China WFOE Taxation services
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Tax system for foreign enterprises located in China depends on the company`s structure. This article focuses on the taxation for WFOE (Wholly Foreign Owned Enterprise, also called WOFE), that is to say a Chinese corporation totally owned by foreign inevstors.
WOFE have to pay 3 kinds of taxes to the government. Two of them are common to every types of WOFE.
The first one is the Income tax. It is calculated as follows:
Income tax = (revenues– expenses – Business tax) x 25%
The second one is an additional tax which only applied to Chinese companies before but has been extended to foreign companies since December 2010. It includes two taxes. On one hand is the City Construction and Maintenance Tax which varies from 1% to 7% according to the localization of the company (7% in cities, 5% in suburban districts and towns and 1% in rural areas). On the other hand is the Education surcharge with a fix rate of 3%. Both of them are calculated on the whole tax base (Income tax + Business tax or VAT depending on the activity. For example, this additional tax represents approximately 0.5% of a service company turnover.
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The third taxation depends on the activity field of the company.
The first field of activity is trading. WOFE specialized in this sector are subject to VAT. There are then 2 different cases.
One case is the small VAT payer status which concern companies whose sales are:
- lower than RMB 500,000 for companies producing taxable goods or delivering taxable services;
- lower than RMB 800,000 for companies doing wholesale or retailing.
The VAT rate is lower for these kinds of firms but the drawback is that they cannot deduce the VAT on purchasing. The formula is as follows:
VAT= Turnover x VAT rate (depends on the Business scope, generally from de 3 to 5.5%, non refundable)
The other case is the normal VAT payer status. It is mandatory for companies whose turnover exceeds the amounts given for small VAT payers. In addition, companies working in B to B must also choose this status because customers need VAT invoices. The rate for normal VAT payer is quite higher but the VAT on purchasing is refundable. Here is the calculation:
VAT= Turnover x VAT rate (depends on the business scope, generally 17% but sometimes 13%) – deductible collected VAT
Furthermore, companies importing goods from China or somewhere else have to pay the custom rights. The prices differ according to the type of product.
The second field concerns services and consulting companies. These activities don`t require VAT payment. Consequently, the third tax they have to pay is the Business tax. It is always calculated in the same way
Business tax = revenues* 5%
The tax declaration has to be done monthly for the VAT and the Business tax. The income tax is determined on a yearly basis but advance fees have to be paid quarterly.
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