Here, SMEsChina.com invited our chief financial manager, Mr Zheng to introduce the company taxation for non residents owned enterprises and some popular topics and FAQs on the tax rules and regulations for a foreign company registered in mainland China.

zheng executive finance manager

Mr Zheng

Executive Finance Manager

Born in Ningbo, Zhejiang, majored in Corporate Finance and Tax Risk at Shanghai Jiaotong University, assists corporations of our customer operating their daily accounting operations and provide tax compliance services.

Responsibilities:

  • Financial Advice

  • Tax Policy Consultation

  • Tax Risk Management

  • Application of Preferential Policy

Chinese companies have a December year end, each financial year from 1st, January to December 31. If you want to consider if these is any year end planning you have to ensure your company is in the best tax position in China (and your country), maybe you can learn the taxation of Chinese companies from this page.

What is the Tax Rate for the Chinese Companies

Tax Qualification – Small Scale Taxpayer

1. Can apply for the general invoices issued by local tax authority.
2. Applicable industries: all industries and business activities, such as: service industry, trade, installation, engineering.
3. Restriction, The annual turnover must not exceed 5 million RMB.
4. Purchase invoices can not deduct the sale VAT.

Basic Taxes of Small Scale Taxpayer:Service Activities:Trade Activities:Engineering and Installation:
Monthly VAT – Value Added Tax3%

Tax-free application with a monthly turnover of less than 100,000 RMB

3%

Tax-free application with a monthly turnover of less than 100,000 RMB

3%

Tax-free application with a monthly turnover of less than 100,000 RMB

Quarterly Corporate Income Tax – Profit Tax

( less than 1 million RMB each year )

5% ( preferential tax rate )5% ( preferential tax rate )5% ( preferential tax rate )
Quarterly Corporate Income Tax – Profit Tax

( 1 – 3 million RMB each year )

10% ( preferential tax rate )10% ( preferential tax rate )10% ( preferential tax rate )
Quarterly Corporate Income Tax – Profit Tax

( more than 3 million RMB each year )

25%25%25%

Tax Qualification – General Taxpayer

1. Can apply for the special VAT invoices ( fapiao ) issued by local tax authority.
2. Applicable industries: all industries and business activities, such as: service industry, trade, installation, engineering.
3. Restriction of turnover, none.
4. Purchase invoices can deduct the sale VAT, such as: local purchase and oversea import.

Basic Taxes of General Taxpayer:Service Activities:Trade Activities:Engineering and Installation:
Monthly VAT – Value Added Tax6%13%9%
Quarterly Corporate Income Tax – Profit Tax

( less than 1 million RMB each year )

5% ( preferential tax rate )5% ( preferential tax rate )5% ( preferential tax rate )
Quarterly Corporate Income Tax – Profit Tax

( 1 – 3 million RMB each year )

10% ( preferential tax rate )10% ( preferential tax rate )10% ( preferential tax rate )
Quarterly Corporate Income Tax – Profit Tax

( more than 3 million RMB each year )

25%25%25%

China Company Taxation for Nonresidents Enterprises

There is no any tax difference for local citizens and nonresidents. All China companies have to pay off the related VAT and corporate income tax (known as: profit tax) depending on their business activities and industries.

In China, 3 common situations need to be taxed.

1. Service activities, such as: consultant fee, consulting fee, service fee, technical consultation or technical service fee, conference fee, planning fee, marketing fee, commission, agency fee, and logistic, transport fee, warehouse, exhibition, design, software development and support, and other related business service activities.

2. Trade activities, such as: procurement payment, sales turnover, importing (overseas procurement), exporting, wherever your sales and purchase activities (local market or oversea countries). All business activities including the buying and selling of actual products and goods.

3. Engineering and installation activities, such as: after you selling your products to Chinese customers, also need your technicians or engineers go to the site for installation, debugging, assembly and other commercial activities. Relatively common industries such as: naval architecture and ocean engineering, environmental protection and power engineering, automation control systems, mechanical and electrical equipment, industrial control systems, construction mechanical and electrical equipment installation and construction engineering, electrical equipment, communications engineering, and a series of engineering and installation industries.

If can Apply for Multiple Taxes

According to Chinese tax laws, the company can choose multiple taxes for its business activities. But the tax rate only can be selected from the same qualification.

