United States-China Tax Treaty
US – China Tax Treaty Quick Summary. The People’s Republic of China is the world’s most populous country and carries a rich cultural tradition. China is the world’s largest exporter and the second-largest economy.
A unitary socialist republic, China is comprised of over 22 provinces, as well as five autonomous regions. Since economic reforms in 1978, it has remained one of the fast-growing economies in the world.
Ultimate power of the state rests with the National People’s Congress. Other primary organs of state power are the President and the State Council.
China’s legal system has evolved rapidly since the 1980’s. Particularly since its accession to the World Trade Organization in 2001, China has relaxed a number of socialist market regulations.
Chinese taxation is imposed at the national level. The primary sources of Chinese tax laws include the following:
Resident companies and individuals are subject to tax on worldwide income.
U.S.-China Tax Treaty
- United States-The People’s Republic of China Income Tax Convention
- TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF TAX EVASION WITH RESPECT TO TAXES ON INCOME
Currency. China has two types of currency, the renminbi (“RMB”) and the yuan (“CNY”). The two are virtually the same. The renminbi is the official currency of China and translates to the “people’s currency.” The yuan is the basic unit of the renminbi, but the word is commonly used to refer to China’s currency internationally. The renminbi is issued by the People’s Bank of China.
Common Legal Entities. Domestic enterprises, wholly foreign-owned enterprises, equity joint ventures, cooperative joint ventures, holding companies, domestic partnerships, foreign-invested partnerships, trusts, and branches.
Tax Authorities. The State Taxation Administration (“STA”) is a ministerial-level department within the government of the People’s Republic of China. It is responsible for the collection of taxes and enforces the state revenue laws.
Tax Treaties. China is party to more than 100 tax treaties and a signatory to the OECD’s MLI.
I. Individual Income Tax
A. Taxable Income
Individual Income Tax
Chinese individual income tax is applicable to individuals who are residents in China if they are considered to be domiciled in China, or if not domiciled in China, if the person stays in China for 183 days for a calendar year. The test for domicile in China is generally whether an individual is habitually residing in China due to their household, family, or economic situation.
A resident of China is subject to individual income tax (“IIT”) on their worldwide income, while a nonresident is subject to personal tax only on their China-sourced income. However, China has a “six-year rule” under which nondomiciled residents who reside in China for 183 days or more per year for over six consecutive years will be subject to IIT on their worldwide income from the seventh consecutive year onward if they reside in China for 183 days or more during the year. The “six-year rule” is reset if the foreign individual spends more than 30 consecutive days outside of China during any tax year.
Foreign individuals who travel to China and earn income from an overseas employer with no permanent establishment in China will have their income see will be tax exempt if they do not physically stay in China cumulatively for more than 90 days in a calendar year. If the individual is a tax resident of a country/region that has concluded a tax treaty/arrangement with China, the 90-day threshold is extended to 183 days during a calendar year or any 12 consecutive months, depending on the applicable tax treaty/arrangement.
In China, an individual is taxed on their income by category. Chinese law groups personal income into nine categories: (1) employment income (i.e. wages and salaries); (2) income from personal services; (3) author’s income; (4) business income; (5) rental income; (6) royalties; (7) interest and dividends; (8) income from the assignment or transfer of property; and (9) incidental income. Each income category has its own tax rate(s) and allowable deductions. For Chinese residents, employment income, income from personal services, author’s income, and royalties are combined as ‘comprehensive income’ for aggregate tax calculation purposes on an annual basis. Income from the other categories is taxed separately by category on a monthly or transaction basis. For non-residents, income from each of the above 9 categories is taxed separately on a monthly or transaction basis.
The following will be considered China sourced income regardless whether or not the payments are made within China: (a) income from employment or contracted labor services performed within China; (2) rental income from real property located in China; (3) income from the sale of property located in China; (4) income from the grant of franchises to be operated in China; and (5) interest and dividend income paid by companies located in China. Additionally, the following will also be classified as China sourced income: (1) payment to authors by companies or types of organizations located in China; (2) incidental income from companies, organizations, or individuals in China; (3) business income from activities performed in China; and (4) income from the transfer of equity in a foreign entity if, at any time during the three-year period (36 consecutive calendar months) prior to the transfer, more than 50% of the fair value of the assets of the invested foreign entity is derived directly or indirectly from immovable properties located within the territory of China.
