Financing and Taxation EU SME Topics

Foreign companies operating in China as legal entities (not including Representative Offices) are subject to a large number of taxes in the same way as domestic companies. Companies not incorporated in mainland China but with their effective management therein will also be subject to the same tax regime. The most relevant taxes are:

• Corporate Income Tax (CIT): standard tax on income, with the statutory tax rate at 25%. Small scale and low profit enterprises* enjoy a preferential CIT policy:
  • Annual turnover below CNY 1 million (around EUR 130k): 20% CIT rate calculated only on 12.5% of their turnover.
  • Annual turnover above CNY 1 million (around EUR 130k) but below CNY 3 million (around EUR 391k): 20% CIT rate calculated only on 25% of their turnover. Other preferential CIT rates (15%) may be applied for companies operating in sectors encouraged by the Chinese government, with local R&D operations and IP (High- and New-Technology Enterprise status), software and integrated circuit enterprises, or investing in priority sectors in central and western regions.

• Value-added Tax (VAT): standard tax on transactions, it applies as a percentage of the invoiced amount for goods and services. The standard VAT rate is 13%, but reduced rates of 9% and 6% also apply for certain sectors and services. Micro, small and medium-sized enterprises may register as “Small scale taxpayer”, for which a flat 3% VAT rate is applied (see FAQ “What is the distinction between ‘General VAT payer’ and ‘Small-scale VAT payer’?”).
• Consumption Tax (CT): sales-based tax, applicable to products that are harmful to health (e.g. tobacco or alcohol), luxury products (e.g. jewellery and cosmetics), as well as high-end products (e.g. passenger cars, boats, etc.) – either imported or manufactured in China. The specific rate of the CT varies depending on the type of product (ranging from 1% to 56%).
• Stamp Tax: levied on various contracts, licenses and accounting books. It varies from 0.005% to 0.1% depending on the contract type.
• Withholding Income Tax: applied to interests, rental, royalties and dividends paid to enterprises non residing in China (e.g. parent company in Europe), usually 10%.

Other common taxes include the Real Estate Tax, the Land Value Appreciation Tax, the Resources Tax, etc.

* Small scale and low profit enterprises are defined as enterprises with an annual turnover below CNY 3 million, less than 300 employees, and total asset value below CNY 50 million.

All companies incorporated in China need to register for the payment of VAT once their sales exceed a certain level (varying between regions, but generally very low e.g. starting at 10,000 – 20,000 RMB per month). When the registration is made, companies need to choose whether they are ‘General VAT payers’ or ‘Small-scale VAT payers’, based on their annual turnover. The distinction is very important:

• ‘Small-scale VAT payer’ applies to companies with annual turnover below 800,000 CNY for commercial companies, or 500,000 CNY for manufacturing companies. In this case, the VAT is calculated at a flat rate of 3%, rather at the statutory rate (13%, 9% or 6%). However, small scale VAT payers will not be able to deduct input VAT, nor to issue Special VAT invoices (‘fapiao’) to Chinese clients.
• ‘General VAT payer’ for all other entities, for which VAT is calculated at the statutory 13%, 9% or 6% rate. A general VAT payer enjoys input VAT credit for the purchase of goods or services.

In limited cases for certain businesses, SMEs may find it more convenient to register as ‘General VAT payer’ rather than ‘Small-scale VAT payer’, because for some businesses the benefits from deducting input VAT may be higher than those obtained from lower VAT rates; at the same time, the majority of Chinese suppliers will require Special VAT invoices when doing businesses, which ‘small-scale VAT payers’ will be able to provide only through intermediaries (after the payment of a fee).

In China, all business transactions are required by law to be recorded on an official invoice (fapiao, 发票). Contrary to other countries, fapiaos are more than just ordinary invoices. Fapiaos are distributed and administrated by tax authorities; taxpayers are required to purchase the fapiaos from the tax authorities. Fapiaos clearly indicate the name and tax identification number of the individual or the business for which they were issued. Fapiaos can be sorted into two categories:

• Special VAT fapiao: This is the most commonly used for input VAT deduction, issued by a general VAT taxpayer;
• General VAT fapiao: This is used in all other instances, including sales to small-scale taxpayers and consumers, VAT-covered transactions done by small-scale taxpayers, or sales of tax-free goods and services.

When an enterprise is incorporated, it needs to state what activities it intends to perform on its Business License, and keep its actual operations within this scope. The fapiao system is one means to enforce this requirement, as the enterprise cannot issue fapiao for activities outside its business scope.

Different taxes are applied to goods imported into China:

• Custom duties: China’s custom duties include (i) general duty rates; (ii) temporary duty rates; (iii) MFN duty rates; (iv) Conventional duty rates; (v) Special preferential duty rates; and (vi) Tariff rate quota (TRQ) rates. Custom duty rates are updated every year in December. EU exporters should refer to MFN duty rates.

Certain imports may be temporarily exempt from custom duties (mostly relating to items urgently needed by China). Occasionally, higher custom duties may be applied as retaliation to political disputes or trade wars (see FAQ “Dairy products: EU producers authorised to export to China”). Finally, custom duties are exempted for many products originating from countries with which China has signed Free Trade Agreement.

• Value-added tax (VAT): China’s import VAT rate is:
  • 13%, applicable mostly to manufactured goods;
  • 9%, applicable mostly to agricultural and utility goods;
  • 6%, applicable to services.

• Consumption tax: applicable to products that are harmful to health (e.g. tobacco or alcohol), luxury products (e.g. jewellery and cosmetics), as well as high-end products (e.g. passenger cars, boats, etc.). The specific rate of the Consumption Tax varies (from 1% to 56%) depending on the type of product, and can be calculated by using either the ad valorem or quantity-based method.

Non-resident enterprises (i.e. companies based in Europe) are taxed on Chinese-sourced income. Services provided by these companies to China-based clients will be considered by Chinese tax authorities as income generated in China: Corporate Income Tax (generally 10%), VAT (6%) and surcharges (generally 0.72%) will need to be paid on the transaction. This will be done by the Chinese client on a withholding basis. In general, the amount withhold cannot be recovered, though it may be deducted from the tax payable in the home country. Exceptions may apply in line with bilateral agreements signed between China and foreign countries.

In order to avoid receiving smaller amounts than expected, European service providers should clearly indicate in the service contract that the amount payable by the Chinese client is net of taxes, or alternatively increase pricing in advance.