Daxue Talks transcript #32: How is profit taxed in China and what are the different Chinese VAT rates
Find here Daxue Talks episode 32. In today’s Daxue talk, Matthieu David, the founder and CEO of daxue consulting, discusses the Chinese corporate tax system. You will discover what an entrepreneur should expect in terms of the profit tax and VAT system in China. At what rate is profit taxed? What is the difference between the VAT on products f and services?
Full transcript below:
Hello, I am Matthieu David the founder of Daxue Consulting, a strategic market research company based in China – in Beijing, Shanghai and Hong Kong. We have been working with more than 400 clients over the last 10 years since 2010.
What are the basics you need to know about taxes in China to manage your business? The first thing is corporate taxes. The tax on profit is 25%. Without going too much into detail, most companies need to pay 25% of their profit as taxes. There are a couple of elements you need to know and check with your accountant or your lawyer at least every year. Usually, there is a bracket, under which you have to pay a lower corporate tax. For instance, if my memory serves me right, in 2018, businesses with less than 1 million RMB of profit have to pay half the tax, meaning 12.5%. When you are exceeding this limit, you were taxed at a 25% rate on the entire profit. So, there is no step and as soon as you break this 1 million you were taxed at 25%. For 2017, the limit was much lower and in 2019 it is much higher. It changes every year, so you have to double-check with your accountant and your lawyer and ask them if you have a question of whether you need to pay taxes and at which level you can have a reduced tax rate. Corporate tax is one thing. You can have reduced taxes if you have a tech company and only in some very specific cases. Actually, for most of the cases, tax reduction does not apply. The cases when it applies are only when you are in a tech park with very specific synergies and when you have a 5-year plan, but this has to be decided with a local government, provincial government or national government and it is not an easy way. So, don’t rely too much on a reduced tax because this happens only rarely.
What do you need to know as an entrepreneur about VAT in China? First thing is that there is a VAT for products and there is a VAT for services. For many years, VAT on services was not deductible. So, you could not deduct the VAT on the VAT you actually had to pay on your costs. This has changed, following one of the biggest reforms in China a few years ago. Still, you need to understand that some VATs are not deductible. For instance, small taxpayer VAT. Let’s go back to the different VAT rates: 15% for products, 6% for services. What you also need to know is that on top of these two types of VAT you have an additional tax of about 10%. Again, it is important that you check with your accountant and lawyer. So, the framework is the following: you have VAT for products, VAT for services and also small taxpayers specific VAT which are not deductible. So those people with few VAT invoices with small taxpayer rate, let’s say 3.5%, then it is not deductible. In services, it can range from around 6% – which is usually the case for most businesses – up to a much higher rate. So, check with your lawyer and accountant. We have now seen the basics and this video will help you to ask the right questions to your accountant or lawyer.
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