Corporate Income Tax 企業所得稅
Corporation Income Tax
(CIT) is a tax paid by an enterprise
(i.e. an economic organization set up in accordance with law) on
their world-wide income from production and business operation.
A Hong Kong company having a
permanent establishment (PE) in China
is taxed in respect of its income effectively connected to the PE. A
Hong Kong company, whether it has PE in China or not, receives dividend,
interest and royalty from a China enterprise is subject to
withholding tax at the following rates: dividend at 10% for at least
25% shareholding, 5% for other case; interest 7%; royalty 7%.
CIT is chargeable on taxable income
after allowable deductions in a tax year at standard rate of 25%
subject to certain reductions and exemptions.
Tax year is from 1 Jan
to 31 Dec. CIT is usually payable on quarterly basis based on
quarterly financial statements. Tax is paid within 15 days of the
quarter end. Yearly tax returns for the tax year must be submitted
within 5 months after the year end and balance of tax liability, if
any, must be paid accordingly.
Taxable incomes include business
income, production income and other incomes. Other taxable incomes
include dividend income, interest income, rental income, sale of
fixed assets, and income from royalty, trademark or technology. Most
government subsidies are exempt. Allow deduction for reasonable
business expenses, charitable donations and depreciation on fixed
assets and intangible assets at prescribed rates. Non-deductible
items include dividend payment, CIT, tax penalty and expenses not
for production of chargeable income. Business loss can be carried
forward to set off future profits subject to a limit of 5 years.
Certain types of enterprise enjoy
lower tax rates or exemption. For example, high-tech enterprises and
foreign enterprise in Special Economic Zone are taxed at 15%. Small
enterprises and foreign enterprises without permanent establishments
in China are taxed at 20%. Certain government encouraged activities
such as scientific research, exploration of energy, development of
transportation etc. are exempt.
Individual Income Tax
An individual who has domicile in
China pays Individual Income Tax (IIT) on his world-wide taxable income.
An individual without domicile in
China is taxed according to his length of stay in China:
for 1 to 5
years: the taxable world-wide income refers to the amount paid in China;
more than 5 years: the taxable world-wide income covers both paid in China and
paid outside China;
for stay of less than 1 year, only
income derived from China is taxable. No world-wide basis.
Full exemption of IIT for Hong Kong
resident under Double Taxation Arrangement if (1) he stays in China
for not exceeding 183 days in 12 month starting or ending in the
year concerned; (2) the income is paid by an employer who is not a
resident in China; and (3) the income is not borne by a permanent
establishment in China. To prove the Hong Kong resident status, he needs to
obtain a Certificate of Hong Kong Resident Status from HK Inland Revenue Department. An
individual who has moved his permanent base to China cannot qualify
a Hong Kong resident.
For a Hong Kong resident rendering
services both in Hong Kong and China, only his income sourced in China is
subject to IIT. The income sourced in China is computed on time
basis. If he stays in China not exceeding 183 days in the calendar
year concerned, only the income paid in China is included in the
time basis apportionment. If exceeding 183 days, all incomes
including those paid outside China are included in the income for
time apportionment. All days of presence in China are
counted. Nevertheless, the taxpayer may ask Hong Kong Inland Revenue Department to raise the
issue with China tax authority if he is also assessed under HK
salaries tax with double counting of days.
For a Hong Kong resident rendering
services in China only, all income sourced in China is taxable: no
time apportionment is allowed.
Taxable income includes wages,
salaries and allowances. It is reported by employer to tax authority
on monthly basis. A fixed amount of deduction is allowed. Tax is
calculated by applying the applicable progressive rate to the
taxable income after deduction of expenses deduction and other
allowable deductions. See example below.
Taxable Income = Gross
Monthly Salary – Social Benefits Contributions –
A HK resident having no
domicile in China can get Expenses Deduction ¥4,800
IIT = Taxable Income x Tax
Rate – Quick Deduction
Monthly taxable income ¥
Applicable tax rate
1 - 1,500
55,001 - 80,000
80,001 and above
Example: Mr. Chan, a HK resident,
worked as a factory supervisor in China. He did not work in HK. In
Mar 2013 his monthly salary was ¥50,000 (tax borne by employee). If
he does not own a permanent residence in China, he has deduction of
¥4,800. So, his taxable income in June is 50,000 – 4,800 = 45,200,
giving an IIT of 45,200 x 30% – 2,755 = ¥10,805. The IIT is paid by
his employer in China to local tax authority within 7 days after the
month end (that is on or before 7 Apr 2013).
IIT is also levied on income from solely owned business, rental
income, royalty income, dividend, interest income. Except business
income and rental income, IIT is deducted and paid by the payer of
the income for the recipient.
Income from solely owned
business is taxed at a separate set of progressive rates (from
5% to 35%).
Rental income, royalty income,
dividend income are taxed at standard rate of 20%.
Individual’s working income
such as writer’s fee attracts an expenses deduction (20%
deduction for payment over ¥4,000, ¥800 deduction for payment
under ¥4,000) and then the balance is taxed at 20%.