B. Social Security Contributions
Contributions to the state-administered retirement scheme, as well as to medical insurance, maternity insurance, unemployment insurance, and work-related injury insurance funds are mandatory for Chinese employees. As of October 15, 2011, foreign individuals who hold a China work permit for working in China are required to make social security contributions in relation to pension, medical, unemployment, maternity, and work-related injury according to the China Social Security Law. Monthly employer and employee social security contribution rates, applicable caps, etc. are governed by local rules, which may vary among the local jurisdictions.
The employer is obligated to withhold the applicable social contributions of employees from payroll for onward payment, together with the employer’s contributions, to the relevant local authorities on a monthly basis.
China now has totalization agreements with ten countries. Inbound employees who are citizens or assigned by employers of these countries can be partly exempted from China’s social security contributions in accordance with the coverage of the relevant totalization agreements. The following is a summary of the nation and the item(s) of social security exempted:
|Germany||Pension and Unemployment Insurance|
|Republic of Korea||Pension and Unemployment Insurance|
|Finland||Pension and Unemployment Insurance|
|Switzerland||Pension and Unemployment Insurance|
|The Netherlands||Pension and Unemployment Insurance|
|Spain||Pension and Unemployment Insurance|
C. Value Added Tax (VAT)
An individual engaged in the sale or importation of goods, the provision of services, and the sales of intangible properties and immovable properties is subject to VAT. For general VAT payers, input VAT can be credited against output VAT.
D. Other Taxes
A consumption tax is imposed on alcoholic beverages, luxury cosmetics, fuel (gasoline and diesel, fireworks, jewelry, motorcycles, motor vehicles, tobacco, luxury watches, yachts, golf equipment, etc. The tax liability is computed based on the sales amount and/or the sales volume, depending on the nature of the goods.
Urban Construction and Maintenance Tax
Urban construction and maintenance tax is imposed at a certain rate on the amount of China’s turnover taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of turnover taxes are also the taxpayers of urban construction and maintenance tax. It is charged at three different rates depending on the taxpayer’s location, i.e. 7% for urban areas, 5% for county areas, and 1% for other areas.
Educational surcharge is imposed at 3% on the amount of China’s turnover taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of turnover taxes are also the taxpayers of educational surcharge.
Local Educational Surcharge
Local educational surcharge is levied at 2% on the amount of China’s turnover taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of turnover taxes are also the taxpayers of local educational surcharge.
Net Wealth/Worth Taxes
There are no net wealth/worth taxes in China.
Inheritance, Estate, and Gift taxes
There are no inheritance, estate, or gift taxes in China.
Real Estate Tax
A real estate tax, which is based on the value of the real property or rental received, is assessed on land and real properties used for business purposes or leased. The annual tax rate is 1.2% of the original value of real properties, and a tax reduction of 10% to 30% is commonly offered by local governments. Alternatively, tax may be assessed at 12% of the rental value. Individuals are exempt from real estate tax if the property is not used for business purposes or rented out.
Urban and Township Land-Use Tax
An urban and township land-use tax is levied on taxpayers, including individuals, who utilize land within the area of city, country, township, and mining districts. It is computed annually based on the space of area actually occupied by a taxpayer multiplied by a fixed amount per square meter that is determined by the local governments.
Land Appreciation Tax
A land appreciation tax is levied on the gain from the disposal of properties at progressive rates ranging from 30% to 60%.
In general, customs duty is charged in either specific or ad valorem terms. For specific duty, a lump sum amount is charged based on a quantitative amount of the goods (e.g. CNY 100 per unit or per kg). For ad valorem duty, the customs value of the goods is multiplied by an ad valorem duty rate to arrive at the amount of duty payable. The applicable duty rate generally is determined based on the origin of the goods.
A deed tax, generally at rates ranging from 3% to 5%, may be levied on the purchase or sale, gift or exchange of ownership of land use rights or real properties. The transferee/assignee is the taxpayer.
