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.
-------------------------------------------------------------------------------------------------
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.
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