Foreign Enterprises’ Tax Compliance in China
Harmonization of Chinese and Foreign Enterprises’ Taxation
Tax compliance in China is constantly changing due to updates to fiscal regulations, affecting any company wishing to set up business in China. In 2007 the National People’s Congress adopted a new law on corporate income tax, still in force today. These new provisions are intended to harmonize the Chinese’s income tax, establishing a single 25% tax rate on income from both local and foreign companies.
The previous tax rate (33% for Chinese companies and 15% for foreign companies) was necessary for China’s reform and opening up, it helped attract foreign capital and accelerated the development of the economy. This policy helped them achieved great success: $40 billion in the 90s, foreign direct investment rose to $70 billion in 2006, exceeding $ 100 billion in 2012, including the financial sector (banking, stock exchange, insurance).
Tax incentives have also been introduced, granted to both Chinese and foreign companies and based on business areas rather than on a geographical criterion. For example, the high-tech sector enjoys preferential rate of 15% in order to encourage investment by foreign companies in the sector.
Variation of Employees’ Taxation in China
When developing a business activity through a Sales Office with Labor Dispatched employees, a foreign company is only subject to taxes regarding its human resources.
However, the level of taxation is different depending on the province where the employee’s local contract is registered, and the nationality of the employee (Chinese national or foreign employee). Consequently, the rules vary from city to city with further modifications according to the applicable policy system’s local changes.
EMPLOYEES TAXATION IN CHINA
The tax calculation system in China differs from city to city and also depends on the employee’s nationality, specifically if the employee is a Chinese national or a foreigner.
Typically, the total cost of taxes for an employee in China is composed of the sum of the Individual Income Tax (IIT) cost and the Social Security cost.
The Individual Income Tax Cost
The Chinese system requires the use of ‘Gross Salary’ from which the ‘Tax Deduction for Employees’ is subtracted in order to obtain the ‘Monthly Taxable Income’. The IIT cost is the result of the ‘Tax Rate’ applied to the ‘Monthly Taxable Income’ before removing the ‘Quick Deduction’.
The Chinese Social Security Cost
In China the current regulations are computing the sum of the Social Insurance and Housing Fund contributions from both the employer and employee. In the case of a foreign employee, only the employer and employee Social Insurance contributions are to be considered in the cost calculation.
Please note that the ‘Tax Deduction for employees’, ‘Tax Rate’, and ‘Quick Deduction’ may vary according to the level of monthly taxable income. In addition, the Social Insurance and Housing Fund contribution rates and maximum base for contribution are dependent on where the employee wishes to contribute his Social Security.
In Shanghai, it is not yet compulsory for foreigners to contribute to the Chinese Social Security system (i.e. the Social Insurance). Consequently, any employee under a Labor Dispatch contract registered in Shanghai is to be charged only for the Individual Income Tax (IIT).
Companies operating with Labor Dispatch employees benefit from the lower labor charges specific to the city of Shanghai, while keeping their business operations in the whole country.