Features of Chinese Income Tax Law
INTERNATIONAL TAX FACTSHEET
China and Australia have become
It will be difficult for Australian businesses to ignore the booming Chinese economy,
Prior to 2008, China had two income tax systems: one applicable to all
From 1 January 2008, these tax systems were unified under the Enterprise Income Tax Law (EITL), which meant that some of the tax incentives previously attractive to foreign investors were tightened and preferential treatment significantly diluted.
Under the new system, tax incentives no longer focused on the ownership or location of the enterprise but rather on the economic and social benefits of development. The nature of the investment became more important.
For example, an enterprise that qualifies as a high and new technology enterprise now pays a reduced rate of 15% tax, compared to the normal 25%. However, it is vital to understand the criteria that provide access to the tax concession.
Despite the shift in tax preferential treatments of granting incentives only to special regions in the entire country from a regional development orientation to an industry based one, the government authorities of ethnic autonomous regions may decide to give full or partial exemptions of the EIT to enterprises located in their region, specifically with regard to the local portion of the enterprise tax.
It is still advantageous to position an enterprise within these special economic zones and the Shanghai Pudong New Area or Western region.
Internalisation and
China has undergone a rapid development of its taxation system since economic reform, adopting many Western-style laws such as:
- Residence/source-based taxation
- Thin
capitalisation - Transfer pricing
- Controlled foreign corporation riles
Australian investors will be somewhat familiar with these rules,
There are some pitfalls that Australian investors should be aware of. The tax treatment of a partnership, for example, is very different to Australian rules.
Firstly, foreign partnerships are subject to the EITL, whilst partnerships
Individual Income Tax Law (IITL)
The Individual Income Tax Law (IITL) is a standalone legislation that regulates individual and sole proprietor taxpayers in China. When Australian investors establish a Chinese operation or send Australian employees into China to expand the business, the IITL should be considered.
Originally designed to tax foreigners on their Chinese income, it contains various rules to narrow the tax base of foreigners. China only seems to tax foreigners on Chinese-sourced income unless they spend a significant amount of time in China.
Foreigners receive a higher standard deduction and enjoy various tax exemptions for fringe benefits. These benefits do not apply to local employees. Although the IITL applies both to foreigners and Chinese nationals, foreigners receive more tax concessions, a situation similar to the EIT before reforms in 2008.
Complexities
China's tax legislation doesn't come close to Australia's in volume - it is a mere 2420 words and the EITL occupies just six pages.
The State Council may also issue notices or other circulars interpreting the regulations, often addressing principal areas, whereas detailed tax circulars are issued by the Ministry of Finance (MOF) and the State Administration of Taxation (SAT).
The circulars are binding on tax authorities and in effect have the force of the law. Chinese courts do not have
Tax Administration
The SAT is responsible for the collection and administration of taxes and China has two collection systems: the State tax bureau system and the local tax bureau system.
The State tax bureau
Each State tax bureau is directly responsible for the tax bureau at above level. Tax registration with the local tax authority is essential and withholding agents are widely used to collect tax at source.
Any payment including dividends, interest, rentals, royalties, proceeds from equity transfer and service fees to a non-resident enterprise requires the payer in China to comply with the exchange control conditions of the State Administration of Foreign Exchange (SAFE) in order to buy the required foreign currency. The bank will require the payer to present a tax certificate. Without it, Australian investors cannot repatriate their profits.
Under the withholding and exchanged control rules, the payer will have to pay the tax first and then obtain the tax certificate for remittance. This gives the State Administration of Taxation opportunity to examine the facts and documentation before issuing a tax certificate.
Investment structuring and treaty
It has been a long-standing practice for many Australian investors to structure their investment into China by interposing an offshore immediate special purpose vehicle (SPV) to provide capital gains tax protection and/or a reduced dividend withholding tax.
A number of tax circulars have been issued by the SAT to address treaty 'shopping' issues. These include proof of tax residence, beneficial ownership and indirect capital gains from equity sales.
China normally follows the OECD approach on many international tax issues, but again it has added the Chinese
Considering your options for investing in China?
It is not an easy task for Australians to navigate through the Chinese tax system when considering investment there. Primary
However China
If you are considering investing in or expanding to China, contact Matt Zhou on 02 9957 4033 to discuss your options.
Last updated March 2012. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant.