According to Chinese law, all foreigncompanies doing business in China are required to pay taxes. It doesn’t matterwhether your company was registered overseas or on the Chinese mainland – ifyou do business in China, you’re liable to be taxed here. Here’s an overview ofthe various taxes you need to be aware of and how taxation works.

Most foreign businesses operate in China aseither a Representative Office or Limited Liability Company (LLC). 

The tax liability starts when the companyestablished. With the updated business registration regulation, 4 certificatesin 1, means that Business License, State Tax Register Certificate, Local TaxRegister Certificate and the Certificate of Organization Code are grouped in onecertificate.

The most important tax categories for foreign companies are:

1.    Corporate Income Tax

2.    Business Tax(this is, at the time ofwriting, in the process of being incorporated into a new value-added tax (VAT) system)

Corporate Income Tax

LLCs are charged Corporate Income Tax at arate of 25 percent on profits earned both in China and overseas fromproduction, business operations and other sources. It is paid quarterly, andworked out according to the formula below:

Tax Payable = Profit (total annual incomeminus expenses and losses) x 0.25 (25 percent tax rate)

Business Tax and VAT

Business tax is paid monthly on revenues fromcertain services (see the chart below for details). 

Furthermore, there are indirect tax surchargeson business tax in industries such as education (3 percent), river maintenance (1 percent),and city construction (1-7 percent).

Business tax is calculated according to the formula below:

Tax Payable = Turnover x Applicable Tax Rate

In recent years, China has launchedinitiatives aimed at replacing business tax with a VAT system. These reformsare intended to reduce cases of double taxation, increase competitiveness inChina’s service industries by reducing their overall tax burden, and improvetax collection. 

However, while progress has been made in someindustries and areas in phasing out business tax and replacing it with VAT,business taxes still apply in certain parts of China and for certain types ofservice.

The table below indicates which types ofbusiness pay Business Tax and which pay VAT, as well as breaking down the taxrates for each respective industry.

Note that the VAT rates above are for “General”VAT taxpayers. A reduced rate of 3 percent is applied to Small-ScaleVAT Taxpayers across all services falling under the business tax-to VATtransition program.

By 2016, the business tax-to-VAT transitionwill be extended to cover all of China and all services. As with business tax,indirect surcharges are added to VAT and LLCs are required to pay the total taxmonthly. 

Other taxes will be continued.