Business China

A Comprehensive Guide to China's Tax System

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Tax management and planning are two of the most important considerations for an organization when setting up operations in China. Whether you look at it from the perspective of compliance, or ensuring proper financial management, it is essential that you understand the entirety of the Chinese tax system to maintain financial stability. For various reasons, the Chinese system of taxation is difficult to understand unless you have a specialist education in the matter—which is why many entrepreneurs think twice about working in china. However, the complexity of the tax code shouldn’t serve as a reason to avoid investing in the Chinese economy altogether.

As it stands, the Chinese economy is arguably one of the largest in the world, with well-developed export and local markets for investors to generate massive revenues through commercial activity. The state offers vast protection to all foreign investors, incentivizes investments, and provides a wide range of investment options to help meet national and personal-commercial goals. Additionally, it’s quite easy to make tax plans that can help reduce your corporate liability and ensure that you generate ample revenues—if you have sound tax advice coming your way, such as the consultancy offered at Business China.

The corporate income tax rate in China currently stands at 25%—a number that initially most investors balk at. However, it is rarely ever the case that organizations pay the whole 25% of the taxes since the government also extends many subsidies and exemptions. Some of these exemptions are industry-specific, while others unique to the location you’re operating in (such as a Free Trade Zone).  We’ll discuss each of these considerations in detail to provide as clear an account of the tax system in the PRC for your advantage.

The Development Of PRC’s Tax System

Historically speaking, the Chinese tax systems has gone through three fundamental transformations—between 1949–1957, 1958–1978, 1979–1982. We have seen drastic changes since 1982, only a range of amendments and additions to the tax structure to facilitate greater participation in the global economy. It’s important to understand that the existing tax system is part of a greater political strategy to facilitate the Chinese Republic’s overarching goals in the global economy. Appreciating the overlaps between national policy and your commercial interests is quite important for all aspiring entrepreneurs—since it underscores the importance of ensuring tax compliance and other regulations.

Having said that, we’ll discuss the various stages of tax system development, with greater emphasis on phase that has persisted since 1979.

Brown traditional buildings in China

Taxes In China Between 1949–1957

This phase of tax development in China has much to do with the restructuring of the economy after the socialist revolution This was a complete overhaul of the system to facilitate China’s economic recovery, and consolidate its economic power after centuries of imperial rule. These reforms introduced 14 new kinds of taxes:

1.Goods tax
2.Industrial and commercial tax
3.Salt tax
4.Customs duty
5.Salary income tax
6.Stamp tax
7.Inheritance tax
8.Transaction tax
9.Slaughter tax
10.House property tax
11.Land property tax
12.Special consumption tax
13.License use tax

These ten years marked a significant change in China’s approach to improve its economic standing in the world. For many economic and business analysts, these changes set the grounds for the Chinese entrance into the global economy with the economic potential that few countries in the world had ever shown. According to historical accounts, the newly formed Chinese state hoped to achieve the following goals through these changes:

1.Increase China’s revenue
2.Stabilize the economy
3.Guarantee China’s financial and economic recovery
4.Work toward greater industrialization

The Second Phase: 1958–1978

During the subsequent twenty years, it was widely held that the existing tax system was much too complex and generated more hindrances in revenue generation. As a result, the government made massive reforms to minimize the hassles associated with tax procedures in the country. The most notable outcome of this overhaul was the elimination of thirteen different types of taxes into seven broad categories, as well as some degree of privatization of State-Owned Enterprises (SOEs) to improve economic efficiency. If one follows this twenty-year history, it becomes apparent that the Chinese government was inching toward greater private control over commercial interests and moving toward a new economic perspective.

The Third Phase: 1978–Today

It’s important to note that the China of today is quite different from what it was 50 years ago. With the passage of time, the country has become much more open to foreign commercial interconnectivity, committed itself to working on multilateral front—not just at a governmental, but also at the private level. It’s one of the reasons it has become increasingly easy for foreign private investors to bring capital to China, and why the country is currently the largest exporter of goods and services in the world.

Beginning from the 1978, the government recognized that the preceding tax reforms weren’t the best for China’s economic development. This is considered a monumental decision in the country’s economic history because it marked the advent of China’s rise in the global economy. Over the subsequent years, after extensive consideration, new taxes were introduced that could regulate foreign investment, and improve tax collection/regulation procedures across the entire country. Over the next few years, we saw the introduction and removal of different types of taxes and economic policies which culminated in Deng Xiaoping’s visit to Southern China in 1994.

Xiaoping’s visit was the beginning of a new era in Chinese economics, that whole-heartedly accepted the arrival and participation of foreign investment in China. These events led to further tax reforms that include reforms to:

  • Adding VAT as a core tax form
  • Consolidating multiple taxes into a single income enterprise tax
  • Combining individual taxes on foreigners, households, and individual income taxes into a singular individual income tax

With this simplification, and accompanying reforms to foreign investment policy at the same time led to the development of China as a prime candidate for foreign investors. The country had a massive labor force, it was rich in technical expertise, was offering a very simple tax system and, above all else, it was welcoming foreign investment. To this day, we see businesses clamoring to establish operations in the country.

If you’re interested, get in touch with us to see how you start your business in China. We offer a wide range of services including setting up a company in China, establishing operations in the Shanghai Free Trade Zone, arranging WFOE licenses, and guiding you through the free trade zone tax systems in China.

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