In China, employers have several tax responsibilities, including withholding and filing Individual Income Tax (IIT) and making social security contributions.

Individual Income Tax (IIT)

Withholding and Filing

Employers are responsible for withholding IIT from employee income. This includes wages, salaries, bonuses, stock options, and allowances. IIT is withheld on a monthly basis and submitted to the local tax bureau by the 15th of the following month. Additionally, employers must file a provisional IIT return on behalf of the employee along with the tax payment. Resident employees are required to file an individual tax return each year by June 30th of the following year.

Tax Rates

China operates a progressive IIT system with rates ranging from 3% to 45%, depending on the employee's taxable income.

Social Security Contributions

Types of Contributions

Employers are obligated to contribute to five types of social insurance for their employees. These include pension insurance, medical insurance, maternity insurance, work-related injury insurance, and unemployment insurance. Both employers and employees also contribute to a housing fund.

Contribution Rates

The contribution rates for social security vary by region, but generally range from 20% to 30% of an employee's salary.

Registration and Payment

Employers must register with the local social security bureau to make contributions. Contributions are typically paid on a monthly basis.

In China, there are several key deductions that can reduce an individual's taxable income.

Standard Basic Deduction

From January 1, 2019, all individuals, regardless of nationality, are eligible for a standard basic deduction of CNY 60,000 per annum (CNY 5,000 per month). This deduction is applied directly to one's gross income before calculating individual income tax (IIT).

Social Security Contributions

Employees contribute 10.50% of their salary towards social security, which covers pension, health insurance, maternity insurance, work-related injury insurance, and unemployment insurance. These contributions are fully deductible from taxable income for IIT purposes.

Housing Fund Contributions

Employees who contribute to the statutory Housing Fund, a government-managed housing savings scheme, can deduct these contributions from their taxable income.

Additional Deductions for Certain Individuals

Specific additional deductions may be available to residents who meet certain criteria. These include deductions for supporting elderly parents, children's education costs, professional development or training expenses, premiums paid for qualifying commercial health insurance policies, qualified charitable contributions, and interest paid on mortgages for first-time home purchases.

Tax-Exempt Fringe Benefits for Foreigners

Foreign employees may be able to deduct certain fringe benefits from their taxable income. These include housing allowances, meal fees, laundry fees, education expenses for children, language training expenses, relocation expenses, business travel expenses, and home visit expenses.

Regional Variations

Local governments may offer additional deductions or preferential tax treatments in certain areas or for specific industries.

Businesses providing taxable services in Mainland China are generally required to register for VAT with the local tax bureau. The VAT registration threshold for services is RMB 5 million in annual taxable sales. Businesses with annual taxable sales exceeding this threshold must register as general VAT taxpayers. Businesses with annual taxable sales below this threshold can register as small-scale taxpayers.

VAT Registration for Overseas Service Providers

Overseas service providers with no physical presence in China may also be required to register for VAT under certain circumstances, such as when providing services to Chinese customers electronically.

VAT Rates for Services

China maintains a multi-rate VAT system, with different rates applying to different types of services. The standard VAT rate is 13%. Reduced VAT rates include 9% for transportation services, postal services, basic telecommunication services, construction services, and certain cultural and sporting services. Modern services, including R&D, technical services, information technology services, cultural and creative services, logistics and ancillary services, leasing, consulting, radio, film and television services, etc., have a VAT rate of 6%. Services provided by small-scale taxpayers have a VAT rate of 3%.

VAT Deductions

General VAT taxpayers can deduct input VAT from their output VAT, reducing their overall VAT liability. Small-scale VAT taxpayers cannot deduct input VAT.

VAT Exemptions and Zero-Rating

Certain services are exempt from VAT, while others are subject to a zero percent VAT rate. Exempt services include public welfare services, financial services, medical services, and educational services. Zero-rated services include export services (if certain conditions are met), international transportation services, and space transportation services.

VAT Exemption for Small-Scale Taxpayers

From January 1, 2023 to December 31, 2027, certain small-scale VAT taxpayers in China with monthly sales of under RMB 100,000 are temporarily exempted from VAT.

VAT Invoicing

Businesses must issue VAT invoices for the provision of taxable services. There are two types of VAT invoices in China: general VAT invoices and special VAT invoices. General VAT taxpayers can issue both general and special VAT invoices, while small-scale VAT taxpayers can only issue special VAT invoices.

VAT Filing and Payment

VAT filing and payment deadlines vary depending on the taxpayer's status and the nature of their business. General VAT taxpayers typically file VAT returns on a monthly basis, while small-scale VAT taxpayers may file on a quarterly basis.

China provides a variety of tax incentives to attract foreign investment, stimulate specific sectors, and aid regional development.

Corporate Income Tax (CIT) Incentives

Companies operating in designated encouraged industries, such as high-tech, new energy, and environmental protection, can enjoy a reduced CIT rate of 15%, compared to the standard 25% rate. Newly established enterprises in certain industries or regions may be eligible for "tax holidays," meaning a complete exemption from CIT for a certain period, typically 2-5 years, followed by a reduced CIT rate for additional years. Small businesses with annual taxable income below a certain threshold (currently RMB 3 million) can benefit from a reduced CIT rate, currently 2.5%.

Regional Tax Incentives

Companies located in less developed western and central regions can benefit from lower CIT rates, as low as 15%, to encourage investment in these areas. Specific tax incentives are often offered to businesses investing in designated special economic zones (SEZs), free trade zones (FTZs), and high-tech development zones.

Industry-Specific Tax Incentives

High-tech enterprises (HNTEs) are eligible for a 15% CIT rate and can carry forward losses for up to 10 years. Companies investing in environmental protection projects can enjoy CIT exemptions for up to 5 years and a 50% reduction in CIT for an additional 3 years. Businesses investing in R&D can obtain tax deductions for eligible R&D expenses.

Additional Tax Incentives

Companies purchasing specific types of equipment encouraged by the government can receive a tax credit of up to 10% of the investment. Foreign-invested enterprises (FIEs) may be eligible for various tax incentives, such as preferential CIT rates, VAT exemptions, and import duty reductions, depending on their industry, location, and investment scale.