China legal and accounting and tax considerations in 2023
Healy Consultants Group will provide a wide range of services regarding incorporation, taxation, legal and human resource compliances to its Clients who wish to set up their business or invest in China.
China tax system
- Standard Corporate Income tax (CIT) rate in China is a flat 25% on all corporate profits;
- A special CIT of 15% applies if the enterprise is classified under high technology status or if enterprise is incorporated in certain regions of China such as i) Guangdong, ii) Fujian and iii) Hainan;
- Capital gains are also taxed at CIT of 25% although losses can be carried forward for 5 years. This is extended to 10 years for Chinese enterprises with “High and New Technology” status and science and technology small and medium sized enterprises (SMEs). No carry-back is allowed;
- There is no tax consolidation regime in China for CIT purposes;
- China levies a withholding tax of 10% on i) dividends, ii) interest, and iii) royalties;
- With effect from May 2018, the value added tax (VAT) rate in China is 16% for sales of goods, importation of goods, leasing of tangible movable property, repair and processing services. A reduced rate of 11% applies to Transportation services, sales and leases of immovable property, basic telecommunications services, construction services, postal services, agricultural products and water and gas supplies;
- From April 2021 to 31 December 2022, small-scale taxpayers will be exempted from VAT payments if their revenue is less than RMB150k monthly.
- Individual Income Tax (IIT) rate in China ranges from 3% to 45 %;
- The double tax treaty between Cyprus and China includes a tax sparing credit clause, which allows Cyprus-based subsidiaries of Chinese resident entities involved in IT, pharmaceutical and financial services industries to claim 100% of their Cyprus taxes from their corporate tax payable in China. This credit is applicable even if their Cyprus subsidiary is exempted from paying taxes in Cyprus, due to the double tax treaty. This would allow Chinese subsidiaries in Cyprus to save up to 10% net off their total taxes payable, making Cyprus an attractive location for Chinese companies to set up their subsidiaries.
- Companies in China must prepare financial statements for annual statutory audit under Chinese GAAP framework following company setup;
- VAT returns must be filed monthly and submitted before the 15th day of the following month;
- All enterprises must file their interim tax returns with the local authorities within 15 days of the end of each quarter, while annual tax returns must be submitted within 5 months from the end of the tax year. They must be filed in the Chinese language, or in both the Chinese and foreign language;
- If the taxpayer fails to pay tax, a late payment surcharge may be imposed on a daily basis at the rate of 0.05% of the amount of tax in arrears, from the date that the tax payment is defaulted.
Miscellaneous tax matters
- China has signed 97 double taxation avoidance treaties with countries around the world, including i) Germany, ii) United States, iii) Russia, iv) India and v) Singapore;
- China has joined international organisations such as the World Trade Organization (WTO) and the Asia Pacific Economic Cooperation (APEC);
- China has recently signed the 5th protocol for the avoidance of double taxation with Hong Kong which provides all qualified HK and China teachers and researchers a relief from paying of their income taxes on the other side for a period of 3 years.
Healy Consultants’ Services
- It is important for our Clients’ to be aware of their personal and corporate tax obligations in their country of residence and domicile; to fulfil those obligations annually. Let us know if you need Healy Consultants’ help to clarify your annual reporting obligations;
- Healy Consultants Compliance Department assists our Clients to efficiently and completely discharge the annual accounting and auditing obligations of their company in China through the following: i) documenting and implementing accounting procedures, ii) implementing financial accounting software, iii) preparation of financial accounting records and iv) preparing forecasts, budgets, and sensitivity analysis to better manage financial obligations and ease the process of reporting to the China accounting authorities.
No. Services Period 1. Update the books in accordance with the Chinese accounting standards Monthly 2. Prepare monthly financial statements for tax filing purpose Monthly 3. File monthly business tax return Monthly 4. File corporate income tax return Quarterly 5. Submit annual employee tax returns Annual
Legal and compliance
- Before company incorporation in China, a lease agreement for office premises must be pre-approved by local government and municipal authorities;
- Although there is no minimum paid up capital requirement for a LLC in China, Healy Consultants recommends paid-up capital of US$15,000 and US$140,000 depending on the industry and the province of registration;
- The paid-up capital must be audited by a certified public accounting firm in China to verify that this capital is contributed in accordance to Companies Law of the People’s Republic of China;
- Following China company setup, each China company must appoint i) at least one shareholder and one director ii) a Chinese legal representative and a Chinese board of supervisors;
- Foreign investors are required to register the controlling person of the WFOE through China’s foreign invested enterprise online filing;
- According to article 38 of the Companies Law of the People’s Republic of China, A Chinese legal representative must be appointed. A Chinese legal representative can act on behalf of a firm to conclude contracts and submit reports to regulators. A Chinese legal representative has the authority of a director and shares in corporate liability;
- The Companies Law of the People’s Republic of China requires limited liability companies to have ‘the board of supervisors’ (made up by shareholders and employees) to serve as a government reporting body. Should there be a breach of the articles of association, the board of supervisors are legally obliged to report directors, supervisors, or senior officers to the relevant authorities.
- Employers are required to contribute to their employee’s i) retirement scheme, ii) medical insurance and iii) unemployment insurance amongst other. Total contribution may add up to 40% of employee’s basic salary;
- Termination within the employment term must be supported by a justified reason. Chinese law only stipulates certain justifications that allow for cause of termination;
- The minimum monthly wage in China is US$300. Apart from the meeting minimum wage requirements, Foreign Invested Enterprises (FIEs) and State-Owned Enterprises (SOEs) are free to set their own wages.
Other legal matters
- The activities of China companies are restricted to the business license issued by the provincial government. Consequently, it is critical for a foreign investor registering a company in China to carefully prepare incorporation documents;
- In 2014, the US and Chinese Governments signed a treaty whereby all Chinese financial institutions will legally disclose the holdings of all their American Clients to the authorities from 2015;
- Consequently, American citizens are required to file the details of all their Chinese holdings with the Internal Revenue Service. Failure to do so will result in penalties of up to i) 10 years of imprisonment and ii) US$500,000 fine.
Frequently asked questions
Do I need a license to do business in China?Yes. All foreign-owned businesses registered in China must obtain a license for their chosen business activity or activities. These companies may not enter new business lines without increasing the scope of their license.