A Handbook of Taxes in China for Foreigner: Part 2 - Understanding CIT

Asomerit Consulting will introduce a series of blogs for you to understand taxes in China. Our second blog will focus on Corporate Income Tax (CIT).

Introduction

When doing business in China, taxes are one of the critical aspects you need to consider. For foreign investors planning to establish a Wholly Foreign-Owned Enterprise (WFOE) in China, understanding China's tax environment is crucial for compliance and optimizing financial structure.

In China, businesses typically involve Value Added Tax (VAT), Corporate Income Tax (CIT), and need to withhold Individual Income Tax (IIT) for employees. To help you better understand the tax system in China, Asomerit Consulting will introduce the major taxes in China through a series of blog posts.

In this blog, we will focus on Corporate Income Tax (CIT). You can also click to read more about Value Added Tax (VAT) in China.

What is Corporate Income Tax (CIT)?

Corporate Income Tax (CIT) is a tax levied on the net income or profit earned by companies operating within China. It is calculated based on a company's total revenue, minus allowable expenses such as business operations costs, salaries, and other deductions.

CIT is applicable to both domestic and foreign enterprises that are engaged in business activities within China. It is essential for foreign investors to understand as it directly impacts the profitability of their business. For foreign-owned companies, this tax is a significant factor in determining their overall business costs and financial structure.

CIT Rate in China

1. Standard CIT Rate

The standard Corporate Income Tax rate in China is 25%.

CIT is calculated based on the company’s taxable income, which is its revenue minus allowable expenses. 

• CIT Payable = (Gross Income - Allowable Deductions) × Applicable CIT Rate

Where:

• Gross Income: The total revenue from business operations, including sales, services, and other income.
• Allowable Deductions: Qualified business expenditures such as raw material costs, wages, rental expenses, depreciation, and other related costs.
• (Gross Income - Allowable Deductions) = Taxable Income: The net profit upon which the tax is levied.

2. Preferential CIT Policies

While the standard CIT rate is 25%, preferential tax policies are available for companies that meet certain conditions.

(1). Small and Low-Profit Enterprises

According to regulations, a Small and Low-Profit Enterprise refers to a company that simultaneously meets the following three conditions:

• Taxable Income: Does not exceed RMB 3 million.
• Number of Employees: Does not exceed 300.
• Total Assets: Does not exceed RMB 50 million.

If your company meets the above conditions, your CIT can be calculated by reducing the taxable income to 25% of the actual amount and then applying a 20% tax rate. This results in an effective tax burden of 5% for the entire taxable income within the RMB 3 million threshold. The current policy is effective until December 31, 2027.

Example

Let's assume a foreign-owned consulting company, Company A, has the following data for 2024:

• Number of employees: 80 (annual average).
• Total assets: RMB 30 million (annual average).
• Taxable income: RMB 2 million.

In this case, Company A qualifies as a Small and Low-Profit Enterprise and can enjoy the preferential CIT policy. The CIT payable for Company A in 2024 would be calculated as:

• CIT Payable = (RMB 2 million × 25%) × 20% = RMB 100,000
• Effective Tax Rate = RMB 100,000 / RMB 2 million = 5%

(2). Other Preferential CIT Rates

• High-tech Enterprises: Eligible companies recognized as such by the Chinese government can enjoy a reduced tax rate of 15%.
• Encouraged Industries in Specific Regions: Some regions in China, such as special economic zones or free trade zones, offer preferential tax rates, often lowering the CIT to 15% for qualifying businesses.

Key Deductions for CIT

Certain expenses can be deducted from a company's gross income to reduce its taxable income, thus lowering the CIT burden. Some common deductions include:

• Research and development (R&D) expenses: R&D expenditures are heavily encouraged by the Chinese government and can qualify for enhanced deductions or tax credits.
• Depreciation of fixed assets: Companies can depreciate assets like machinery, buildings, and equipment over their useful life, reducing taxable income.
• Employee salaries: Salaries and wages paid to employees are deductible, provided they are in line with market standards.
• Advertising and promotional expenses: Reasonable marketing and promotional expenses can be deducted as part of the business’s operating costs.

CIT Filing and Payment

Foreign businesses operating in China must comply with the CIT filing and payment deadlines set by the Chinese tax authorities. The system is based on prepayments followed by an annual final settlement.

1. Prepayment Methods

• Monthly/Quarterly Prepayments: This is the most common method. Companies must calculate their provisional taxable income for the period and make a tax prepayment within 15 days after the period ends.
• Other Methods: For businesses without clear accounting systems, prepayments may be based on a fixed pre-set ratio.

2. •    Annual Final Settlement

• After the fiscal year ends, businesses must perform an annual CIT reconciliation (final settlement) between January 1st and May 31st.
• This process calculates the year's actual total tax liability. The prepayments made throughout the year are then offset against this final amount, resulting in either a final tax payment or a refund for overpayment.

Conclusion

Understanding and navigating China's Corporate Income Tax landscape—from the standard 25% rate to various preferential policies like those for Small and Low-Profit Enterprises—is essential for optimizing your tax structure and ensuring compliance. The complexities of deductions, filings, and adhering to deadlines can be daunting.

To ensure accuracy, maximize your eligible benefits, and free up your valuable time, consider partnering with a trusted professional. At Asomerit Consulting, we specialize in providing reliable bookkeeping and tax services tailored to foreign-owned businesses in China. Let us handle the intricacies of CIT so you can focus confidently on growing your venture.