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[ESTABLISHING A BUSINESS ENTITY IN CHINA]
a) Value-added Tax In general, VAT is imposed widely on revenue generated from the sale of goods or intangible assets, as well as provision of processing, repair, maintenance, transportation, profession, and other services. Therefore, most FIEs will be collected the VAT during their daily business operation. The VAT rate may vary depending on the underlying business activity. For example, it is 13% for trading of goods, 6% for services, 9% for transfer of land, etc. If an FIE pays the VAT to third parties, it may be able to enjoy relevant deduction for such VAT. b) Income Tax - Corporate Tax
for available preferential tax treatments.
- Individual income Tax
Individual income tax applies to foreign nationals that are residing in China or have income deriving from China, depending on their working and residence status in China. Partnership In principle, partnerships in China are tax pass-through entities and do not need to pay income tax at the partnership level. The partners are subject to income taxes on their distributive share of the business profits earned from the partnership. Although a foreign-invested partnership is a “pass - through” entity and not directly subject to income tax, it needs to pay other taxes related to its business, such as VAT, urban maintenance and construction tax and stamp duty, etc.
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China currently enforces a unified income tax treatment for all companies in China, with a tax rate of 25%. A “resident enterprise” 17 is subject to tax on its worldwide income. It should be noted that the law provides tax incentives to those resident enterprises that invest in high and new technology and certain other encouraged industries. It is recommended that FIEs assess their eligibility
c) Withholding Tax Withholding tax is imposed on all income generated in or derived from China by foreign investors, such as dividends, interest, royalties, rental income, or profits on transfer of assets, etc. The currently applicable withholding tax rate for foreign investors is ten percent. The withholding tax rate is subject to adjustment under applicable tax treaties or arrangements. For example, the tax
17 A resident enterprise refers to an enterprise legally established in China, or an enterprise established according to the laws of a foreign jurisdiction but has an actual operating institution in China. Therefore, an FIE falls under the scope of a resident enterprise.
ILN Corporate Group – Establishing a Business Entity Series
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