Individuals who execute or receive ‘specified documentation’ are subject to stamp duty. The stamp duty rates vary between 0.005% on loan contracts to 0.1% for property leasing and property insurance contracts.
Treatment of Foreign-Owned Real Estate
A foreign individual is subject to deed tax and stamp duty upon the purchase of real property in China. A foreign individual is subject to IIT, VAT, real estate tax, stamp duty, plus some minor local taxes on its rental income. A foreign individual is subject to IIT, VAT, land appreciation tax, and stamp duty upon the disposal of real property in China.
Motor Vehicle Acquisition Tax
A motor vehicle acquisition tax, at a rate of 10% of the taxable amount, will be charged on any purchase and importation of cars, motorcycles, trams, trailers, carts, and certain types of trucks.
Vehicle and Vessel Tax
A tax is levied on all vehicles and vessels within China. A fixed amount is levied on a yearly basis. Transport vehicles are generally taxed on a fixed amount according to their own weight, with passenger cars, buses, and motorcycles being taxed on a fixed unit amount. Vessels are taxed on a fixed amount, according to the deadweight tonnage.
E. Allowed Deductions
Standard Basic Deduction
As of 1 January 2019, the amount of the standard basic deduction is CNY 60,000 per annum (i.e. CNY 5,000 for monthly tax withholding purpose).
Chinese social security contributions made in accordance with the Social Security Law and contributions made to the statutory Housing Fund are deductible for IIT purposes. Chinese taxpayers are also allowed deductions for the following: (a) child education; (b) continued education; (c) mortgage interest: (d) rental expense; (e) elderly care; and (f) major medical expenses. There are also certain deductible items specifically provided by various IIT regulations, such as employee contributions to qualified corporate annuities, premiums paid to commercial health insurance eligible for IIT incentives, premiums paid to commercial endowment insurance eligible for IIT deferral treatment, etc.
If an individual makes charitable contributions to qualified domestic non-profit organizations, such contributions are deductible to the extent of 30% of one’s taxable income reported. This deduction is applicable to all categories of income.
Income for Labor Services, Author’s Income, and Royalties
A deduction equal to 20% of the gross receipt is allowed when determining the income from labor services, author’s remuneration, and royalties. A further deduction of 30% is allowable for author’s remuneration.
The following deductions are provided for rental income:
- If the amount received in a month is not more than CNY 4,000, a deduction of CNY 800 is allowed.
- If the amount received in a month exceeds CNY 4,000, a deduction equal to 20% of the gross receipt is allowed.
There are specific and complex tax rules to address the deductions available for income derived from the operation of privately-owned businesses, sole proprietorship enterprises, and partnerships. Certain deduction caps are similar to those applicable to companies that are subject to corporate income tax.
In addition, the standard basis deduction of CNY 60,000, specific deductions, specific additional deductions, and other allowable deductions (i.e. personal deductions applicable to comprehensive income) are allowed to be deducted when calculating the taxable business income provided that the taxpayer does not derive comprehensive income in the tax year.
Income from the Transfer of Property
For sales of property, the original cost of the property and reasonable expenses incurred are deductible from the sales proceeds to determine the taxable income.
Generally, capital losses are not allowed to be set off against other income or carried forward to other years. Losses from privately-owned business and sole proprietorship enterprise can be carried forward for five years.
Personal Deductions from Employment Income for Non-Residents
For non-residents, Chinese tax law only allows the standard basic deduction of CNY 5,000 per month.
F. Foreign Tax Relief
Foreign taxes paid on non-China-source income may be claimed as a credit on the China tax return, but only to the extent of the IIT payable on the same category of income derived from the same country. Unused excess credits are non-refundable and can only be carried forward for a maximum of five years. Documentary evidence of the tax payment (e.g. tax payment certificate, tax clearance certificate) to substantiate claims of foreign tax credits is required by the Chinese tax authorities.
