Money and Banking:
Taxes in China
IMPORTANT NOTES: Before delving too deeply into the issue of taxes in the PRC, read these important points and keep them in mind............
1. Tax rates are subject to change....no surprise here. Always check for the latest information on this site, by contacting local taxing jurisdictions or one of the accounting organizations(International or local) in the location where you are operating.
2. Many tax rules and regulations are "subject to local interpretation". Caution should be used in this area. Local interpretation can take the form of an unclear rule or regulation, or has not yet been implemented.
3. The PRC can change it's rules and laws at any time. This also applies to tax rates, type of taxes, rules and exceptions. There are many examples. Seek the advice of reputable local or international accounting firms.
Dividend Withholding Tax:
You can take profits out of China in the form of dividends. However, any declared dividends for foreign enterprises are subject to a 10% withholding tax. You r profits are better spent re-investing in your enterprise inside CHina which is exactly what the government wants you to do.
The dividend withholding tax also comes into play when setting transfer prices.
Fees are a part of life in China. You will incur fees whether starting up a manufacturing operation, a marketing house, a distribution channel or importing product. Fees and licences for power hook-up, installations, permits, etc are no small items.
The Chinese government looks at fees as a way to generate more revenues. As a result, they are constantly looking at what companies are doing and frequently change both taxes and fees(often hidden) in an effort to maximize those tax revenues. It is beneficial to ask about fees upfront, but do not expect a clear or complete answer. At best, hope for an answer to the direct fee you are questioning. This is prevalent all over the country. Benchmarking can sometimes provide better insight to what fees may be imposed and how big they may be. If starting up a factory for example, contact a few firms who have just set up shop in the area for an idea of what to expect.
Special Economic Zones- Tax Holidays:
Special Economic Zones(SEZs) offer reduced tax rates to manufacturing operations. The objective is to lure international investment into these zones. The rates offer a tax holiday for a number of years, and in general, works like this:
For more information, look into More on SEZ's.
A review should be made of the tax deductibility of technical service, administrative and other support costs invoiced from the parent or another subsidiary organization. The parent corporations' tax accounting organization should analyze the tax issues and advise management on it's options and impacts. If the company is small and does not have a tax accounting organization, it should seek the advice of a qualified outside accounting firm
Logic and proper accounting suggests that any costs incurred for the benefit of the subsidiary in China should be charged to the subsidiary. If it is not deemed tax deductible in the PRC, then it should be determined if it is tax deductible on the parent corporations taxes. Most likely, expenses incurred in support of an overseas project is not tax deductible on the home country's books. The U.S. for example, will allow this type of cost to be tax deductible on U.S. company books for a short period of time as a potential new business is being investigated and formed, and during the inception phase.
After start-up, all costs associated with the subsidiary should be invoiced to the sub by the parent, regardless of tax deductibility in the PRC. Any invoices of this nature are subject to a 10% chinese withholding tax.
Again, in all cases, qualified tax accounting analysis and consultation is strongly advised.
Federal and Provincial Taxes:
The federal tax(subject to change) is 33%. As mentioned above, there are major tax concessions in SEZ's during the early years of your operations. In starting up manufacturing outside and SEZ, seek to negotiate concessions in the early years.
Check with your international accounting firms or a local chinese firm in the area you will be operation for any changes to federal tax rates and for rates for the province in which you are located.
Check your local taxing jurisdiction and local accounting firms for local rates and unique local taxes. The common taxes you can anticipate and a representative rate, common in many provinces, are:
Again, consult with an international accounting firm or a local chinese firm for the latest rates which can change with short notice.
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