For example, if your Chinese company is a small scale taxpayer and your business scope including multiple cross-industry options, you can apply for service activities as 3%, meanwhile, you can apply for your trading activities as 3%, and engineering and installation, 3%.

In a similar way, if your Chinese company is a general taxpayer qualification and your business scope of corporation including multiple cross-industry options, you can apply for service activities as 6%, meanwhile, you can apply for your trading activities as 13%, and engineering and installation, 9%.

What is the Multiple Cross-industry Activities

This is a simple question, sometimes, a Chinese company needs to provide different business activities, such as, mechanical and electrical engineering industry, in addition to the regular equipment procurement and sales (trade activity), this company also needs to offer installing services (engineering and installation activity) and technical support for after-sales (service activity). So the mechanical and electrical engineering company needs to apply for 3 tax rates from the local tax authority.

If you plan to add a new tax rate for your Chinese company, you have to provide the agreements or contracts to prove you need it.

Computational Formula of Small Scale Taxpayer

Monthly Income:Monthly Cost:VAT / 3%:Profit Tax:
90,000 CNY50,000 CNY0, tax-free5%, 2,000 CNY
120,000 CNY50,000 CNY3,600 CNY3,320 CNY

If your Chinese company is a small scale taxpayer:

For example, your monthly turnover is 90,000 RMB, and monthly corporate cost is 50,000 RMB (cost means running expenses, include: salary, rent, reimbursement or other corporate costs).

Your current month’s VAT is ZERO. No joke, its 0, you can learn it from above small scale taxpayer basic rate table, because your monthly turnover less than 100,000 RMB, you can apply for the tax-free application. But you have to pay corporate income tax (profit tax), your net profit is 40,000, so the preferential tax rate of corporate income tax is 5%, your Chinese company just needs to pay 2,000 RMB (40,000*5%).

If your company’s monthly turnover is 120,000 RMB, corporate cost also is 50,000 RMB as above situation, in this case, you have to pay income VAT 3,600 RMB (120,000*3%, can not apply for the tax-free), whatever your business activity is (small scale taxpayer for service, trade, engineering and installing will be the same tax rate, 3%). Of course, your corporate income tax is 3,320 RMB (120,000-50,000-3,600=66,400*5%=3,320).

Computational Formula of General Taxpayer

2 Million CNYService Activity 6%:Trade Activity 13%:Installation 9%:
Monthly Income:200,000 CNY1,500,000 CNY300,000 CNY
Monthly Purchase:1,200,000 CNY
VAT:11,320.7534,513.2724,770.64

For better understanding the different VAT rates for general taxpayer, SMEsChina.com still use cross-industry activities (mechanical and electrical engineering company) as an example to learn what happens for 3 VAT rates. The financial data of our instance is tax-included price.

The mechanical and electrical engineering company get an order placed from a customer (assume that the total amount of the contract is 2 million RMB), the order contract is divided into 3 parts (such as: equipment sales amount 1,500,000 RMB, plus equipment installation and commissioning is 300,000 RMB, and after sales service 200,000 RMB), and meanwhile, we assume that the amount of equipment purchase is 1,200,000 RMB.

The mechanical and electrical engineering company’s monthly corporate cost is 290,000 RMB (cost means running expenses, include: transport, salary, rent, reimbursement or other corporate costs).

OK, let’s estimate the monthly taxes for this company.

VAT of Service activity: (200,000/1.06)*6%=188,679.25 (excluding tax price) *6%=11,320.75 RMB.

VAT of Trade activity: (1,500,000/1.13)*13%-(1,200,000/1.13)*13%=1,327,433.63 (excluding tax price) * 13% – 1,061,946.90 (excluding tax price) * 13% =172,566.37 – 138,053.10 = 34,513.27 RMB.

VAT of Installation and Commissioning: (300,000/1.09)*9%=275,229.36 (excluding tax price) * 9%=24,770.64 RMB

Therefore, the conclusion is: this mechanical and electrical engineering company has to pay total VAT within the current month 11,320.75+34,513.27+24,770.64=70,604.66 RMB.
The company’s gross profit is: (2 million minus equipment purchase 1.2 million and minus VAT payable 70,604.66)=729,395.34 RMB.
The corporate income tax (profit tax) is: 729,395.34 RMB * preferential tax rate 5% = 36,469.77 RMB.

