A rundown of the major taxes in A rundown of the major taxes in China for foreign businesses

Understanding taxes in China

China is in the process of going through some major tax reforms in the hope of helping local companies and neighbouring countries save billions of dollars on taxes in 2016.

The continuation of tax reforms were emphasized by the statement released by the National Bureau of statistics at the end of January, going into some detail about China's plan to expand its value-added tax (VAT) reforms to let industries that enter the scheme this year pay 560 billion yuan ($85.1 billion) less in tax than they did in 2015.

In addition to this there is also the Belt and Road Initiative that is set to help neighbouring countries doing business with China such as Cambodia, India, Indonesia, Pakistan, Romania and Russia to benefit from tax agreements. 

This is certainly great news for domestic companies in eligible industries and for the countries along the Belt and Road, but when it comes to foreign enterprises looking to move their operations to China, what are the relevant tax costs that their business may incur?

Read on to find out what the major taxes in China for foreign businesses are today, and how where you register your company may help you save below...

Major taxes in China for foreign businesses 

• Corporate income tax (CIT)

All enterprises that generate income in China are required to pay CIT (except those of a sole proprietorship and partnership). The standard CIT rate is at 25%, but qualified enterprises which are engaged in industries encouraged by the China government in the following areas in southern China are subject to a reduced 15% rate:

Region	Hengqin	Pingtan	Qianhai
Industry Categories	High and New Technology Industry	High Technology Industry	Modern Logistics Services Industry
	Pharmaceutical and Healthcare Industry	Commercial Services Sector	Information Services Industry
	Science Education and Research and Development  Sectors	Agricultural and Marine Industry	Technology Services Industry
	Cultural Innovation Sector	Ecological and Environmental Protection Industry	Cultural Innovation Sector
	Commercial Services Sector	Public Facility Management Industry

source: White and Williams LLP

• Withholding CIT

Withholding CIT on payments to non-tax residents is currently set at a reduced rate of 10%. This tax is applicable to:
-dividends, bonuses and other equity investment 
-interest, rental, royalty and other passive income

• Individual income tax (IIT)

Individual income tax is taxed according to progressive rates that range from 3% - 45%. Enterprises located in Qianhai that hire foreign staff that are categorized as a high-end talents or talent in short supply are eligible for goverment subsidies on a salary which exceed 15 percent of their taxable salary income.

• Value-added tax (VAT)

VAT is an indirect tax that has gone through major reform, with China effectively replacing its Business tax (see below) with VAT nationwide in August 2013. VAT tax payers are classified as:
-general tax payers (VAT rate between 6-17%)
-small-scale tax payers (VAT rate at 3%)
Small-scale tax payers are not eligible for VAT rebate, and they are unable to issue invoice, otherwise known as 'Fapiaos' in China.

• Consumption tax (CT)

CT applies to 14 categories of consumable goods including tobacco, alcoholic drinks, cosmetics, jewellery, fireworks, gasoline, diesel oil, tires, motorcycles, automobiles, golf equipment, yacht, luxury watch, disposable chopsticks and wooden floorboard. This tax is filed and paid monthly.

• Business tax (BT)

BT applies to the provision of services (excluding processing services and repair and replacement services), the transfer of intangible properties and the sale of real estate properties in China. Due to the VAT reform some services are now subject to VAT and not business tax. General BT rates range from 3% - 20%, but they vary depending on the industry, and are subject to change as China expands its VAT reform to include more industries.

• Land appreciation tax

A tax levied on the income realized from the transfer of state-owned property at progressive rates ranging from 30% - 60%.  

• Resources tax

Tax that companies who engage in the exploitation of mineral resources such as crude oil, natural gas, coal, other raw non-metallic minerals, raw ferrous metals, non-ferrous metallic minerals and salt (both solid and liquid) are subject to pay.

• Property tax

The owners, users or custodians of houses and buildings need to pay property tax at the applicable rate of 1.2%, calculated on the residual value minus between 10 percent and 30 percent of the original value of the property (as determined by the local government).

• Vehicle and vessel tax

A tax levied at a fixed amount annually on the owners of vehicles and vessels used in the China. Manufacturers or importers who produce energy-saving vehicles/vessles or new energy vehicles/vessles are eligible to enjoy a half-reduced tax rate may apply to the Ministry of Industry and Information Technology (MIIT) for the tax incentives.

• Stamp tax

A tax levied on enterprises or individuals who execute or receive "specified documentation" in China such as contracts and accounting books with tax rates that vary between 0.3% - 1%.

