China Tax & Business Guide - Deloitte

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Basic facts
Population 1.3bn Inflation 1.7% (2006)
Main languages Mandarin Chinese (Standard) GDP per head US$2,070*
Currency Renminbi or Yuan (CNY) GDP growth 10.7% (2006)
Economic communities Asia Pacific Economic Co-operation, WTO
GDP sources 11.8% agriculture, 48.7% industry, 39.5% services
*Economist Intelligence Unit estimate.
Political environment

The Chinese Communist Party (CCP) has held power since the PeopleÌs Republic of China (PRC) was founded in 1949. Market reforms enacted over the past three decades have transformed the economy and raised living standards.

The two most senior officials are Hu Jintao, the CCP general secretary and state president, and Wen Jiabao, the premier.
Foreign trade and investment
Exports US$969.7 (2006) Imports US$751.9 (2006)

Leading export markets: The US, Japan and the EU.

Major exports: Office machines and data-processing equipment, telecoms equipment, and clothing and footwear.

China welcomes foreign investment, and as part of its World Trade Organisation (WTO) commitment has opened many industries to foreign investment.

Regulations for Guiding the Direction of Foreign Investment set out four investment categoriesÛencouraged, restricted, prohibited and permittedÛthat determine the level of government approval required and the tax exemptions available.

Foreign-exchange controls have been significantly relaxed. Entities in China do not need approval to open, change or close a foreign-exchange account. Moreover, entities are permitted to purchase foreign currency to make payments to foreign entities provided the payments do not exceed certain thresholds.
Business and financing
Business forms Wholly foreign-owned venture, equity joint venture, co-operative joint venture, joint stock company, limited liability company, holding company, representative office and branch

Overseas investors are increasingly turning to wholly foreign-owned ventures, as rules restricting foreign investment are relaxed.
Labour environment
Unemployment rate 9.5% (2006)* Minimum wage Varies by province
*Economist Intelligence Unit estimate.

Education levels vary by region. English-speaking college graduates and engineers are common in the capital, Beijing, or Shanghai, but personnel with specialised technical skills or training in accounting, finance, marketing and personnel management are scarce.

The labour law stipulates that wages be paid according to the principle of equal pay for work of equal value. New labour rules stipulate that foreigners may be hired only where there is a demonstrated need to do so; prior approval is required from local labour authorities.
Taxation
Corporate tax

A recently passed tax reform will unify the income tax treatment of domestic and foreign enterprises. As from January 1st 2008, both domestic and foreign-funded enterprises will be subject to a 25% statutory rate (subject to certain transition relief). The reform also includes rules relating to controlled foreign corporations, thin capitalisation and foreign tax credits.
Standard rate 33%

Resident companies are taxed on their worldwide income, with a credit for foreign tax; non-resident companies are taxed only on their Chinese-source income. The rate of tax is 33%, comprising a 30% corporate income tax and a 3% local tax, but foreign investment enterprises (FIEs) generally pay tax at concessional rates depending on their location and type of business. Tax exemptions are also available in certain locations and business sectors.

When the tax reform takes effect, the uniform corporate tax rate for both domestic enterprises and FIEs will be 25%. The current geographically based incentives will be industry-based.
Individual tax
Progressive rates rising to 45%

Individual income tax is imposed on both Chinese and foreign individuals at progressive rates to 45%. Persons resident for more than five years are taxed on worldwide income. Non-residents or persons in China for one to five years are subject to personal income tax on Chinese-source income, as well as foreign-source income borne by Chinese entities. Non-residents who have resided or stayed in China for more than 90 days but less than one calendar year are subject to tax only on Chinese-source income. Non-residents who have resided or stayed in China for less than 90 days in a calendar year are subject to tax on Chinese-source income borne by Chinese entities.
Capital gains
Company gains taxed as income

A 10% withholding tax applies to net capital gains from the transfer of shares or equity interest in enterprises in China held by FIEs and from the transfer of shares in enterprises in China held by establishments set up by FIEs in China.

Individuals are taxed at 20% on their gains. Individuals are exempt from gains on the sale of their only private dwelling if they have occupied it for five years.
Indirect tax
Standard rate 17% Lower rate 13%

Value-added tax (VAT) applies to most products at a rate of 17%. The lower VAT rate of 13% applies to grain and edible oil, books, water and certain agricultural inputs such as fertilisers. A 6% VAT rate applies to small enterprises. Exports are basically zero-rated and exporters may apply for a refund of VAT.

The business tax applies to a broad range of services, including insurance, construction, entertainment and the sale of immovable property. Business tax rates are 3Ò5% for most services, but a 20% rate applies to entertainment. There is an exemption from business tax on royalties paid for technology transfers into China by FIEs.
Tax administration and compliance
Tax year Corporations: calendar year (accounting year subject to tax authorityÌs approval); Individuals: calendar year

FIEs must file provisional income tax returns with the local tax authorities within 15 days of the end of each quarter, and pay quarterly instalments of tax, generally based on the profits for the quarter. Final settlement of the tax liability must generally be made within four months of the end of the tax year.
Additional tax information
Withholding taxes Dividends 0%, Interest 10%, Royalties 10%.
Tax treaties China has more than 75 tax treaties.
Dividends Dividends are currently exempt under Chinese domestic law, but taxation may be re-introduced in the upcoming reform.
Revenue protection There is transfer-pricing legislation.
Groups There is no provision for group taxation.
Incentives Special economic zones; export, high-tech and infrastructure projects.
Other taxes Consumption tax, Import duties, Land appreciation tax, Local land use tax, Resources tax, Stamp tax, Urban real estate tax, Vehicle and vessel licence tax.