Interest income is taxed at
An individual earning income
without deduction of IIT must file a tax return with local tax
authority within 7 days of the following month and pay IIT
An individual having an annual income of
¥120,000 or above must file an annual tax return to tax authority within 3
months after the year end.
Value Added Tax增值稅
Any enterprise and individual
engaged in sales of goods, provision of services of processing,
repairs and replacement must pay Value Added Tax (VAT).
Exporters of goods are exempt
and may apply for refund of VAT for input tax on goods purchased.
Necessities such as food,
water, natural gas, books, newspapers, magazines etc. : 13%
All other goods; services of
processing, repairs and replacement : 17%
General taxpayers need to
separately calculate the output tax and the input tax for the VAT
period. Then the difference is the actual amount of VAT payable.
Tax payable = Output tax payable for the VAT period - Input tax for
the VAT period
Output tax payable = Sales in the current VAT period (excluding VAT)
× Applicable tax rate
For purchase of goods, the input
tax is the VAT in the VAT special invoices received from suppliers.
For importation of goods, the input
tax is the VAT in the tax certificates issued by Custom Authority.
Input tax for transportation cost
of goods purchased is computed at 7% on transportation cost.
No input tax deduction is allowed for
purchase of fixed assets.
VAT period may be 1 day, 3 days, 5 days, 10 days, 15 days, 1 month
or 1 quarter as set by the tax authority. Usual VAT period is 1
month and for these taxpayers VAT must be paid within 5 days after
the month end.
Small-scale taxpayers are taxed on the revenue from sales of goods
or provision of taxable services by applying 3%. Small-scale
taxpayers are those engaged in sales of goods with annual turnover
<¥ 800,000; or engaged in production of goods with annual turnover <
¥ 500,000. VAT payable = Sales amount (excluding VAT) × 3%.
Exemption is granted for individual
taxpayer whose sales does not meet the monthly threshold of
Exempt items include contraceptive medicines and devices; antique
books; instruments and equipment imported for scientific research,
experiment and education; articles imported for the disabled etc.
Mixed sales means sales activities involve both goods and services. Mixed
sales arising from manufacturing, wholesaling and retailing are
deemed to be sale of goods and subject to VAT. In any other cases,
Business Tax is payable instead of VAT.
VAT special invoice sets out the VAT and selling prices separately. Enterprises involved in printing and using invoices are subject to
control by tax authority. For goods sold to consumers, the invoices
need not show the VAT separately. Small-scale taxpayers are
not required to issue VAT special invoices.
Business Tax 營業稅
Taxpayers of Business Tax (BT) include
all enterprises and individuals engaged in provision of service
(transportation 3%, service industry 5%, entertainment 5% to 20%),
transfer of intangible asset (5%) or transfer of immovable property
(5%) – PRBT Article 1.
Items taxed under BT are not chargeable to
For transfer of immovable properties, the purchase price of the
property or land use right can be deducted from the sale
Tax payable = [ Turnover (excluding
BT) in BT period – Allowable deductions ] × Applicable tax rate
BT period may be 5 days, 10 days,
15 days, or 1 month as set by the tax authority. Usual BT period is
1 month and for these taxpayers BT must be paid within 5 days after
the period end.
BT may be exempt for schools,
medical organizations, handicapped services, cultural services,
religious activities etc.
Concurrent activities: Where the
turnover of goods and services is accounted separately, enterprises
pay VAT or BT separately as verified by tax authority. For example,
and lodging revenue of hotel is subject to BT whereas its
merchandise sales revenue is subject to VAT. Where the turnover of
services and goods cannot be accounted separately, the total revenue
is subject to VAT.
Consumption Tax 消費稅
Every enterprise and individual engaged in the production and
importation of consumer goods (e.g. tobacco, alcoholic drinks,
cosmetics, jewel, fireworks, gasoline, diesel oil, tires,
motorcycles, automobiles) may pay Consumption Tax (CT) – PRCT Article 1.
The tax is computed on sales price or sales volume.
exempt and may apply for refund of VAT for input tax on goods
enterprise purchases consumer goods from a producer for further
production, the CT paid by the producer can be deducted from the
total CT on the final taxable consumer goods. Deduction is based on
the amount of the consumer goods used in the further production
during the relevant CT period.
Taxable goods include tobacco
products, alcoholic drinks, cosmetics, skin-care products, gold and
jewel, firework, gasoline and diesel, motor-car, motorbike, car-tyre
Tax rates vary from 3% to 50%
according to the types of consumer goods.
Tax payable = Turnover in CT period
× Applicable tax rate; or = Quantity sold in CT period × Applicable
CT period may be 1 day, 5 days, 10
days, 15 days or 1 month as set by the tax authority. Usual CT
period is 1 month and for these taxpayers CT must be paid within 5
days after the month end.
Tax Administrative Review
Where a taxpayer believes his
legitimate rights were infringed by a tax officer, he can request
for a tax administrative review by a higher authority. .If the
taxpayer is not satisfied with the review, he can take legal
proceedings in Peoples’ Court.
Study of China Tax for HK
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