• Customs duties

Duties are imposed on goods imported into China and are generally assessed on the CIF (cost, insurance and freight) value that include a total of 8.294 taxable items. The rate of duty depends on the nature and country of origin of the imported goods.

• Deed tax

A tax levied on the transferees or assignees on the purchase, gift or exchange of ownership of land use rights or real properties, with the tax rates generally ranging from 3% - 5%.

China accounting work: Outsourcing vs. in-house?

 

How to go about your China accounting work?

When it comes to the setting up and running of a business in China, there are so many different aspects that owners need to consider for their business to run smoothly. Whether it is staffing up and navigating local labour laws, or ensuring that one’s company is in line with government regulations, to preparing the relevant documents for monthly tax filing and the annual audit, the reality is that one can only really manage a certain number of staff and business functions before a company’s ‘business’ starts to be affected.  

It is for this reason that more owners and companies are turning to outsourcing business functions. This enables focus on what really matters, their core competencies. Let's take a look at outsourcing accounting work vs. in-house to showcase how outsourcing may benefit your company in the following key areas below...

Costs and liability

This is invariably one of the biggest reasons why most business owners initially consider outsourcing their accounting work, and for good reason. A salary report conducted in 2015 by J.M Gemini, one of China’s leading recruitment companies, placed local employees salaries in the following positions (amount in RMB):

Junior Accounts Clerk

3,500-5,000
1-2 years experience

Senior Accounts Clerk

4,500-8,000
2-4 years experience

Assistant Accountant

7,000-10,500+
5-6 years experience

Accountant

11,000-16,500+
5-6 years experience

(Chief) Accountant

18,000-28,500+
5 years (Auditing & Accounting Experience)

Finance Analyst

14,000-29,500+
3-6 years experience

Internal Auditor

13,000-27,000
3-5 years experience

Associate RMB Funds

36,000-41,500+ (plus 20% bonus)
3+ years (Investment background necessary)

Sr. Manager, Accounting Services

38,500-60,000+
8+ years experience

Finance Manager/Controller

29,500-60,000+
5+ years (managerial grade)

Commercial Business Manager

33,000-43,500+
8+ years (Accounting background)

Finance & Admin Manager

24,000-48,000+
10+ years experience

Tax Accountant

8,500-12,500
2-4 years experience

Tax Manager

24,000-50,000+
5-10 years experience

If you consider that on top of these base salaries more money needs to be set aside for things such as social insurance, office space, expensive bookkeeping software etc. the overall costs work out significantly more than outsourcing accounting work to a third party (as you will see below), especially for SME’s.

The typical costs behind outsourcing your China accounting work

 
Accounting services in China typically range from 1000RMB/month (subject to volume of transactions). The table below shows a typical sliding scale based on the number of transactions:

Volume of transactions per month	Service Fees (in RMB)
30 and less	1000/month
30 to 50	1500/month
50 to 70	2000/month
70 to 90	2500/month
90 and above	3500/month

Outsourced accounting services typically include:

1. Preparing and posting journal entries
2. Preparing bank and cash reconciliation
3. Compiling Balance Sheet, Expense Summary and bank account reconciliation schedule on a monthly basis
4. Declaring individual income tax (IIT) for staff
5. Filling tax forms (monthly, quarterly)
6. Applying for VAT rebates

While there are clearly benefits to an in-house accounting team, especially to multinational corporations, fledgling services companies and trading companies can both save money and remain compliant through outsourced accounting. Outsourcing your company’s accounting work to a third party accounting firm can help companies significantly reduce staffing expenses and help avoid costly accounting errors.

Accountants at these bookkeeping firms, and the firms themselves, are liable for the standard of their work and their reputation. A local employee may not be able provide you with the same amount of security and peace of mind unless you yourself, or your accounting department, have the resources to effectively manage them.

Standard reporting in your own language and selecting a firm

Finding and hiring a CPA in China that possesses the necessary qualifications and language skills required to work comfortably with your company may prove to be difficult on your own. Regardless of whether you outsource or hire in house or outsource you should ensure that they are experienced in navigating the complexities of accounting in China by performing adequate background checks and due diligence on either the prospective employee or accounting firm. More reputable firms will have a number of reliable testimonials from companies that they will be happy for you to contact. 

Similarly, employees with stellar track records will have no problem speaking with previous employers. Finally, interviewing in your language will also help you ascertain whether you can communicate well with the firm or employee.

