China Levies Additional Taxes On Foreign Companies

by Mary Swire, Tax-News.com, Hong Kong

02 December 2010

There have been further moves towards the standardization of taxes paid by Chinese domestic companies and by foreign companies with operations in China, as the latter have now become liable, from December 1, for local city construction and maintenance taxes, as well as for an education-supporting tax.

Foreign-funded companies and joint ventures have been totally exempt from those taxes that, since the mid-1980s, have only been paid by Chinese domestic businesses. The exemptions were part of the preferential tax regime that China previously provided for foreign investors, whereas now the government is seeking a unified taxation system, having, for example, begun a move towards a single corporate income tax rate for domestic and foreign companies some two years ago.

The city construction and maintenance taxes are presently 7% in a city, 5% in a town and 1% in smaller other locations, while the rate of education-supporting tax is 3% of a company’s turnover tax. Turnover tax is defined as an amalgamation of value-added tax, consumption tax and business tax, and the new taxation will be paid monthly at the same time as those taxes are paid.

It is not thought that the taxes now being made payable by foreign companies, being calculated as only up to 10% of those other taxes, will be considered to be large in comparison with the other taxes paid by a company in China, or reduce corporate investment returns to a significant extent. They will, however, be seen as a move away from favourable foreign direct investment incentives by China, as its economy and markets mature.

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