Tax Incentives For Foreign Invested Enterprises In China
Chinese foreign investment law and local policies offer many tax breaks and other financial incentives to encourage foreign investment, particularly with respect to Enterprise Income Tax (the equivalent of US corporate tax). Keep in mind that China intends to phase out these favorable policies toward foreign capital over a five-year period in line with its WTO commitments. Nevertheless, it remains unclear whether China will raise FIE tax rates, lower general tax rates, or simply use nationality-neutral standards that will nevertheless disproportionately benefit FIEs National incentives vary according to how much you are investing and whether your project is located in special economic zones; local incentives vary according to jurisdiction and relative bargaining power. In recent years China’s central and western provinces, starved of foreign investment relative to the coastal areas, have been offering incentives that are in some cases considerably more generous than their coastal counterparts. The national government is now encouraging foreign investors to invest in China’s relatively undeveloped hinterlands in order to distribute wealth evenly throughout the nation and reduce the flow of economic migrants to the coast. Other taxes include: * Withholding Tax - a withholding tax of 10% is imposed on China-sourced income derived by foreign corporations without permanent establishments in China (FIE profits distributed to foreign investors are one of several exemptions to this rule).
* Customs Duties are levied on imported goods and materials, and applicable rates vary. “Encouraged” category FIEs may apply for specific exemptions applicable to equipment imported for their own use (see the Foreign Investment Guidance Catalog for a list of Encouraged activities). * Value Added Tax (VAT) - sales of goods and some services within China are usually subject to VAT at rates of either 13% or 17%. Imported goods may also be subject to VAT. “Encouraged” category FIEs may apply for significant exemptions applicable to imported equipment for their own use (see the Foreign Investment Guidance Catalog for a list of Encouraged FIE activities).
* Consumption Tax - Basically a “sin” tax - certain goods that are defined as luxury items or unhealthy products are subject to consumption tax at rates ranging from 3% to 45%. * Land Use Tax - local governments may impose land use tax at a rate determined by the local government within guidelines set by the State Council. * Land Appreciation Tax - upon disposal of real estate, the seller is usually liable for Land Appreciation Tax at graduated rates of between 30% and 60%. * Business Tax is levied at rates of 3% - 5% for certain services including insurance, construction, and assignment of various intellectual property rights. Entertainment services are taxed at a rate of between 5% and 20%. * Motor Vehicle Acquisition Tax - acquisition of various types of motor vehicles (such as cars, motorcycles and certain trucks) are taxed at a 10% rate. * Deed Tax - transfers, gifts and exchanges of land use rights and buildings are taxed at rates of 3% - 5%. National Tax Preferences for FIEs Sample Local Tax Preferences for FIEs Sample Industrial Park Tax Preferences for FIEs Individual Income Tax.