Tax system for foreign enterprises located in China depends on the company`s structure. This article focuses on the taxation for WFOE (Wholly Foreign Owned Enterprise, also called WOFE), that is to say a Chinese corporation totally owned by foreign investors.
WOFE doing business in China are liable to the following types of taxes:
- Income Tax
- Transaction Tax : Value added tax, Consumption tax
- Other taxes: Vehicle and vessel licence tax, Stamp tax, Property tax, Deed tax In addition, custom duties are levied on imports and exports and individuals working in China are liable to individual income tax.
The first one is the Income tax. It is calculated as follows:
Rate
| Progressive Tax Rate and Table of Quick Deductions Applicable to Wages and Salaries | |||
|---|---|---|---|
| Level | Net Taxable Income per Month (assessable income net of deductions and allowances) | Rate(%) | Quick Deductions(RMB) |
| 1 | RMB 1,500 or less | 3 | 0 |
| 2 | over RMB 1,500 to RMB 4,500 | 10 | 105 |
| 3 | over RMB 4,500 to RMB 9,000 | 20 | 555 |
| 4 | over RMB 9,000 to RMB 35,000 | 25 | 1,005 |
| 5 | over RMB 35,000 to RMB 55,000 | 30 | 2,755 |
| 6 | over RMB 55,000 to RMB 80,000 | 35 | 5,505 |
| 7 | over RMB 80,000 | 45 | 13,505 |
The second one is an Additional tax which only applied to Chinese companies before but has been extended to foreign companies since December 2010. It includes two taxes. On one hand is the City Construction and Maintenance Tax which varies from 1% to 7% according to the localization of the company (7% in cities, 5% in suburban districts and towns and 1% in rural areas). On the other hand is the Education surcharge with a fix rate of 3%. Both of them are calculated on the whole tax base (Income tax + Business tax or VAT depending on the activity. For example, this additional tax represents approximately 0.5% of a service company turnover.
The third taxation depends on the activity field of the company.
The first field of activity is trading. WOFE specialized in this sector are subject to VAT. There are then 2 different cases.
One case is the small VAT payer status which concern companies whose sales are:
– lower than RMB 500,000 for companies producing taxable goods or delivering taxable services;
– lower than RMB 800,000 for companies doing wholesale or retailing.
The VAT rate is lower for these kinds of firms but the drawback is that they cannot deduce the VAT on purchasing. The formula is as follows:
VAT= Turnover x VAT rate (depends on the Business scope, generally from de 3 to 5.5%, non refundable)
The other case is the normal VAT payer status. It is mandatory for companies whose turnover exceeds the amounts given for small VAT payers. In addition, companies working in B to B must also choose this status because customers need VAT invoices. The rate for normal VAT payer is quite higher but the VAT on purchasing is refundable. Here is the calculation:
VAT= Turnover x VAT rate (depends on the business scope, generally 17% but sometimes 13%) – deductible collected VAT
Furthermore, companies importing goods from China or somewhere else have to pay the custom rights. The prices differ according to the type of product.
To eliminate double taxation, the PRC government has commenced to levy value-added tax in lieu of business tax (“VIB”) with Shanghai as a pilot city since January 2012. The reform of VIB has been extended to the transportation industry and certain modern service industries across the country since 1 August 2013.
