Taxes provide the most important revenue source for the government of the People's Republic of China. Value-added tax (VAT) produces the largest share of tax revenue in China, while corporate income tax produces the next largest share.
Tax is a key component of China’s macro-economic policy and greatly affects the country’s economic and social development. With the changes made since the 1994 tax reform, China has sought to set up a streamlined tax system geared to a socialist market economy.
Most taxes are based on regulations established by the State Council. Detailed tax rules are established by the State Council Committee on Tariff Regulations, the Ministry of Finance, the State Taxation Administration, and the Customs Office. A few kinds of taxes are based on laws passed by the National People's Congress.
Types of taxes
VAT produces the largest share of China's tax revenue. Corporate income tax is the next largest.
Taxes in China include:
Turnover taxes. This includes VAT and Consumption Tax. Consumption taxes were first implemented in 1994 on items including tobacco, alcohol, cosmetics, and cars, among other goods. The consumption tax was expanded in 2006 to apply to items including yachts, luxury watches, golf equipment, and single use chopsticks, among others. Consumption tax is mainly collected at production and importation. Business tax was a local tax, but replaced by the implementation of VAT nationwide in 2016. Income taxes. This includes Enterprise Income Tax (effective prior to 2008, applicable to such domestic enterprises as state-owned enterprises, collectively owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises) and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals. The Enterprise Income Tax Law of the People's Republic of China has replaced the above two enterprise taxes as of 1 January 2008. Individual income tax in the PRC was not collected until 1980. "There are no local taxes on personal income in China". The top marginal tax rate on high income earners is 45% for the portion of income above 960,000 RMB. Different sources of personal income are taxed differently (for example, income from wages are taxed on a progressive rate; income from royalties is taxed at a flat rate). Personal income tax accounts for less than 7% of China's tax revenue, as of 2019. Generally, China's income tax is a residential system in which income tax is collected both on domestic and foreign income.
Since 1 January 2008, the general corporate income tax rate for both domestic enterprises and foreign enterprises is 25%. Various exceptions exist. 15% tax rate is a concession rate for high-tech companies. Other preferential tax policies may apply for small, low-profit enterprises, enterprises in public infrastructure construction, enterprises employing veterans, or enterprises engaged in cultural production (such as opera troupes).
Hong Kong and Macau tax corporate income on the basis of territoriality -- only income from the domestic territory is taxed. Resource taxes. This consists of Resource Tax and Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources. Taxes for special purposes. These taxes are City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, and Vehicle Acquisition Tax. These taxes are levied on specific items for special regulative purposes. Behavioural taxes. This includes Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax (not yet levied), Slaughter Tax and Banquet Tax. These taxes are levied on specified behaviour. Customs duties. Customs duties are imposed on the goods and articles imported into and exported out of the territory of the People's Republic of China, including Excise Tax. Environmental Protection Tax: The environmental protection tax was passed in 2016 and became effective in 2018. Its purpose is to protect the environment, reduce pollutant emissions, and promote ecological improvement. Taxpayers are enterprises, businesses, and production/management that directly discharge taxable pollutants into the environment in the territory of the People's Republic of China and other waters under the jurisdiction of the People's Republic of China. - In case of tax exception (1) When enterprises, public institutions and other producers/operators discharge taxable pollutants into centralized sewage and domestic waste treatment facilities established by law. (2) When enterprises, public institutions and other producers/operators store or dispose of solid waste in facilities or locations that meet national and local standards for environmental protection. Taxable pollutants include solid waste, atmospheric pollutants, water pollutants, and noise.
Mined minerals are taxed at a low rate in comparison to the value of the extracted minerals themselves. The rates vary depend on the type and grade of minerals. Resource tax was first established in 1984 on coal, oil, and natural gas. The 1994 tax reform expanded the resource tax to include also include ferrous metals, nonferrous metals, nonmetallic minerals, and salt. Resource taxes were based on the volume of minerals until 2011, when resource taxes became based on the sales value of minerals.
China does not have personal property taxes. Property tax only applies to business property. Since the early 2010s, the Ministry of Finance has sought to implement personal property taxes but has been opposed by the National People's Congress and many local governments. As of at least early 2024, no personal property tax measures have made it on to the legislative agenda. Two of China’s largest cities, Chongqing and Shanghai, have trialed property taxes between 0.4% and 1.2% since 2011, mainly targeting second homes, luxury properties, and purchases by non-residents.
China also does not have capital gains tax, gift tax, or estate tax. Interest is also not taxed.
