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Introduction to China Taxation

As inbound investment into China continues to be of interest to foreign investors, it is important to understand the legal and administrative framework of China’s tax laws, general types of taxes under the current tax regime, relationship of domestic tax law to international tax treaties, etc. It is also worth pointing out that the Basic Law of Hong Kong Special Administrative Region (“BL for HKSAR”) provides that mainland China and Hong Kong have two distinct tax systems.


1.1 Establishment and development of China taxation laws

The China taxation system is an evolving system with tax laws affecting foreigners commencing in the early 1980s with a view to attract foreign investments and boost the implementation of its “Reform and Opening-up” economic policy. The major achievements at that time included Income Tax Law for Sino-foreign Equity Joint Ventures, Income Tax Law for Foreign Enterprises and Individual Income Tax Law.

In the 1990s, China carried out a comprehensive tax reform mainly affecting the turnover tax system including Value-added tax, Business Tax and Consumption Tax. At the same time, it introduced the Tax Collection and Administration Law.

In a continuing effort to attract foreign investment, China provided tax incentives and favorable tax treatment to Foreign Enterprises and Enterprises with foreign investment. Since domestic enterprises were governed under a separate tax regime with less beneficial tax treatment, this created unfair competition and an imbalance in tax treatment.

Upon China’s accession to the World Trade Organization in 2001, further tax and legal changes were introduced. The major change is the new Enterprise Income Tax Law which unified the tax treatment of domestic and foreign enterprise. Effective on 1 January 2008, the aim of the new Enterprises Income Tax Law was to provide equal opportunities for domestic and foreign enterprises. Other major achievements include the promulgation of Legislation Law, Administration Licensing Law and the revised regulations for Value-added Tax, Business Tax and Consumption Tax.

Generally speaking, over the past three decades, China has gradually reformed its tax system to keep up with the country’s economic development. As the economy continues to grow and the business environment changes, tax rules and regulations will undoubtedly be amended and reformed.

Sources of law and legislative authority

As indicated above, mainland China and Hong Kong have two separate tax system consistent with the policy of “One Country - Two System”. Accordingly, when referring to the application of the territorial concept for tax purposes, ‘China’, ‘mainland China’, ‘the People’s Republic of China ’and ‘PRC’ refer to the mainland of China in which the laws relating to China taxes apply.

The legal system in China is a legislative system. Currently, tax regulations are mostly promulgated by regulatory and administrative authorities of the government.

The Constitution of the People’s Republic of China (“Constitution”) provides the highest legislative authority to the National People’s Congress (“NPC”) and its Standing Committee. These bodies have the final authority to promulgate and interpret legislation, although in practice this power has largely been delegated to the State Council. In 2000, the Legislation Law was enacted in order to provide the foundation for legislative activities. Item 8 of Article 8 clearly states that the tax system should be legally constituted and that it is the responsibility of the NPC to introduce tax legislation. Article 9 of the Legislation Law provides transitional rules allowing the State Council to promulgate interim regulations until the requisite legation has been enacted by the NPC.

The State Council, which is headed by the Premier, is China’s central governing body Regulations passed by the State Council are secondary to those enacted by the NPC and its standing committee. Decrees, directives, notices, circulars and other type of explanatory notes issued by subordinate ministries under the State Council supplement the regulations and provide guidance on the application and interpretation of the laws. The Ministry of Finance (“MOF”) is responsible for tax matters while the State Administration of Taxation (“SAT”), which functionally forms part of the MOF, is responsible for administering and interpreting tax legislation and for developing tax policy in practice.

Local rules and regulations may be enacted by People’s Congresses at the provincial level. The only restriction is that those local rules and regulations must not contradict the Constitution, laws enacted by the NPC or the rules and regulations issued by the State Council.