Topics of Chinese Taxation

Chinese VAT and corporate income tax need to be paid by the invoicing. Such as, this month you have issued VAT invoices to customers, your VAT amount will be deducted by tax authority directly from your corporate basic account.

The tax authorities will retrieve the amount of the last month’s invoices from the invoice system before the 15th of each month, and collect the corresponding taxes for the previous month.

  • VAT for service, trade and engineering and installation have to be paid each month.
  • Corporate income tax (profit tax) has to be paid each quarter.
  • If there is a national holiday, the tax authorities will extend the taxation time.

Sure, loss can also be used in future years, known as: cover the deficit. Chinese companies can voluntarily decide to make up for losses in the past few years to reduce the corporate income tax for the current year.

Sure, the year-end bonus can be paid to your CEO, or senior managers or other key team members, depending on your decision, the year-end bonus as the management costs to offset the profit tax (known as: corporate income tax), but you have to understand another point, the bonus as the personal income paid from corporate account, the key teams have to pay individual tax for their personal incomes.

In addition to the regular procurement (such as: purchase products, components) operated from oversea market, known as: import businesses. If a Chinese company plans to pay service fee to oversea market, such as: outsourcing transaction, design work, technology consulting, or design fee, labor fee, or other service fees, Chinese tax authorities need to withhold and pay the value-added tax and corporate income tax of overseas enterprises (service providers), known as: prepayment.

Local loans with RMB is simple, but the loans from oversea (related party or foreign directors) need to be approved from foreign exchange department, SMEsChina teams suggest you to use the registered capital to transfer funds from oversea shareholder’s account.

VAT, individual tax need to be paid each month, corporate income tax ( profit tax) need to be paid each quarter.

Interest of loan must be the same as local bank current rate.

Dividend tax in China is the best way, 20% will be prepaid, the remaining 80% will be transferred with SWIFT system, also you need to apply for the foreign exchange procedure, and after exchanging the currency from RMB to USD, then will be back to your home country’s account of shareholder. Our CPAs will provide these documents and guidance.

Do not worry about that, SMEsChina financial support center will help your Chinese company to apply for the preferential tax rate in time and obtain the approval from the tax authority.

Expense/cost invoices (known as: fapiao in China, can offset your quarterly profits, invoice title must be under your corporate name and tax ID):

  • Traffic fapiao (traveling, catering, hotel, tickets), etc.
  • Purchasing / transport / fapiao from suppliers.
  • Running costs (warehouse, rent, advertising, conference, exhibition, marketing, office equipment, communication fee), etc.
  • Management costs (welfare, salaries, social insurance, house funding, other benefits), etc.

Ready to Start and Launch a Business in China? So Are We.

SMEsChina teams focus on the growth of enterprise and providing a variety of business solutions in the area of strategy consultancy, WFOE setting up services, business registration, company formation, incorporation of domestic invested enterprise, finance and audit services, HR and payroll, corporate bank account, resident permit, immigration and visa, trademarks and legal compliance.

China is attracting more and more foreign companies, SMEs,entrepreneurs, startups, brands to invest and establish their business entities through reforming various laws and regulations actively. More than 47 million companies and small medium enterprises have registered their business entities in mainland China and over 3.5 million new enterprises are incorporated during each financial year with comfortable process of registering companies. Here SMEsChina is sharing our knowledge and business insights to global enterprises and companies for better learning the regulations and rules of China corporations running and corporate maintaining. All reference and guidance collected by SMEsChina Teams in accordance with the latest implemented laws of the People’s Republic of China on Wholly Foreign-Owned Enterprises ( WFOE ), Joint Venture ( JV ) and Limited Liability Company ( LLC ), Limited Liability Partnership ( LLP ), and other relevant and officially promulgated regulations and rules on the corporation formation and registration of industrial and commercial enterprises and related IP laws, immigration and resident policies ( VISA ), tax laws.

SMEsChina teams happy to work around you and look after your daily China operations confidently and smoothly. Check if setting up a private company is right for you, if you have everything to set up a business in Mainland China, you can get in touch with our teams to get more useful information and online guidance.

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