Direct taxation of businessesi Tax on profitsDetermination of taxable profit
A Chinese-resident enterprise is subject to EIT on its worldwide income. A PE of a non-resident enterprise is subject to EIT on its China-sourced income and on its non-China-sourced income that is effectively connected to the PE.
The taxable profits of an enterprise are equal to its total revenue for the tax year less its non-taxable revenue, tax-exempt revenue, deductions and prior-year losses. Enterprise taxpayers are required to use accrual accounting, and taxable net income is calculated on this basis, except where the tax authorities adopt a deeming method for determining taxable income, as is common for ROs and other types of PE. Taxpayers need to take into account certain differences between the general accounting standards for enterprises and the tax accounting requirements under the EITL when preparing EIT returns.
In general, reasonable expenditures actually incurred by an enterprise in connection with the deriving of revenue are deductible. The main types of non-deductible items include dividends, EIT payments, tax surcharges, penalties, non-qualified donations, sponsorship expenses, unapproved reserves and other expenses that are related to the generation of non-taxable income.
The straight-line method is used in computing both depreciation of fixed assets and amortisation of intangible assets. Certain fixed assets may be depreciated using an accelerated depreciation method as an incentive to encourage activities such as technological development.Capital and income
The EITL does not distinguish between the tax treatment of capital income and ordinary income. A capital gain derived by a taxpayer is subject to EIT as ordinary business income.Losses
Losses may be carried forward for five years after the tax year in which they are generated. Loss carry-backs are not allowed. Since a capital gain is taxed as ordinary business income, the offset of income losses against capital gains, and vice versa, is allowed. There are no specific provisions preventing loss relief in the case of an ownership change, although the general anti-avoidance rule may apply where the change is among related parties. The losses of a Chinese enterprise's foreign branches may not be set off against its domestic profits.Rates
The general EIT rate is 25 per cent, but high and new technology enterprises (HNTEs) to which the state provides key support are subject to a reduced rate of 15 per cent, while qualified small-scale and low-profit enterprises are subject to a reduced rate of 20 per cent. Under several circulars, qualified technologically advanced service enterprises are also subject to a reduced rate of 15 per cent.Administration
The tax year begins on 1 January and ends on 31 December. An enterprise must file a provisional monthly or quarterly tax return within 15 days of the end of each month or quarter and pre-pay provisional EIT at that time. The enterprise must file an annual tax return within five months after the end of the tax year, and the provisional tax already paid during the year will be credited to the annual tax payable.
The SAT is the central government tax authority in China. The SAT is responsible for the implementation of the tax laws and also has a role in creating tax policy, a role that it shares with the Ministry of Finance (MOF). From 1991 to mid-2018, there were two tax bureaus at each of the provincial, city and district levels in China. In August 2018, China completed a tax administration reform to merge the state and local tax bureaus. After the merger, the new local tax authority at each of the provincial, city and district levels has assumed all of the functions previously performed by the separate state and local tax bureaus at each level.
Tax authorities are required to carry out tax audits in accordance with an audit plan that is formulated annually.
There is as yet no formal procedure for advance rulings in China. Chinese enterprises can consult the tax authorities on specific tax issues online or via a hotline. The responses of the tax authorities, however, are not binding on the tax authorities. Under Chinese law, a taxpayer may challenge a tax assessment issued by a Chinese tax authority through the administrative review procedure after paying the tax. If the taxpayer is not satisfied with the outcome of an administrative review, it may bring a lawsuit in the courts.Tax grouping
Currently, there is no consolidated tax-grouping regime in China. Each Chinese company is a separate taxpayer under the EITL, and should pay tax and bear losses separately.ii Other relevant taxesVAT
The sale of goods, repair and replacement services and the provision of labour services in relation to the processing of goods in China are subject to VAT under administrative regulations that have been in place since 1994. The provision of other services and the transfer of immovable or intangible properties are also within the scope of VAT under a VAT pilot programme that was introduced in phases between 2012 and 2016. VAT is also levied on the import of goods into China, unless the imports are specifically exempted under special rules. The standard VAT rates for general VAT taxpayers are 16 per cent, 10 per cent or 6 per cent depending on the specific taxable activity.
General VAT taxpayers may utilise input VAT credits to offset against output VAT. The standard VAT rate for small-scale VAT taxpayers is 3 per cent and no-input credits are available to small-scale VAT taxpayers.Stamp duty
Stamp duty is levied on the execution or receipt in China of certain documents, including contracts for the sale of goods, documentation effecting the transfer of property or shares, business account books, and certificates evidencing rights and licences. The rates of stamp duty vary. For the transfer of shares in a resident enterprise, the applicable stamp duty rate is 0.05 per cent of the contract value for each party.Land appreciation tax
Land appreciation tax is levied on gains realised from real property transactions at progressive rates from 30 to 60 per cent, based on the land value appreciation amount, which is the excess of the consideration received from the transfer or disposition of real property over the total deductible amount, which mainly consists of the original cost of the land and the cost of improvements.