In addition to basic background checks and ensuring that filing deadlines and regulatory deadlines are organized, checking that the accounting firm is able to actively help you reduce tax liability is a key indicator of an accounting firm that is more than just an ‘accounts calculator’. Such a firm should be able to provide you with clear examples of where you can reduce tax liability based on your current business and corporate structure.

Overall, outsourcing accounting work is the most cost effective and safe option for most small to medium sized enterprises that are unfamiliar with China. Finding the right firm will ensure your company remains compliant in the ever changing face of China’s corporate law reforms. In addition, it enables you to save both on employee costs and tax liability.

How Much Does It Cost To Open A WFOE In China?

 
There are many attractions for starting a business in China, such as low manufacturing costs, plentiful infrastructure, billions of potential customers, and a fast-paced and vibrant working environment where there is plenty of money to be made.

The most popular and beneficial company type that foreign businesses open to take advantage of this amazing market and economy is a 'Wholly Foreign Owned Enterprise," but now you will most likely be wondering: "OK, but how much does it cost to open a WFOE in China, and what are the benefits?"

Buckle up as we answer these questions in this blog post...

So You're Thinking Of Starting A Business In China?

 

Of course, foreign companies can't just waltz into China and set up shop. They need to register a legitimate company, and by far the most popular company type for foreign businesses today is the 'Wholly Foreign Owned Enterprise,' or WFOE for short.

But what makes this kind of company so special, and if it is indeed the correct company type for you, why choose it?

What Is A WFOE?

The 'Wholly Foreign Owned Enterprise' (commonly named a WOFE as an alternative acronym) is a limited company which allows foreign businesses to run a company in China which:

• Is legal
• Can hire & fire both foreign and local staff
• Is independent with no need for local partners or Chinese meddling
• Can invoice in CNY
• Can provide customers official invoices (fapiao)
• Is able to transfer profits outside of China in USD
• Has more control over valuable Intellectual Property
• Retains ALL profits

These are all benefits provided to local companies, but the difference is that in the past most foreign companies would have to enter into a joint venture with a local partner, as this was how China protected its own interests while building up its own knowledge and ability.

Times have moved on, and now foreigners are permitted to set up a company where they have absolute control. Of course, they must still pay tax and social insurance payments as these are a normal obligation to the Chinese government that every company has, but beyond that they answer to no one.

 

 

What's YOUR Ideal Wholly Foreign Owned Enterprise?

This company type gives autonomy in China, but anyone who has been here will tell you that China loves its pigeon-holes, and it's no different in the case of this company type.

There are typically three categories that foreign companies' new China outfit will fit into:

1. Manufacturing
2. Trading
3. Consulting (service)

Once your scope of business is decided that is set in stone, although some wiggle-room is often allowed for minor side-projects which do not strictly fit under the announced scope of work.

For instance, a manufacturer who also offered QC consulting on a limited basis besides their main work of manufacturing products could well find that this would be accepted by local authorities with no change required to their business.

Were you to decide to change your business's main thrust of work entirely however, you'd need to re-apply for your WFOE all over again. 

How Much Does It Cost To Open A WFOE In China?

 
So you've decided that this kind of company sounds perfect for starting a business in China. Great!
Now let's tackle the important question, that of setup costs.

There are 2 cost centres when it comes to opening your WOFE.

1. Setup costs
2. Registered capital

Setup Costs

You essentially have 4 options , and how deep your pockets are and, more importantly, how well you value having a good job done that will create you a company with good standing in China, will dictate which you choose.

 

1. International Law Firm

Large international law firms offer a premium business incorporation service.
You can expect 5* service, bilingual staff offering all kinds of languages, and total professionalism.
The job will be done properly and to the letter including helping you find an office, as these large firms have been around for many years and are well versed in setting up companies in all areas of China.

Drawbacks
Their costs can be high, costing as much as around RMB100,000 for each company that you wish to incorporate in China. While this covers everything, the high cost makes it prohibitive for many SMEs whose budget doesn't stretch to this level of cost.

It can also be that their representatives aren't as 'hands-on' as a smaller firm's would be, meaning that you aren't as in the loop due to the sheer amount of clients they're handling at any one time. Some people prefer to be close to their project, and so in this case they may not enjoy the separation.

 

2. Mid-Size Local China Business Services Provider

This is where TCBC Business Services is located, as we're a typical example of a mid-size local Chinese business services provider who has been around for a decade or longer.

Their role is to offer the same services as the international law firms, but at much more affordable prices, catering to everyone from SMEs up to global companies looking to set up a branch.