G. Other Tax Credits and Incentives
Dividend income is generally taxed at 20% unless otherwise provided for in the applicable income tax treaty. Effective September 2015, dividend income derived from shares traded on the Shanghai and Shenzhen Stock Exchanges is entitled to 50% or 100% tax reduction depending on the length of holding. Interest on government bonds and finance bonds issued by the Chinese Government, as well as bank deposit interest income, is currently exempt from IIT.
Income of diplomatic representatives, consuls, and other personnel of foreign embassies and consulates is also exempt from IIT.
II. Corporate Tax
A. Taxes on Corporate Income
Tax resident enterprises (TREs) are subject to corporate income tax (CIT) on their worldwide income. A non-TRE that has no establishment or place in China is taxed only on its China-source income. A non-TRE with an establishment or place in China shall pay CIT on income derived by such establishment or place from sources in China as well as income derived from outside China that effectively is connected with such establishment or place. Under the CIT law, the standard tax rate is 25%.
Local Income Taxes
There is no provincial or local income tax.
B. Determination of Foreign or Domestic Status
Companies established and formed in China are always treated as TREs. A foreign company with a place of effective management in China will also be classified as a TRE.
Permanent Establishment (PE)
Under Chinese law an “establishment” or “place” as an establishment or place in China engaging in production and business operations, including the following:
- management organizations, business organizations, and representative offices;
- factories, farms, and places where natural resources are exploited;
- places where labor services are provided;
- places where contractor projects, such as construction, installation, assembly, repair, and exploration are undertaken;
- other establishments or places where production and business activities are undertaken; and
- business agents who regularly sign contracts, store and deliver goods, etc. on behalf of the non-TRE.
C. Value-Added Tax (VAT)
The sales or importation of goods, the provision of services, and the sales of intangible properties and immovable properties are subject to VAT. For general VAT payers, input VAT can be credited against output VAT. The applicable VAT rate for general VAT payers from 1 April 2019 are set out in the following table, and the rate for small-scale VAT payers is 3%.
The VAT refund rate for exported services is the same as the applicable VAT rate. For exported goods, the VAT refund rates range from 0% to 13%. There is a prescribed formula for determining the amount of refund, under which full refund of input VAT is not available to many exported goods and the exporter will suffer different degrees of export VAT costs.
In addition, certain taxable activities, including a few types of sale of goods, services, and cross-border transactions, are applicable to the VAT exemption treatment. In that respect, the relevant input VAT incurred cannot be credited or refunded.
D. Other Taxes
Import and export customs duty is levied on goods that are allowed to be imported into or exported based on the relevant customs regulations. The consignee of imported goods, consignor of export goods, and owner of entry articles are parties held liable for paying customs duties.
The customs classification of import and export goods is the base for the customs supervision, customs taxation, and customs statistics. In 2017, along with the revisions of the classified catalogue in ‘International Convention for Harmonized Commodity Description and Coding System’ made by World Customs Organization (WCO), large scale adjustments have been made to China’s import and export tariff system.
Import duty is charged in ad valorem, specific, compound, or sliding terms, etc. Ad valorem duty is charged based on the customs valuation of the goods. The dutiable value of the goods is multiplied by an ad valorem duty rate to arrive at the amount of duty payable. Duty collection on an ad valorem basis is the main taxation measure used by most countries, including China. The dutiable value of import and export goods is the taxable value determined by the Customs to levy ad valorem duties on the import and export goods, which is the base to value and levy customs duties payable of import and export goods and import links taxes payable of the import goods.
Import duties are categorized as normal tariff rate, Most Favored Nation (MFN) tariff rate, contractual tariff rate, preferential tariff rate, tariff-rate quota (TRQ) rate, and temporary tariff rate.
The Country of Origin of imported goods also plays a part in determining the applicability of a number of other trade policies, such as TRQ, preferential tariffs, anti-dumping duty, anti-subsidy duty, etc.
Import and export goods are reduced with or exempted from customs duties, import VAT, and consumption tax according to state regulations.
The importation of raw materials under processing trade is bonded, and customs duty, import VAT, and consumption tax exemption is allowed on the part to be re-exported after processing.
For goods that enter into and exit from the customs special supervision zone, import duties, import VAT, and consumption tax are held over at the time of importation, which are to be exempted for exportation and to be paid for sales from the customs special supervision zone to domestic markets.
