Corporate Income Tax in China

An introduction to CIT  

The standard CIT rate for enterprises registered in China, whether a local shareholder or a foreign shareholder, is 25 percent. There are numerous incentives and policies that may lower this amount for high-tech businesses, low-profit companies, and other companies that meet the criteria of the tax incentives guide.  

Contributing Advisor

Jenny Liao

Partner

Corporate Income Tax (CIT), sometimes referred to as Enterprise Income Tax, is paid by business entities in all economic sectors, including professional organizations, all foreign corporations with production and trading activities in China, and others. However, individual proprietorships and partnerships do not pay corporate income tax since their profits are considered personal income. 

This article examines the corporate income tax framework; who it applies to, its rates, and its calculation method. 

Key points about China’s corporate income tax:  

• CIT is settled on an annual basis but is often paid quarterly. The final calculation is based on a company’s year-end financial result. 
• There are two ways of calculating taxable income: the direct method and the indirect method. 
• The amount of income tax payable may be adjusted from accounting profit through applicable tax exemptions, deductions, or income.  
• The fundamental regulations on China’s corporate income tax are the CIT Law and its Implementation Guidelines. 

Who pays corporate income tax in China?  

CIT applies to all enterprises (except individual proprietorships and partnerships), as well as all organizations that generate income in China. The CIT Law divides enterprises into resident and non-resident enterprises, each with its own set of tax obligations. 

Corporate Income Tax rates 

The standard CIT rate is 25 percent, applicable to resident enterprises and non-resident enterprises with income-generating establishments in China.  

CIT rates could be lower based on the entity type, size, sector, or location:  

• A 10 percent withholding rate (temporarily reduced from 20 percent) is applied to China-sourced income not related to a non-resident enterprise’s establishments in China or China income derived by non-resident enterprises without establishments in China; 
• Small and low-profit enterprises are entitled to a reduced CIT rate of 20 percent; and 
• A reduced CIT rate of 15 percent is applied to high-tech enterprises or enterprises registered in special zones, such as enterprises engaging in encouraged sectors in Hainan. 

Calculating Corporate Income Tax payable 

Corporate income tax payable is calculated using the below formula: 

CIT PAYABLE = CIT TAXABLE INCOME x CIT RATE - TAX EXEMPTIONS OR REDUCTIONS BASED ON TAX INCENTIVES 

CIT is settled on an annual basis but is often paid quarterly, with adjustments either refunded or carried forward to the next year. The final calculation is based on a company’s year-end audit. 

Taxable income 

CIT taxable income is calculated on an accrual basis, which means that income items are recorded when they are earned, and deductions are recorded when expenses are incurred. There are two ways of calculating taxable income:  

• The direct method; and,  
• The indirect method. 

Direct method 

The formula for calculating taxable income under the direct method is as follows: 

CIT TAXABLE INCOME= GROSS INCOME - NON-TAXABLE INCOME - TAX EXEMPT INCOME - DEDUCTIONS - ALLOWABLE LOSSES CARRIED FROM THE PREVIOUS TAX YEAR 

Gross income 

Gross income refers to income in currency and non-currency forms received by the enterprise from various sources, which include: 

• Income from the sales of goods;  
• Income from provision of services;  
• Income from transfer of property;  
• Equity investments, such as dividends and profit distribution;  
• Interests, rents, and royalties;  
• Income from gifts and donations; and 
• Other income. 

Non-taxable income 

The following income within the total income is deemed as non-taxable income:  

• Financial allocation (e.g., government subsidies to enterprises);  
• Administrative and institutional expenses and government funds lawfully collected and brought under financial administration; and  
• Other non-taxable income stipulated by the State Council. 

Tax-exempt income 

Tax-exempt income includes: 

• Income from interest on government bonds; 
• Gains from dividends, bonuses, and other income from equity investment between qualified resident enterprises; 
• Gains from dividends, bonuses, and other income from equity investment received from a resident enterprise by a non-resident enterprise with an establishment or premises in China, with which the income has an actual connection; and
• Income of qualified non-profit organizations. 

Deductions 

Deductions from gross income include:  

• Reasonable expenditure incurred in relation to an enterprise’s income, such as costs, expenses, taxes (except CIT and VAT), and losses;  
• Charitable donations and gifts up to 12 percent of the gross annual profit;  
• Reasonable depreciation of fixed assets;  
• Amortization of intangible assets;  
• Amortization of long-term prepaid expenses;  
• Inventory cost;  
• The net value of an asset transferred; and  
• Other deductions are stipulated by laws and regulations. 

Caps apply when deducting certain expenses from taxable income, such as follows: 

Non-deductible expenditures include: 

• Dividends, bonuses, and other income from equity investment paid to investors; 
• CIT; 
• Fines for delayed tax payment; 
• Penalties, fines, and confiscated property; 
• Sponsorship expenditures other than charitable donations within 12 percent of the gross annual profit; 
• Non-verified reserves; and 
• Other expenditures are unrelated to income. 

Indirect method 

In practice, the indirect method below is more frequently adopted in the annual declaration of CIT. 

CIT TAXABLE INCOME = GROSS PROFIT AS SHOWN IN THE ACCOUNTING BOOK ± ADJUSTMENTS FOR TAX PURPOSE ± INCOME/PROFITS TO MAKE UP FOR THE LOSS INCURRED IN THE PREVIOUS YEAR 

The inconsistencies between applying the CIT Law and China's Accounting Standards for Business Enterprises (ASBEs) are referred to as "adjustments for tax purposes." When tax laws and administrative rules conflict with an enterprise's financial and accounting techniques used to calculate the enterprise's CIT taxable amount of income, the tax laws and administrative regulations shall take precedence. 

Corporate Income Tax incentives 

CIT incentives support and encourage the development of businesses of certain types in certain areas, and engaging in certain sectors, including: 

• CIT incentives for small and low-profit enterprises;
• CIT incentives for high-tech enterprises;
• CIT incentives for advanced technology service enterprises;
• CIT deductions on R&D expenditures;
• CIT incentives for hiring disabled employees;
• CIT incentives for hiring retired soldiers;
• Tax reduction for enterprises investing in west China;
• Tax incentives for enterprises engaging in pollution control;
• CIT incentives for enterprises making investments in or operating public infrastructure projects especially supported by the state;
• CIT incentive for eligible technology transfers;
• CIT incentive for income derived from eligible environmental protection, energy saving, or water conservation projects;
• CIT reduction for enterprises investing in seed-stage or start-up technology enterprises;
• CIT incentive for software enterprises;
• CIT incentives for integrated circuit enterprises; and
• CIT reduction for enterprises established in certain development zones.

Withholding Corporate Income Tax 

The withholding income tax rate is currently 10 percent for passive income and 25 percent for deemed profit from the provision of labor services and from contracting projects of non-resident enterprises.

Withholding tax is a tax: 

• Levied on passive income (i.e., dividends, bonuses, other equity investment gains, interests, rentals, royalties, transfer of property) received by non-resident enterprises from China; and
• Based on deemed profit obtained by a non-resident enterprise from its business activities with its establishment or premises within the territory of China, it shall include income from the provision of labor services and from contracting projects. Deemed profit = income* deemed profit rate; the rates could vary from around 15% to more than 50% in different cases.

If a foreign party is a tax resident of a country or jurisdiction that has entered into a double tax treaty with China that includes reduced withholding tax, the foreign party can enjoy these reduced rates upon approval from the designated tax bureau. The China enterprise remitting the funds overseas should be the withholding agent.