China Taxation for US/UK Investors
For investors and business owners from the USA and the UK, China remains an attractive market and supplier. As such, setting up a legal structure to invest in China continues to be popular. Tax in China is not simple to understand. Fortunately, Moores Rowland Asia Pacific has offices in Beijing, Zhengzhou, Shenzhen, Hong Kong and Macao. Let’s be honest, there are many corporate service providers who can help you set up an entity. There are those that can do it extremely cheaply as well. But you’re reading this for a reason. It’s because you’re from the USA or UK and you know that you need more than just an entity set up. US and UK tax rules are extremely complex – especially around Controlled Foreign Corporations. So you are reading this because you need something structured in a tax efficient way by an internationally qualified team of accountants and tax lawyers with expertise in corporate structuring, cross border taxation and transfer pricing. In the UK, HMRC has recently been speaking to the press; warning about increased scrutiny of taxpayers with international assets. In the USA, after years of cuts, the IRS recently got $11.4 billion. The money is to be used to improve customer service and fund a “business systems modernization program” meant to bring IRS systems into the 21st century. Also included in that number is an extra $320 million “to be used solely for carrying out” the new tax law passed in December 2017. Now let’s talk about tax in China. Under the current tax system in China, there are 26 types of taxes, which, according to their nature and function, can be divided into the following 8 categories:
- Turnover taxes. This includes three kinds of taxes, namely, Value-Added Tax, Consumption Tax and Business Tax. The levy of these taxes are normally based on the volume of turnover or sales of the taxpayers in the manufacturing, circulation or service sectors.
- Income taxes. This includes Enterprise Income Tax (effective prior to 2008, applicable to such domestic enterprises as state-owned enterprises, collectively owned enterprises, private enterprises, joint operation enterprises and joint equity enterprises) and Individual Income Tax. These taxes are levied on the basis of the profits gained by producers or dealers, or the income earned by individuals. Please note that the new Enterprise Income Tax Law of the People’s Republic of China has replaced the above two enterprise taxes as of 1 January 2008.
- Resource taxes. This consists of Resource Tax and Urban and Township Land Use Tax. These taxes are applicable to the exploiters engaged in natural resource exploitation or to the users of urban and township land. These taxes reflect the chargeable use of state-owned natural resources, and aim to adjust the different profits derived by taxpayers who have access to different availability of natural resources.
- Taxes for special purposes. These taxes are City Maintenance and Construction Tax, Farmland Occupation Tax, Fixed Asset Investment Orientation Regulation Tax, Land Appreciation Tax, and Vehicle Acquisition Tax. These taxes are levied on specific items for special regulative purposes.
- Property taxes. This encompasses House Property Tax, Urban Real Estate Tax, and Inheritance Tax (not yet levied).
- Behavioural taxes. This includes Vehicle and Vessel Usage Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Securities Exchange Tax (not yet levied), Slaughter Tax and Banquet Tax. These taxes are levied on specified behaviour.
- Agricultural taxes. Taxes belonging to this category are Agriculture Tax (including Agricultural Specialty Tax) and Animal Husbandry Tax which are levied on the enterprises, units and/or individuals receiving income from agriculture and animal husbandry activities.
- Customs duties. Customs duties are imposed on the goods and articles imported into and exported out of the territory of the People’s Republic of China, including Excise Tax.
Corporate income tax (“CIT”) – standard tax rate is 25%, but the tax rate could be reduced to 15% for qualified enterprises which are engaged in industries encouraged by the China government (e.g. New/high Tech Enterprises and certain integrated circuits production enterprises). Tax holidays are also offered to enterprises engaged in encouraged industries. Other CIT incentives are also available for tax resident enterprises in China. Withholding income tax on payments to non-residents – a concessionary rate of 10% is currently applicable to interest, rental, royalty and other passive income. Individual income tax (“IIT”) – progressive rates range from 3% to 45%. The UK expects their CIT to fall to 17% in 2020. The US just saw their CIT fall to 21%. Does that mean that we would see a movement of Chinese firms, or at least U.S. companies operating in China, back to the West? Some consider it unlikely for 3 reasons.
- The main reason for this is that their actual tax burden in China remains lower than the post tax reform US. In China, for a small-sized or nonresident investor, the applied corporate tax is only 20%. Furthermore, if the company’s main business activities fits into the government’s priorities, such as high-tech, the applied corporate taxes may be further reduced to 15% with two years of exemption. More generally, China has a very flexible tax rate that can be easily adapted to fulfill its industrial policy or fight international tax competition. A good example is China’s recent announcement of a temporary tax exemption for foreign companies’ reinvested profits.
- In China, wages account for more than 35% of companies’ expenses, and given that wages in China are still much lower than in the U.S., there is even less incentive to move production from China to the U.S.
- Most Chinese local governments still offer subsidies to foreign corporates, especially the larger ones, which further eases their net tax burden. This has long been the way for local governments to compete among themselves to attract companies and create jobs in their regions. If companies were to consider leaving for the U.S., Chinese local government can easily increase their subsidies to buffer the negative effect.
At the same time, it is worth sitting with your professional advisors to determine the best structure for your company and your investments given the shifting sands of the tax landscape both in the East and in the West. Our international tax team at Moores Rowland Asia Pacific can advise on cross border issues involving the US, UK or Asia. Feel free to reach out to us at anytime.