A consumption tax is imposed on specified categories of luxury and environmental unfriendly goods, including cigarettes, alcoholic beverages, high-end cosmetics, jewelry, gasoline, automobiles, battery and coating, etc. The tax liability is computed based on the sales amount and/or the sales volume, depending on the goods concerned. Consumption tax is not recoverable but is deductible as an expense for CIT purposes.
Real Estate Tax
A real estate tax, which is based on the value of the property or rental received, is assessed annually on land and buildings used for business purpose or leased. The tax rate is 1.2% of the original value of buildings. A tax reduction of 10% to 30% is commonly offered by local governments. Alternatively, tax may be assessed at 12% of the rental income. Real estate tax is deductible for CIT purposes.
Urban and Township Land-Use Tax
An urban and township land-use tax is levied on taxpayers who utilize land within the area of city, country, township, and mining districts. It is computed annually based on the area of lands actually occupied by a taxpayer multiplied by a fixed amount per square meter that is determined by the local governments.
Arable Land Occupation Tax
Arable land occupation tax is levied on companies and individuals who build houses or carry out non-agricultural construction on arable lands. It is computed based on the area of arable lands actually occupied by a taxpayer multiplied by a fixed amount per square meter that is determined by the local governments and is settled on a one-off basis.
Land Appreciation Tax
A land appreciation tax is levied on the gain from the disposal of land use rights or real estate properties at progressive rates from 30% to 60%. Land appreciation tax is deductible for CIT purposes.
All enterprises and individuals who execute or receive ‘specified documentation’ are subject to stamp tax. The stamp tax rates vary between 0.005% on loan contracts to 0.1% for property leasing and property insurance contracts.
A deed tax, generally at rates from 3% to 5%, may be levied on the purchase, sale, gift, or exchange of ownership of land-use rights or real properties. The transferee/assignee is the taxpayer.
For employment income, an employer is obligated to withhold individual income tax from an employee’s salary and settle the payment with the tax authorities on a monthly basis.
Social Security Contributions
Social security contributions to pension funds, medical funds, etc. are mandatory for both employers and employees in China. Employers are normally required to make social security contributions in relation to pension, medical, unemployment, maternity, and work-related injury for their employees. The percentage of social security benefits borne by employers and employees, as well as the contribution base, vary from city to city.
Urban Construction and Maintenance Tax
Urban construction and maintenance tax is imposed at a certain rate on the amount of China’s indirect taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of indirect taxes are also the taxpayers of urban construction and maintenance tax. It is charged at three different rates depending on the taxpayer’s location: 7% for urban areas, 5% for county areas, and 1% for other areas.
Educational surtax is imposed at 3% on the amount of China’s indirect taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of indirect taxes are also the taxpayers of educational surtax.
Local Educational Surtax
Local educational surtax is levied at 2% on the amount of China’s indirect taxes (i.e. VAT and consumption tax) payable by the taxpayer. Effectively, the taxpayers of indirect taxes are also the taxpayers of local educational surtax.
Motor Vehicle Acquisition Tax
A motor vehicle acquisition tax is levied at 10% of the taxable consideration, on any purchase, import, self-production, receipt as a gift or award, etc. of an automobile, a tramcar, a trailer, or a motorcycle with a gas displacement of over 150 milliliters within China.
Vehicle and Vessel Tax
A tax is a tax that is levied on all vehicles and vessels within China. A fixed amount is levied on a yearly basis. Transport vehicles generally are taxed on a fixed amount according to their own weight, with passenger cars, buses, and motorcycles being taxed on a fixed unit amount. Vessels are taxed on a fixed amount, according to the deadweight tonnage.
Vessel Tonnage Tax
Vessel tonnage tax is levied on any vessel entering into a port inside the territory of China from overseas and is collected by the General Customs. The tax payable is computed based on the net tonnage multiplied by the applicable tax rate that is determined based on the net tonnage and the term of the tonnage tax license.