You should expect good service, hands-on representatives, and good local experience which helps them to speak to the right people in the right offices and decrease incorporation times. They can also easily help you to find an office in which to base your company.

Whereas we cover Shenzhen, Guangdong province's PRD's other cities, and Hong Kong, there are other similar companies in other parts of China who offer similar services for their areas.

Typically setting up a WOFE in China with this size of firm will cost around RMB10-20,000.
Unlike large international firms, these companies really care about and need your business, and so are liable to make a big effort to please the clients at every turn.

Drawbacks
Languages other than English may not be offered.
The high level of professionalism offered by the international law firms probably won't be as stringently followed, but by Chinese standards it should be good.

3. Sole Trading China Business 'Expert'

Often staff who have worked for a mid-size firm in China will decide that they are going to go it alone.

Some of these people are very capable of giving a decent service as they have been in the industry for a long time.

Typically they'd try to offer the bargain basement prices for company setup, around RMB10,000 or less.

Drawbacks
There is no guarantee that you will get good service as relying on one individual is always risky.
What you are sold may not be the facts. They may say that they can set up your kind of company, but it may be that they have never done this before and make mistakes during the incorporation period costing you time, money, and good standing with the local government of the city you wish to operate in.

May not have much ability to help you locate a suitable office.
They will often be swamped with work and are not able to give you the attention that you deserve.

4. DIY

You can always set up your own WOFE in China, that's no secret.
This is probably the lowest cost option, and would come in at under RMB10,000. 
Drawbacks
The process is going to be a nightmare for 99% of foreign companies due to:

• It being completely in Chinese
• The need to enter into dialogue with local government officials
• Copious amounts of paperwork
• No assistance being given by the authorities, leaving much guesswork for the uninitiated
• Confusion about where to go to submit various paperwork, as there are several government offices involved
• You needing to find your own office and negotiate its contract with the local landlord

Do you need to pay international prices to set up your company? Certainly not. But when you start looking for the cheapest option you will soon find that what sounded like a bargain at the time will cost more later.

At the end of the day you get what you pay for, and by cutting corners on something as important as setting up your company correctly, you may well cause yourself unnecessary stress, delays to starting doing business in China, additional costs to re-submit and re-apply for certain steps in the process, and lose good standing with the local authorities who require things to be done correctly.

Registered Capital

On we go to the second cost centre for foreign companies aiming to open a company in China: Registered capital.

It's not in China's interest to let foreign businesses open a company if they aren't sure that there is capital in place to keep it running, create jobs, and pay staff on time. This is why the government usually insist on an amount of registered capital being committed to any new WOFE incorporation.
Depending on which industry you're in, you're likely to be required to provide the following registered capital levels:

• Manufacturing: 500,000RMB
• Trading: 300,000RMB
• Consulting: 100,000RMB

This may not be required 'at once,' and often the authorities will put a time limit on when the amount needs to be invested into China, for instance, within 1 year. This gives new companies time to build up funds in a Chinese bank account, although this allowance is less likely in fields like manufacturing where there are many jobs riding on the employer and the investment acts a 'safety net' for their salaries were the company to hit a rocky patch.

Also in certain areas of China the local governments don't insist on any registered capital at all in a move which is meant to level the playing field between foreign companies and their local counterparts who don't have to provide it. The thinking behind this is that it may spur more job creation by encouraging ever more foreign companies to set up businesses in China, even smaller ones.

Rounding Up The Costs

 
Foreign companies could pay as much as RMB100,000 to set up their WOFE if they use an international law firm, but this is seriously overkill for most organisations!

Typically you can have your WOFE set up by a professional outfit for around RMB10-20,000, and this will get you speed, security, and excellent local knowledge. You'll also be aware of just how much registered capital you will need to put in from the start too as they will know your local area's requirements. 

Cutting corners and trying to save a meagre RMB5,000 or so here and there is likely to cause far more stress and hassle than it's worth to make that small saving, as there is actually too much local knowledge and huge amounts of paperwork and bureaucracy necessary for this process to make it worth your while.

Don't forget - Setting up the WOFE alone is not the end. You will still need bookkeeping,accounting work permits for foreign staff, and perhaps need to register trademarks (amongst other things), before your new company can trade legally and be compliant.

Conclusion

While dropping huge bundles of cashing on just opening your business in China is not a good use of money, relying on trusted local experts to set up WOFEs cheaply, quickly, and correctly is a good use of funds, especially when costs are typically affordable.