Jasur Mavlyanov, CEO of Shanghai Silk Road, talks to Jason from the accounting department of Shanghai Silk Road on types of corporate taxes companies pay in China.
According to current laws, there are three main taxes that companies should pay in China:
- VAT (Value Added Tax)
- Corporate income tax
- Employment Tax (Personal Income Tax)
1) VAT (Value Added Tax)
It has two classifications:
a) VAT (Value Added Tax) for General Tax Payer companies (this type is especially for trading companies, e.g. import-export) – For goods between 9% and 13%, for service (trading companies can also provide services) 6% – paid monthly.
b) VAT (Value added Tax) for Small Scale Tax Payer companies (this type is especially for those companies which are engaged in service-based businesses, e.g. consulting) – if the income is less than 300K RMB in a quarter or less than 100K RMB in a month, VAT is 0%.
2) Corporate Income Tax
Paid from net profit. If net profit is less than 1 million RMB/Year, then the tax rate is 5%. If net profit is between 1 million RMB and 3 million RMB / year then the tax rate is 10%. Government recalculates profits at the end of the year, and if it exceeds 1 million, then the tax rate will increase, i.e. only the over part of 1 million RMB will be charged 10%. If net profit is over 3 million RMB / year, then the tax rate is 25%. Corporate income tax is paid every quarter.
3) Employment Tax (Personal Income Tax)
Tax free threshold is 5000 RMB, i.e if your salary is 5000 RMB, then you don’t have to pay a personal income tax. But if your salary is above this amount, the tax rate will depend on the time and the amount that you’re paying yourself. Below is how personal income is calculated in different months of the year and amounts of salary paid.
4) Social Security
For foreign employees, companies don’t need to pay any social security. But when they employ local talent – Chinese employees, they will have to pay between 1500 RMB and 2000 RMB / month for social security per local employee.
Can business owner do the accounting – filing themselves in China?
Chinese laws do not forbid foreign entrepreneurs to do the company accounting themselves, i.e. they don’t have to hire an accountant to do the filings, but in practice, it’s not recommended, because i) system is in Chinese ii) filing process is a lot different from other countries iii) if anything goes wrong, it’s very easy for WFOE / WOFEs to be blacklisted. Therefore, we recommend that foreign business owners in China find licensed accountants and work with them. At Shanghai Silk Road, we have accountants – you can let us know if you need help with doing your accounting.
What documents should I send to my accountant?
- Bank statements – for RMB and USD accounts from your corporate bank account in China
- Invoices (fapiao)
Chinese Invoice (fapiao)
Chinese invoice – fapiao is an official invoice issued by the Chinese tax bureau (but provided by the seller) for any goods or services purchased within t the country. Fapiao cannot be printed using a home printer. It’s printed by a company accounted using a tach machine. Blanks are taken from the Tax Bureau.
Do WFOE/WOFEs have to conduct quarterly / yearly audit?
Yes, audit is done on an annual basis in China when preparing the annual report of the company for the Tax Bureau, that is between 2 April and 13 June every year.
How do WFOE/WOFEs do tax return in China?
Firs thing to understand is – only General Tax Payer companies can do the tax return. Small Scale Tax Payer companies cannot. When we talk about tax returns, we’re talking about getting the VAT back from the government that your WFOE/WOFE paid when purchased a product in China. Based on the rate and the time you purchased your product – your supplier is expected to give you an invoice (fapiao) – you can file for a tax return, usually the average rate is 10% – 13%.
How can WFOE/WOFEs reduce taxes legally in China?
Like any other country, as a company employee, it’s possible to cover some of your expenses using your company account, i.e. transportation, business trips – hotels, business lunches etc., if you have children, your kids’ education can be paid by your company too. All you have to do is to collect invoices, from the places you made a payment to – taxis, hotels, restaurants, schools etc. and send the copies to your accountant so he/she can list those expenses as company expenses, this reduces the net profit and reduces the corporate income tax.