1.2 Types of laws and regulations

Laws promulgated by National People’s Congress and their amendment

The NPC enacts legislation. Any laws promulgated by the NPC and its Standing Committee are usually amended through resolutions passed by NPC after being reviewed by the Legal Work Committee of the NPC. The same process is also used to enact supplementary provisions to laws and/or orders promulgating basic laws.

The tax laws within China tax regime that are in force are the:

  • Enterprise Income Tax Law
  • Individual Income Tax Law
  • Vehicle And Vessel Tax Law
  • Tax Collection and Administration Law

Administrative regulations and other rules

Administrative regulations issued by the State Council are normally called “regulations”, “detailed implementation rules”, “provisions” or “measures”. Generally, regulations which clarify and interpret tax laws are called “detailed implementation rules”. Regulations, provisions and measures are commonly used in administrating matters delegated to the State Council without prevailing laws. For example, implementation rules have been issued by the State Council, to provide guidance and clarification for the Enterprise Income Tax Law while “regulations” have been published for Value-added Tax (“VAT”) although VAT has not been enacted into Law.

Instructions, orders and other Kinds of Explanatory Notes

In practice, among decrees , directives, notices and circulars which may be issued to provide clarification or instruction on specific issues in laws or regulations, circulars are the most commonly used by MOF and SAT for tax matters and have various names:
  • Guoshuifa - issued by the SAT to its branches at a provincial level, which are also released to the public;
  • SAT Bulletin – issued by the SAT to the public, a new publication developed recently;
  • Guoshuihan – issued by the SAT to its branches at a provincial level to approve or respond to particular tax matters, which, in theory, only apply to a particular issue or case;
  • Caishui - issued by the MOF to its branches and branches of the SAT, both at a provincial level and also released to the public.

Local regulations and rules

Local rules and regulations may be issued but they must first be reviewed by the NPC to ensure that they do not contravene the Constitution. The State Council also examines the proposed regulations to determine if there are any conflicts with other administrative laws or regulations. Any local regulations proposed by authorities below the provincial level must be approved by the legislative authorities at the provincial level.

Local rules and regulations may be confusing because the same factual situation may be handled differently by different tax bureaus.

1.3 Principles and applicability

Being a country that has adopted the legislative law system, China does not commonly use cases to interpret tax laws and regulations. Also, China’s tax system is relatively new. Accordingly, there are very few legal precedents or judicial cases which can be relied upon to interpret tax legislation in China. Instead, the historical development of tax legislation, the theories and principles imbedded in the legislation and socio-economic policies and development plans for China are useful in interpreting tax laws and in understanding the tax system in China.

1.4 Interpretation of laws

The official language in China is Chinese. Where laws are translated into other languages, the original Chinese version is the authoritative version.

According to the Legislation Law of Laws and Regulation, the interpretation of laws and regulations could reside with different groups:
  • Legislative interpretation – theoretically speaking, the Standing Committee of the NPC interprets the Constitution, those laws that have been enacted by the NPC and the State Council’s own laws which need to be clarified or supplemented. However, in practice, due to the working mechanism of the Standing Committee, it rarely exercises this power in the tax administration arena. This may be attributed to the fact that tax administration is closely linked to the economic policy of the government and this partially explains why the MOF and SAT, as the executive arm of the State Council, play a more active role in the interpretation of tax legislation.
  • Administration or executive interpretation-authorized by the Legislation Law, the State Council is responsible for interpreting the applicability of regulations. The interpretation issued by the State Council has the same effect as the actual regulation in question, forming part of the law itself. In practice, MOF and SAT, as the fiscal arm of the State Council, take the responsibility for interpreting the rules. In practice, these interpretations have the same legal force as the rules in question.
  • Local interpretation - the scope of local regulations and rules are supplemented or clarified by the standing committees of provincial People’s Congresses that issued the applicable law. The interpretations issued have the same effects as the rules or regulations in question, although they only have effect in the local jurisdiction. However, the local interpretations are limited to only some specific tax areas.
  • Judicial interpretation – technically, as under the legislative law system, the Supreme People’s Court and Supreme People’s Procuratorate are only allowed to make binding interpretations of laws within the context of trial and procuratorial work and will not interpret regulations. And, in practice, due to lack of court cases related to taxation matter, the Supreme People’s Court is absent from tax administration so far.

