If you are a foreign investor targeting China, one of the concerns is likely to be taxed. Indeed, Questions, such as “What are the taxes that a business needs to pay?” and “Are these taxes too high?”
Keep ringing in the minds of many investors. This post has all the answers to these questions, plus a lot more for you to make the right decisions.
Here is a General Look at the Taxes in China
China follows a legal system with laws, rules, and policies from the National People’s Congress (NPC) and the state council. Rulings from the national agencies also help to shape the legal system.
The main principle of taxation is that the Chinese are taxed on incomes generated from worldwide sources, but non-residents only for income generated in China. In China, the duty of collecting taxes and remitting them to the relevant government agencies is bestowed on the State Taxation Administration (STA).
STA further works with the provincial-level tax bureaus that sub-branch to district and city-level tax bureaus.
When you open a foreign enterprise in China, the chances are that matters of taxes will be dealt with by district-level and city-level tax bureaus. So, it will be good to understand where their offices are located and how they relate with companies in their areas of operation. Here are the main taxes that your company needs to pay when operating in China.
Wholly Foreign-Owned Enterprise (WFOE)
In China, a WFOE is a type of company registered under the country’s laws, and as the name suggests, it has 100% foreign ownership. It is a limited liability company so the investor’s liability is only limited to the shareholding he/she has. So, in the event of issues such as bankruptcy, no one will come for your assets to settle business debts.
As a separate legal entity, the enterprise is required to pay taxes outlined in Chinese laws. The main tax that a WFOE is required to pay is the capital gains tax, which is 25% in the country. However, smaller companies might be allowed to pay 20%. For the employees working in your WFOE, it is mandatory to pay personal income taxes.
Foreign-Equity Joint Venture
Equity joint ventures (EJVS) are limited liability companies that require a partnership between a foreigner and a local Chinese. In the EJV, the Chinese partner is required to have majority shareholding while the foreigner takes the minority.
Because it is a limited liability company, an EJV has to pay a capital gains tax of 25%, just like a WFOE. However, it might be able to enjoy a lower rate of 20% if the business is small or even 15% if it is a high-tech firm.
Withholding Taxes
In China, interests, dividends, royalties, and capital gains will attract a 10% tax rate if they are coming from a Chinese business to another enterprise not registered in the jurisdiction.
Again, fees enjoyed by non-resident businesses are charged a withholding tax that is set at 25%.
Take the example of a company offering consulting services in an area such as construction. In such a case, the rate of withholding taxes is between 15% and 30%. However, other managerial services are taxed at a higher rate of 30-50%.
Agency of Experts can Help You to Get It Right on Taxes
In China, there is a whole list of taxes that you need to pay, and we have only highlighted a few. These additional obligations include resources tax, stamp duty, and urban land use tax. This is never easy for most investors coming to China and the best way to go about it is working with an agency of experts.
Professionals, who have worked with other enterprises and helped them to get it right on tax matters, can also hold your hand to avoid going against the law. Indeed, you can enjoy a lot more from the experts, such as assistance with the complex process of registering a business in China and drawing the right strategies for growth.
The moment you make the big decision to go to China, it is paramount to ensure you understand all the tax obligations. This is not all. It is also important to follow the Chinese accounting standards. Do not just jump in and try following all the tax obligations alone because it can be challenging; let an expert help you.