Last updated on 7 de April de 2023
China is the world’s second largest economy and financial market. We analyze the most important Taxes in China: income tax, corporate tax, and VAT.
- Taxes on Earned Income
- Capital Income Taxes
- Corporate Tax
China is the second largest economy in the world by total GDP. And it has been forecast that by 2029 China will overtake the United States.
However, we know very little about China because it is a very opaque country. We are aware it is the factory of the world and know some of its largest corporations. But very little is said about how taxes work in China.
With almost 1.4 billion people, China is a very heterogeneous country. While Shenzhen, Shanghai and Guangzhou are large economic centers, and Beijing concentrates all political power, there are still many rural areas where the standard of living is very low.
Additionally, while Hong Kong and Macau are officially part of China, they enjoy administrative and fiscal powers.
China uses its own currency, the Yuan, also known as the Renminbi. It is known as CNY and RMB. CNH is the code for the yuan trading outside mainland China.
Throughout this analysis, we will see the tax figures in both local currency (RMB) as well as their equivalent in US Dollars. For this we will use an approximate exchange rate of $1 = 7 RMB.
When it comes to the cost of living in China, according to WorldData.info, prices are on average 37% lower than in the United States. However, and just like in the US, the cost of living varies markedly between a big city and a rural region.
Taxes on Earned Income
Labor income is subject to both social security payments and income tax:
The Chinese Social Security is quite similar to that of Western countries. Both the employer and the employee have to make contributions, which depend on the gross salary of the employee. These payments also give the right to receive certain services and future payments.
Most workers in China pay more in social security contributions than in income tax. Therefore, it is important to understand how they work.
Let us first touch on the maximum social security contribution base. This depends on the province in which we work and the average salary there. The social security base tends to be capped at three times the average salary in the province the previous year.
Thus, if the average salary last year was $1,000 per month or $12,000 per year, the maximum base used to calculate social security payments will be $36,000.
It should be noted that our social security contributions will be calculated on our salary the year before as opposed to the current year. The exception are those people who just joined the labor market.
Consequently, if our salary last year was $20,000, and this year it has gone up to $25,000, our contributions will be calculated on $20,000.
Social security contributions are made for the following concepts: pension system, healthcare system, accidents insurance and unemployment insurance. In the case of women, payments also have to be made for maternity insurance.
In addition, employees of Chinese nationality must contribute to a fund for the future purchase of a home. This is done to force most citizens to own their own apartment in the long term.
The following table indicates the percentages that must be paid to the Chinese social security for each of these concepts. Please note percentages vary slightly depending on the region.
Calculations are based on a maximum contribution base of 288,000 RMB ($41,000) per year:
As a whole, we can conclude that social security contributions in China are indeed high. They are similar to many Western European countries.
Income tax in China follows a progressive structure where higher incomes pay a higher percentage in tax. Taxes are paid on the income tax base and not the entire gross salary.
There are several deductions available with the goal to reduce the base on which income taxes will be calculated:
- Contributions made by the worker to social security
- Universal deduction: 60,000 RMB ($8,571)
- For each child: 12,000 RMB ($1,714)
- Elderly person in our charge: up to 24,000 RMB ($3,429)
- Mortgage interest: 12,000 RMB ($1,714)
- Rental costs: 9,600 to 18,000 RMB ($1,371-$2,743), depending on the territory
Once the tax base has been calculated, the following 7 brackets will be used to calculate the final tax bill:
- 0 to 36,000 RMB ($0 to $5,143): 3%
- 36,000 to 144,000 RMB ($5,143 to $20,571): 10%
- 144,000 to 300,000 RMB ($20,571 to $42,857): 20%
- 300,000 to 420,000 RMB ($42,857 to $60,000): 25%
- 420,000 to 660,000 RMB ($60,000 to $94,286): 30%
- 660,000 to 960,000 RMB ($94,286 to $137,143): 35%
- More than 960,000 RMB (More than $137,143): 45%
Taxes on the Self-Employed and Small Business Owners
For those who own their business, such as freelancers and small entrepreneurs, income tax in China has different brackets. While it still follows a progressive structure, the marginal tax rate for the self-employed is 10 percentage points lower than for employees:
- 0 to 30,000 RMB ($0 to $4,286): 5%
- 30,000 to 90,000 RMB ($4,286 to $12,857): 10%
- 90,000 to 300,000 RMB ($12,857 to $42,857): 20%
- 300,000 to 500,000 RMB ($42,857 to $71,429): 30%
- More than 500,000 RMB (More than $71,429): 35%
Capital Income Taxes
Capital income in China received a more favorable tax treatment than labor income. This may surprise many since, officially, China is a communist country.
Thus, the tax rate for income from savings and investments for residents in China is usually 20%. This percentage applies regardless of the type of income received: interest income, dividends, rental income or realized capital gains.
The only exception would be dividends received from companies listed in China. In that case, dividends will be taxed at a rate between 5% and 20%, depending on how long we have owned those shares at the time the dividends got paid.
VAT is the tax we pay when buying goods and services as consumers in China.
The general VAT rate in China is 13%.
However, VAT in China also has reduced rates for many products. The following table summarizes all existing rates including products and services to which they are applied:
Finally, as part of the VAT framework, China also has a luxury tax applies to certain non-essential purchases.
In this category we would find cosmetic products, luxury watches, jewelry, some cars and motorcycles, boats, alcoholic beverages, tobacco, and gasoline. The VAT surcharge applicable to luxury goods varies, but ranges from 1% to 56%.
The general corporate tax rate in China is 25%. However, certain industries, those considered strategic by the Chinese government, enjoy lower rates of taxation.
Thus, high-tech companies that meet a series of requirements will be able to benefit from a reduced corporate tax rate of 15%.
On the other hand, some companies that develop software can benefit from a rate of only 10%.
The other exception are companies registered in certain geographical areas of the country, where the Chinese government has a special interest in promoting economic development. Those companies would also benefit from reduced corporate tax rates.
I hope you found this analysis of taxes in China helpful. This can make you understand the incentives behind people working, investing, consuming and starting businesses in the world’s second largest economy.
Especially interesting is the fact that tax rates for companies and capital income tend to be lower in China than in most developed countries. This responds to the objectives pursued by the Chinese government.
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And if you want to read about the tax regime in the special administrative area Hong Kong, check out the following link:
Taxes in Hong Kong – A Complete Guide