In practice, as discussed above, it readily apparent that the SAT and MOF are the ones who exercise the legal power to interpret the country’s tax laws and regulations by the issuance or circulars to its branches, bulletins, rulings, notices and replies.

The SAT has responsibility for determining tax policy and administration, for formulating and coordinating tax policies. The MOF is also involving in developing tax legislation and policy and to some extent, play a supervising role in the tax legislation.

1.5 Tax administration

In practice, except for some special regions such as Shanghai, tax authorities at the provincial, municipal or regional levels are established to include both local tax bureau and state tax bureau at the same level which are responsible for administering different type if taxes respectively as result of “divided tax system”.

The State Council has authorized SAT to be responsible for the collection and administration of taxes that generate revenue for the central government (e.g. Consumption tax), and for revenue which will be shared between the central and local governments (e.g. Enterprise income tax, Value-added tax, Resource tax). Local tax bureaus are responsible for the collection and administration of taxes that only generate revenue for the respective local government (e.g. Business tax, Individual income tax, Urban and township land use tax, Real estate tax, Land appreciation tax, Stamp duty).

Local branches of State tax bureau are in change of the day-to-day administration of State tax matters. Local branches of State tax bureau and the local tax bureaus must follow the SAT’s guidance and directions with respect to tax policy and the interpretation of tax laws and regulations.

Apart from the above, the Customs is responsible for the collection and administration of customs duty, and the Customs is authorized to be responsible for the collection of value-added tax and consumption tax, etc. that are applicable to goods imported to China.


China does not have a comprehensive tax law. Instead there are different and separate tax laws applying to different taxpayers and different actives. There are currently five categories of taxes.

2.1 Turnover taxes

  • Value-added tax
Value-added tax is imposed on the sale of goods, the provision of processing repairs and replacement services within China and the importation of goods into the territory of China.

  • Consumption tax
This tax is levied on taxpayer engaged in manufacturing, commission processing or importation of specified non-essential or luxury consumer goods within the territory of China. The covered items include tobacco; liquor and alcohol; cosmetics; pearls, jewels and jade; firecrackers and fireworks; golf balls and golf equipment; luxury watches; yachts; disposable wooden chopsticks; solid wood flooring; refined oil products; motor vehicle tyres; motorcycles and motor cars.

  • Business tax
Business tax is levied on services, the transfer of intangible assets and the sale of immovable property whining the territory of China. Business tax will be imposed on services covered under the following industries with consideration or compensation.
- transportation;
- construction;
- financial and insurance;
- post and telecommunications;
- cultural, supports, and entertainment segments;
- and other service industries.

  • Surtax (or so-called ‘local levies’)
Surtax includes City Maintenance and construction tax, and national and local Education
Surcharges. They are levied on the total Value-added tax. Business tax and Consumption
tax are actually paid.
National and local education surcharges are not “taxes” as they are not collected under a tax law. However, they are levied and collected as local levies upon the turnover tax.

  • Customs duty
Import customs duty is imposed on goods imported in China, and export customs duty are imposed on certain goods exported from China. Customs duty is generally calculated on an ad valorem basis and in a few cases, calculated based on quantity, or by any other means.

2.2 Income taxes

  • Individual income tax
Chinese and foreign nationals who reside in or are domiciled in China, or who derive China-sourced income are subject to individual income tax on their employment income, business and other personal income or remuneration. There are 11 categories of taxable income. The tax liability depends on the China tax residency status of the individual and the source of his/her income.

