Enterprises Doing Business in Shanghai
Foreign enterprises with their head offices in China are taxed
on their worldwide income. Tax credit is allowed for income
taxes paid to other countries on certain incomes. Other foreign
enterprises doing business in Shanghai and non-resident enterprises
are taxed on income derived from China source only.
There are two systems of tax authorities in China, namely,
National Tax Bureau and the Local Tax Bureau. In general,
the National Tax Bureau is responsible for assessing and collecting
taxes for enterprises and corporations, while the Local Tax
Bureau is responsible for individual income taxes and property
MAJOR TAXES ON FOREIGN ENTERPRISES
Foreign enterprise taxpayers can be classified into (1) Foreign
investment enterprises, which include equity joint ventures,
cooperative / contractual joint ventures and wholly foreign-owned
enterprises and (2) Foreign enterprises, which include Permanent representative
offices and branches.
Foreign invested enterprises and foreign enterprises doing
business in China are liable to the following types of taxes:
1. Income Tax
2. Transaction Tax : Value added tax, Consumption tax, Business
3. Other taxes: Vehicle and vessel license tax, Stamp tax,
Property tax, Deed tax
In addition, custom duties are levied on imports and exports
and individuals working in China are liable to individual
TAXABLE INCOME – income tax
There is in general no distinction between profits for accounting
purposes and tax purposes, since all accounts have to be prepared
according to various legislations on accounting. However,
for certain categories of expenses, for example entertainment
and traveling, there are maximum amounts allowable and for
certain categories of expenses, for example depreciation,
organisation expenses, strict line shall apply.
The tax year is
calendar year but a foreign enterprise may apply to the tax
authorities to adopt its own fiscal year as the tax year.
The current income
tax rate is 30% and local income tax is 3%, making a total
Foreign enterprises engaged in manufacturing in Shanghai pay
income tax at a reduced rate of 24%. Those established in
the economic and technological development zones of Shanghai
and Pudong New Area pay income tax at a reduced rate of 15%.
In some areas, tax holidays still apply to foreign enterprises
engaged in preferred industries.
Fixed assets with
a useful life of one year or more may be depreciated. Fixed
assets with cost less than RMB2,000 can be written off immediately.
Straight-line method shall be applied according to the law.
There are regulations providing the minimum useful lives for
different categories of assets. Residual value should not
be less than 10 %.
Operating loss for enterprises carrying on business in Shanghai
can be used to set-off taxable profits in the future years
for up to five years.
(1) Value Added Tax
Enterprises engage in the business of selling commodities,
repair and maintenance services or import and export business
in China are subject to value added tax. The standard rate
for value added tax is 17%, but the rate for certain basic
commodities such as grain, cooking oil, running water, forage,
fertilizer, pesticide, and farming machinery is 13%.
(2) Consumption Tax
Production, processing and importation of the following 11
commodities in China are subject to consumption tax: tobacco,
alcoholic drinks or alcohol, cosmetics, skin and hair care
products, jewellery, fireworks, gasoline, diesel, automobile
tire, motorcycle and motorcar. Consumption tax is calculated
in accordance with quantity (e.g. gasoline) or according to
the fixed scheduled rates (e.g. the rate for motorcar with
its engine cylinder capacity under 2,200ml is 8%).
(3) Business Tax
Enterprises engage in transportation, post and telecommunication,
finance and insurance, construction. art, sports, entertainment,
and services, or transfer of intangible assets and immovable
properties are subject to business tax. Business tax rate
is 3% or 5%. But the tax rate for entertainment sector is
10% or 15%.
TAXABLE INCOME – Other taxes
These taxes are levied on the taxpayers according to a fixed
schedule. The scheduled rates may be amended from time to
time, for current information, please check with the relevant
(1) Vehicle and Vessel Licence Tax
Vehicles owned and used by foreign invested enterprises are
subject to Vehicle and Vessel Licence Tax
(2) Stamp Tax
Stamp taxes are levied on contracts made in China in respect
of purchases and sales, processing contracting, engineering
project, asset leasing, transportation, storage and warehouse,
loan, asset insurance, technology contract, transfer of property
rights, accounting ledger, royalty license. The minimum rate
of a stamp tax is 0.005% and the maximum is 0.1%. royalty
license and accounting books (not including wage records)
taxed on per piece basis, at RMB5.
(3) Property Tax
(a) The tax is levied at an annual rate of 1.2% on the original
value of the real estate, after 20% is deducted therefrom.
(b) The tax rate is 12% if it is levied on the rental income.
(c) Newly constructed houses, which are built or purchased
by the foreign-invested enterprises in Pudong New Area and
Economic and Technological Development Zones, shall be exempt
from real estate tax for 5 years as of the month of completion
of construction or purchase.
(4) Deed Tax
Purchaser or acquirer of land and building is subject to deed
tax. The transfer of ownership of land and building refers
(a) The granting of land use right by the state (not including
the transfer of management right of the rural collective land);
(b) Transfer (including selling, bestowal and exchange) of
land use right;
(c) Sale and purchase of buildings;
(d) Bestowal of buildings
(e) Exchange of Buildings.
(f) The current tax rate is 3-5%.
Foreign enterprises without a permanent establishment in China
are subject to a withholding tax of 20% on its profits, interests,
rentals, royalties and other income sourced in China. Double
tax agreements (DTA) may reduce the rate.
Withholding tax on Profit, Interest, Rental and Royalty
A 20% withholding tax shall be levied on the income derived
from profits, interests, rentals, royalties and other sources
in China by foreign enterprises that have no establishments
in China. However they enjoy a reduced withholding tax rate
of 10% in Shanghai.
Other types of concession and preferential treatment in terms
of income tax reduction or exemption may be granted upon approval
of municipal government in accordance with current policies
on enhancement of industry and development.
Dividends from foreign investment enterprises are excluded
from the taxable income of another foreign investment enterprise.
Dividends paid to foreign shareholders (individuals or corporation)
at present are not subject to income tax or withholding tax.
For tax purposes, there is no distinction between capital
gains and other types of revenue received in China. Therefore,
foreign shareholders are subject to foreign enterprises income
tax on capital gains at 20% (withholding tax) from the sales
of their investments in foreign investment enterprise. No
indexation allowances will be taken into account.
Taxation on Partnership and Joint Venture
Partnership is uncommon in China, but cooperative joint venture
(CJV), which is not a legal entity on its own, is widely used
in China. A CJV is not a legal entity and its partners carry
unlimited liabilities. The foreign partner of a CJV is taxed
on its share of pretax profits according to rules applicable
to a foreign enterprise.
Double Taxation Treaty
China maintains over 60 DTAs with its trading partners. In
general, China adopts a mixed model of OECD and UN, with emphasis
on the right to tax when the income is derived from or in