affiliates

Management fees for stewardship are not deductible, but services fees paid for genuine services provided by affiliates in China or overseas and charged at arm’s length should be deductible. Other payments to affiliates, such as royalties, are also tax-deductible, provided that the charges are at arm’s length.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.