  • Enterprise income tax
Enterprises that are resident enterprises in China are subject to enterprise income tax on income derived from sources inside and outside China. These enterprises include both domestic enterprises and foreign invested enterprises. “Foreign invested enterprises” include Chinese-foreign equity joint ventures, Chinese-foreign cooperative joint ventures and wholly foreign-owned enterprises.

“Foreign enterprises” with establishments in China are subject to enterprise income tax on their net income derived from production, business operations and other activities carried out in connection with their establishment in China. Foreign enterprises without establishments in China are subject to withholding taxes on income, such as dividends, interest and royalties, derived in China.

2.3 Property and specific purpose taxes

  • Stamp duty
All entities and individuals that conclude or receive specified documents, such as various types of contracts, documents of the transfer or property title, business books and accounts, etc., are subject to stamp duty.

  • Deed duty
This tax is imposed on the assignment or transfer of the ownership title of the land use rights and/or the buildings. Deed tax is generally payable by the assignee or transferee at a rate between 3% to 5% of the transaction price or the value of the assignment or transfer.

  • Land appreciation tax
All entities and individuals deriving gains form assignment or transfer of land use rights, buildings and the associated structures within the territory of China need to pay land appreciation tax while an exemption is granted to taxpayers in a transaction where the value-added amount of the assignment or transfer is less than 20% of the total amount of deductible items.

  • Real estate tax
This tax is imposed on the owner or mortgagee of real estate. The tax is calculated based on the appraised value of the land and buildings or the rental income. In certain situations, the custodian or occupant of the property may be liable to pay the tax on behalf of the owner or mortgagee.

  • Vehicle and vessel tax
This tax is imposed on owners or custodians of taxable vehicles and vessels within the territory of China.

  • Vehicle purchase tax
This tax is imposed upon entities and individuals who purchase taxable vehicles within the territory of China. It is a one-off tax, thus, if a taxpayer purchases a vehicle for which vehicle purchase tax has already been paid, this tax will not apply again.

2.4 Resource tax

This tax is levied on all entities and individuals engaged in the extraction of certain mineral products and natural recourses, or in the production of salt within the territory of China.


International tax treaties typically follow the format of one of two model conventions: the Organization for Economic Co-operation and Development (“OECD”) Model Convention and the United Nations Model Convention. China’s tax treaties follow these two models. As of 2011, China has signed more than 90 tax treaties within foreign countries and has signed two tax arrangements with Hong Kong and Macau.

Where the provisions of a tax treaty or agreement concluded between China and a foreign country are different from the provisions of the Enterprise Income Tax Law, the provisions of the treaty or agreement shall prevail. There are similar provisions in the regulations and circulars related to individual income tax.

For purposes of execution of tax treaties (or arrangements) signed by China, the SAT would formulate interpretations of the articles thereof. The most recent and prevailing one is the interpretation provided for the tax treaty between China and Singapore (“Sino-Singapore tax treaty”), i.e. Guoshuifa [2010] 75 or Circular 75.

Circular 75 addresses most of the articles in the Sino-Singapore tax treaty. It provides detailed guidance on important concepts in the Sino-Singapore tax treaty, such as “person”, “resident”, “permanent established”, etc., as well as guidance on the application of the dividends, interest, royalties, capital gains, the dependent and independent personal services articles, etc.

Circular 75 is the general guidance on tax treaty issues in practice. It is clearly stated that Circular 75 shall apply to the same articles in China’s other tax treaties (or arrangements) if the content of the relevant articles is the same as that of the Sino-Singapore tax treaty, and supersedes any previous interpretations that are inconsistent with Circular 75.

This article has focused on the legislative and legal authority for the tax regime in China together with an understanding of how tax policy is formulated and administered. It also introduces the general categories of China tax and the main types of taxes under the current China tax regime and the relationship of domestic tax law to international tax treaties.

Having considered all of the above, it is better for enterprises to obtain further professional advice regarding the current tax rules and practices in China before making investment decisions.