As the entrepreneurs that started with Deng Xiaoping's reforms die, the lack of estate tax is seen as a challenge. Their inheritances (estimated to be 2 trillion dollars between 2025 and 2035) would concentrate wealth against the stated policy of the CPC. Introducing a estate tax would require transparency about holdings, and, since a lot of the wealth is linked to political officers, revealing it would promote mistrust against the power structure.
Land use sales are a major non-tax component of government revenues. In China, land is not privately owned. It cannot be permanently owned by private individuals or businesses. Local governments own urban land and rural land is collectively owned. Local governments generate significant revenue by selling urban land. They also purchase rural land and resell it at a higher price as urban land.
China's fiscal year is the same as the calendar year.
Tax filing and payment Depending on the form of tax, taxpayers in China are required to file tax returns periodically or annually. Filing tax returns often entails giving detailed information about taxpayers’ income, expenses, deductions, and credits. The information provided is used by the tax authorities to assess the taxpayer's compliance with tax laws and regulations and to calculate the taxpayer's tax due. Taxpayers in China are subject to stringent filing and payment deadlines that must be met in order to avoid penalties and enforcement measures.
Monthly and quarterly filing of tax returns Value Added Tax (VAT), Corporate Income Tax (CIT), Consumption Tax (CT), Resource Tax, and Environmental Protection Tax are taxes that are paid on a monthly or quarterly basis. If taxpayers must file and pay taxes on a monthly basis, they are obligated to do so within the first 15 days of the following month. They must also ensure that the tax authorities must receive tax returns and payments on or before this date. This deadline is set out in the "Provisions of the State Administration of Taxation on the Time Limit for Tax Declaration and Payment”. The main types of monthly taxes include Individual Income Tax(IIT), Value Added Tax, Resource Tax, and Corporate Income Tax.
In China, several taxes have a quarterly reporting requirement. The quarterly tax filings are usually required for CIT and VAT, among others. Taxpayers with quarterly filing deadlines must submit their tax returns within the first 15 days of the month following the end of each quarter (April, July, October, and January). Urban Maintenance And Construction Tax(UMCT), the Education Surcharge, and the Local Education Surcharge are taxes that are due at the same time as the VAT and CT and are paid at the same time, respectively your tax filing frequency.
General anti-avoidance rules (GAAR) Tax evasion was common in China due to underdeveloped tax collection mechanisms and weak law enforcement in the 1980s and early 1990s. To combat tax evasion and other forms of tax avoidance, China has implemented the General Anti-Avoidance of Tax Evasion Regulations (GAAR). The GAAR was introduced for the first time in China in 2008 in the PRC Enterprise Income Tax Law and has subsequently undergone numerous updates and revisions. GAAR's foundational objective is to prevent taxpayers from employing aggressive tax planning techniques to reduce or eliminate their tax obligations. Any tax avoidance arrangement by an enterprise in China is subject to the General Anti-Avoidance Rule, which attempts to guarantee that the arrangement serves legitimate commercial goals and not solely to achieve tax benefits. Investigating whether the company's intention for the tax arrangement is reasonable and legal, as opposed to an illegal attempt to acquire tax benefits, is the goal. Tax authorities can disregard or recharacterize transactions that they deem to be artificial or to lack economic substance under the Chinese GAAR regulations. If a GAAR investigation is to be initiated, the local tax authorities must first obtain approval from the State Administration of Taxation. The request must be elevated through the several higher level tax authorities, which are above the local tax authority, in order to receive this approval. Taxpayers subject to the GAAR provisions in China must provide sufficient documentation to back up the commercial purpose of their transactions, transaction documentation, communications between the taxpayer and parties involved in the transaction, and documentation that can demonstrate that the arrangement has a non-tax avoidance purpose. The tax authorities in China must inform the taxpayer in writing of any challenges made to a transaction under the GAAR provisions and state their justifications.
It is considered that there is no legitimate commercial purpose in the following cases:
(1) More than 75% of the income of foreign enterprises comes from taxable assets in China.
(2) At any point in the preceding year, more than 90% of the foreign corporation's asset value (excluding cash) consists of Chinese assets;
(3) The foreign company has only limited activities and risks, and although legally fully incorporated, it has virtually no economic existence. This provision is specifically aimed at shell companies and similar arrangements.
(4) Overseas tax burden is less compared to direct remittances.
However, a transaction will not be considered an indirect transfer in the following situations:
(1) The exchange of publicly listed shares on a stock market;