Like employers worldwide, employers in China must pay taxes. Yet, financial services in China also have many advantages, and certain employers are eligible for certain tax benefits and incentives. This article describes and analyzes China’s major employee tax guidelines.
Taxes Paid by Employers
Corporate Income Tax
International companies who are active in the Chinese market and generate a China-sourced income, are obligated to pay CIT. Generally speaking, there is a fixed standard CIT rate which is 25%, and is calculated according to the following formula:
CIT payable = Taxable income x CIT rate – tax reductions (if applicable)
Companies in industries who meet several criteria can enjoy tax benefits and incentives:
- Qualified high-tech companies, or companies who are active in encouraged industries enjoy a reduced tax rate of 15%. In some cases, they might be able to get an exemption.
- Between January 2019 – December 2021, companies who take an active role in pollution prevention and the agriculture sector as a whole are eligible to a reduced tax rate of 15%.
- Between January 2019 – December 2021, small companies whose total taxable income is 1 million RMB or less can enjoy a reduced tax rate of 5%.
- Between January 2019 – December 2021, small companies whose total taxable income taxable income exceeds 1 million RMB but does not exceed 3 million RMB enjoy a reduced tax rate of 10%.
- Between January 2011 – December 2030, companies based in China’s western regions can enjoy a reduced tax rate of 15%.
- Between April 2021 – December 2022, small companies whose taxable income does not exceed 1 million RMB will enjoy a reduced CIT rate of 2.5% (a 50% decrease).
- Encouraged industrial enterprises in Hengqin of Guangdong, Pingtan of Fujian and Qianhai of Shenzhen enjoy a reduced tax rate of 15%.
- For specific economic zones or regions, such as Hainan, Guangdong-Hong Kong-Macao Greater Bay Area and Shanghai Lingang Free Trade Zone, the tax rate is determined according to the local preference.
Withholding Income Tax
A withholding tax, also called a retention tax, is a means by the government to combat tax evasion and other tax offenses. According to this government requirement, the payer is required to withhold or deduct a certain percentage of his or her income, and pay it to the government. Most jurisdictions levy WHT on employment incomes, dividends and interest.
International companies that are based outside of China but also supply services to clients in China are required to pay WHT on their China-sourced income. If the HQ wishes to get money from China (except for dividends), it should issue an invoice for the Chinese subsidiary, and based on which the Chinese government levies tax. In other words, although the HQ is the one to issue the China tax invoice, the Chinese subsidiary is the one to pay the taxes. This is why many overseas companies without a legal presence in China cannot receive the total gross amount of income, as the tax is deduced from the gross invoice value.
The withholding tax rate on income is usually around 10%. However, it can vary according to different terms of services and regions.
In China like in Western countries, employers are obligated to support their employees by contributing to their different social security insurances. In China the social security scheme consists of 5 mandatory insurances + a housing fund, which is applicable to Chinese employees only.
As any expert in employment services in China will tell you, failure to pay properly will lead to penalties on the employer. Yet it is important to also remember that proper handling might actually benefit the employer. For example, in an event of a work injury, and in case the employee is insured, the insurance company will be the one to bear the costs rather than the employer.
The amount contributed by employers to the different insurances varies between localities in China. The following is a breakdown of the social insurances’ contribution rates paid by foreign employers in three different cities:
Last updated: May 2021
Regulations in China change relatively frequently. For the most up-to-date regulations, please check in with us.