The exploitation of natural resources, including crude oil, natural gas, coal, salt, raw metallic metals, and non-metallic metals, mineral water, carbon dioxide gas, etc., is subject to resource tax on a sales turnover or tonnage/volume basis. Resource tax is collected on the usage of water in 10 provinces on a trial basis.
Environmental Protection Tax (EPT)
EPT is collected from enterprises that directly discharge taxable pollutants (i.e. air pollutants, water pollutants, solid waste, and noise pollution) within the territory of China. EPT is calculated based on the volume of pollutants discharged, multiplied by the specific EPT amount.
Tobacco tax is levied on taxpayers who purchase tobacco leaves within the territory of China. The tax is assessed at the rate of 20% on the purchasing value and shall be settled with the local tax bureau at the place of the purchase.
Cultural Business Development Levy
Companies and individuals engaged in entertainment and advertising businesses shall pay cultural business development levy at 3% on the relevant income.
E. Branch Income
A branch of a non-TRE in China is taxed at the branch level. If there is more than one branch, they can select its main office in China to conduct a consolidated CIT filing, which requires the overall tax payable to be calculated and adjusted on a consolidated basis but with the tax payment settled separately at the respective branches’ locations.
F. Group Taxation
Group taxation is generally not permitted under the CIT law unless prescribed by the State Council.
All companies are required to conduct transactions with related parties in arm’s-length transactions. The Chinese tax authorities are allowed to make adjustments to transactions between related parties that are not conducted at arm’s length and result in the reduction of taxable income of the company or its related parties using the following appropriate methods: comparable uncontrolled price method, resale price method, cost plus method, transactional net margin method, profit split method, and other methods (e.g. cost approach, market approach, income approach) that are consistent with the arm’s-length principle.
The CIT law has a thin capitalization rule disallowing interest expense arising from excessive related-party loans. The safe harbor debt/equity ratio for enterprises in the financial industry is 5:1 and for enterprises in other industries is 2:1. However, if there is sufficient evidence (e.g. a thin capitalization special issue file) to show that the financing arrangement is at arm’s length, these interests may still be fully deductible even if the ratios are exceeded.
Controlled Foreign Companies
Under the controlled foreign companies (“CFC”) rule, the undistributed profits of CFCs located in low-tax jurisdictions with an effective income tax rate of less than 12.5% may be taxed as a deemed distribution to the TRE shareholders. The Chinese tax authorities have published a list of countries (i.e. a ‘white list’) that they do not regard to be low-tax jurisdictions.
Depreciation of Fixed Assets
Fixed assets with useful lives of more than 12 months must be capitalized and depreciated in accordance with the CIT regulations. Generally, depreciation is calculated by the straight-line method. Shorter tax depreciation life or accelerated depreciation may be allowed due to advancement of technology or suffering from constant vibration or severe corrosion. Production-nature biological assets, such as livestock held for breeding and commercial timber, also have to be capitalized and depreciated using the straight-line method.
Amortization of Intangibles and Goodwill
A deduction is allowed for amortization of intangible assets, such as, patents, trademarks, copyrights, and land-use rights. Generally, intangible assets have to be amortized over a period of not less than ten years. For an intangible asset obtained through capital contribution or assignment, it can be amortized according to the useful life prescribed in the laws or agreed in the contracts, if any. However, acquired goodwill is not deductible until the invested enterprise is entirely transferred or liquidated.
Organizational and Start-Up Expenses
Organizational and start-up expenses are tax deductible fully in the first year of operation.
Research and Development Expense
From 1 January 2018 to 31 December 2020, for R&D expenses incurred for new technology, new products, or new craftsmanship, an extra 75% in addition to the actual expenses incurred are also tax-deductible as an incentive.
Asset loss (including bad debt loss) may be deductible in the tax year during which such loss is incurred, provided that supporting documents are maintained for inspection by the in-charge tax bureau.
Interest on loans generally is tax-deductible. For interest expenses on borrowings from non-financial institutions by a non-financial institution, the portion that does not exceed the commercial rate is deductible. The tax deduction of interest paid to related parties is subject to the thin capitalization rule under the CIT law.
