New Policy: Gov Announces Latest Tax Benefits for Foreign Companies in China
The terms corporate income tax, corporation tax, and company tax interchangeably refer to the percentage paid to the government by a company of its production and operations. This taxation expense is necessary for any entity to operate legally in a jurisdiction.
Just like any country in the world, China – too – has a corporate tax law in force that requires all entities, foreign or domestic, to prepare periodic tax reports and payments to the government. It’s used to add a layer of accountability to business operations in the country and strict measures are taken against those who fail to comply.
New Foreign Tax Law
All registered corporations in the country – both foreign and domestic – are subject to China’s corporate tax law. After continuous development in the world trade economy, a host of foreign-funded enterprises ventures into China.
To separate foreign entities from domestic entities, and also to encourage foreign investment, China has what many call “preferential” tax policies for non-Chinese companies and recently, the local jurisdiction announced a number of changes.
Here’s a summary of some of the most important bits you should know about:
Income Tax Exemption
For foreign investors who stay in China, there’s a 3% personal income tax exemption available.
Meaning, if you run a company in China, you don’t have to pay the full amount of the personal income tax and you will get a 3% off if your company is already paying corporation tax in the country. You might need to talk to your accountant to get this allowance.
Tax Holidays for Long-term Enterprises
For foreign companies that have been operating in China for longer durations, the government will exercise reduced corporation tax rates.
For instance, for any non-Chinese entities – such as a WFOE, JV, or RO – that have been operational for longer than 15 years in the country, the government will exempt company tax for 1~5 years that follow after the 15-year milestone is reached.
Companies might need to elect for this exemption and it will be granted on a case-by-case basis – meaning that, this exemption is not available to all types of companies.
Service Provider Companies
If you operate as a service provider company and have invested over USD $5 million in China, you will get a one-year tax-free period after 10 years of operation.
The first year after the 10-year mark is tax-free, and your tax payments will be halved for the subsequent 2 years. Again, you might need to elect with the tax bureau to get this exemption.
Special Economic Zone Trading Companies
Companies registered in Special Economic Zones (also called Free Trade Zones) can also exercise a one-year tax holiday.
In this case, the companies must have an initial investment exceeding CNY ¥100 million and more than 10 years of operations. The tax exemption is the same – 100% tax freedom for one year and a half tax payments for the subsequent 2 years after being in business for 10 years.
High-Tech Companies
Companies that are involved in high-end technology – that’s new and innovative, and are successfully qualified as “high-tech” by the Chinese government, can get up to two years of tax-free operation in China. Those that qualify can also get half tax-rates for up to six years of operation.
After the tax exemption period expires, these companies will pay corporation tax at 10% if the export value of their product reaches 70% of what it was in the initial stages.
High-end Intellectual Property Owners
Enterprises that own a “high-tech” intellectual property can get up to five years of 0% corporation tax in China. After the five-year term expires, the tax rate will be halved for a subsequent three-year period.
These companies must qualify as truly high-tech and must own an independent intellectual property to an innovative and “transformational” product, as per the government.
Moreover, after such an enterprise launches a qualifying project or product in the country, it can get a tax exemption on its profits (made from the sale of the product) for three years – even if they choose not to exercise the “High-end Intellectual Property” incentive before the launch.
Conclusion
It is evident that the Chinese are encouraging more and more foreign investment. While we previously discussed the incentives available to trading entities in the region, the government is much more supportive of high-tech ventures and products.
These are not the only benefits available to tech companies. China is on a roll to bring technological advancement in the country and in most cases, high-tech startups can exercise greater incentives from the local jurisdiction to do business in the country.
Featured image by Freepik.com