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China's tax laws and policies are made by the
National People's Congress and its standing committee, State Council, the
Ministry of Finance, State Bureau of Taxation, State Council Customs Duty
Regulation Commission, and General Administration of Customs. The main tax law
for foreign investors is Foreign Income Tax Law of the People's Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises, adopted
at the Forth Session of the National People's Congress and promulgated by the
Order No. 45 of the President of PRC on April 9, 1991. According to Article 5 of
the law, the income tax on enterprises with foreign investment and the income
tax which shall be paid by foreign enterprises on the income of their
establishments or places set up in China to engage in production or business
operations shall be computed on taxable income at the rate of 30%. Local income
tax shall be computed on taxable income at the rate of 3%.
Generally, China's tax policy toward foreign
invested enterprises grants preferential tax to the industries and regions that
are encouraged by China to receive investments. The income tax on enterprises
with foreign investment and foreign enterprises established in special economic
zones is levied at the reduced rate of 15%. In addition, foreign enterprises
that have been operating for more than 10 years may be exempt from enterprise
income tax in the first and second profit-making years and enjoy a 50% reduction
in the following three years.
Other taxes that may affect foreign businesses
include land-use tax, land value-added tax, housing tax, contract tax, stamp
tax, business tax, tax on urban maintenance construction, tax on the occupation
of cultivated land and tax on vehicles and ships. There are certain tax treaties
that offer foreign businesses operating in China some breaks. China has signed
agreements with 60 countries on avoiding double taxation and tax evasion, and 51
agreements of which have gone into effect by July 1999. The first income tax
treaty between China and U.S. known as the Agreement for the Avoidance of Double
Taxation and the Prevention of Tax Evasion (Sino-U.S. Agreement) was signed in
1984. The agreement aimed "to reduce double taxation of income earned by
residents of either country from sources within the other country. Another goal
of the agreement was to prevent avoidance of the income taxes imposed by the
taxing authority of either country". Under the treaty, China cannot tax
U.S. business income unless the business activities in China are
"substantial enough to constitute a permanent establishment or fixed
base".16
Foreign investors may also be exempt from
personal income tax on the after-tax profits (dividends, bonuses) they obtain
from the foreign-funded enterprise. Production and management equipment,
building materials and vehicles used for production and other goods imported as
part of the total investment may be exempt from import duties, value-added tax
and consumption tax. Moreover, in order to competing with other
provinces/regions, local governments often have their own incentives for foreign
investors. The following chart shows the existing taxes implemented in China.
The Existing
Taxation System in China