Reserves and Provisions
Provisions for asset impairment reserves (e.g. bad debt provisions) and risk reserves generally are not tax-deductible unless otherwise prescribed in the tax rules. Financial institutions and insurance companies may deduct certain provisions and reserves, subject to the caps specified in the relevant tax circulars.
The CIT law does not specifically address the deductibility of contingent liabilities. According to the general principle of the CIT law, contingent liabilities are liabilities that an enterprise has not actually incurred and thus shall not be tax-deductible.
Charitable donations are tax-deductible at up to 12% of the annual accounting profit, and any excess amount in the current year can be carried forward and deductible in the following three years. From 1 January 2019 to 31 December 2022, donation for poverty alleviation purpose to targeted poverty-stricken areas can be fully deducted. Non-charitable donations, as well as sponsorship expenditures that are non-advertising and non-charitable in nature, are not deductible.
Wages and Employee Expenses
Reasonable wages and salaries of employees incurred by a company are tax-deductible. Directors’ fees are also tax-deductible. As an incentive to encourage the hiring of handicapped people, 200% of the actual salary expenses paid to handicapped staff are deductible.
Basic social security contributions, including basic pension insurance, basic medical insurance, unemployment insurance, injury insurance, maternity insurance, and housing funds, that are made by an enterprise in accordance with the scope and criteria as prescribed by the state or provincial governments are deductible.
Commercial insurance premiums paid for investors or employees shall not be tax-deductible unless they are paid for safety insurance for workers conducting special types of work.
Staff welfare expenses, labor union fees, and staff education expenses are tax-deductible at up to 14%, 2%, and 8% of the total salary expenses, respectively.
Entertainment expenses are tax-deductible up to the lesser of 60% of the costs actually incurred and 0.5% of the sales or business income of that year. The excess amount must not be carried forward to and deducted in the following tax years.
Advertising Expenses and Promotion Expenses
Advertising expenses and business promotion expenses are deductible at up to 15% (30% for certain enterprises in the cosmetics, medicine, and beverage industries) of the sales (business) income of that year unless otherwise prescribed in the tax regulations. Any excess amount is allowed to be carried forward and deductible in the following tax years. Advertising expenses and business promotion expenses incurred by the tobacco industry are entirely not tax-deductible.
Fines and Penalties
Fines, penalties, and losses arising from confiscation of property are not deductible for CIT purposes.
CIT payments and surcharges that are imposed on overdue taxes are not deductible for CIT purposes.
Net operating losses
Generally, tax losses can be carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. For new/high tech enterprises and small and medium sized technology enterprises, tax loss can be carried forward for ten years. Carryback of losses is not permitted.
Payments to Affiliates
Management fees for stewardship are not deductible, but services fees paid for genuine services provided by affiliates in China or overseas and charged at arm’s length should be deductible. Other payments to affiliates, such as royalties, are also tax-deductible, provided that the charges are at arm’s length.
H. Withholding Taxes
Non-TREs without establishments or places of business in China shall be subject to a withholding tax (“WHT”) at 10% on gross income from dividends, interest, lease of property, royalties, and other China-source passive income unless reduced under a tax treaty. If a non-TRE shareholder uses dividends distributed from a China TRE to make direct investment into China or acquire a China TRE from third parties, the non-TRE shareholder is eligible for WHT deferral treatment on the dividends, provided that certain conditions are met. The non-TRE shareholder shall report and settle the deferred tax if it later recoups the investment through equity transfer, equity buyback, liquidation of the China TRE, etc. Dividends distributed by a foreign investment enterprise out of its pre-2008 profit to non-TRE shareholders are still exempted from WHT.
I. General Anti-Avoidance Rules
There is a General Anti-Avoidance Rules (“GAAR”) provision in the CIT law allowing the STA to adjust taxable revenue or taxable income where business arrangements, structures, or transactions are entered into without reasonable commercial purpose and result in a reduction, exemption, or deferral of tax payment. The STA may initiate a GAAR investigation if they suspect that an enterprise undertakes any of the following arrangements: abuse of preferential tax treatments, abuse of tax treaties, abuse of corporate structure, use of tax havens for tax avoidance purposes, or other arrangements that do not have a reasonable commercial purpose.
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