China seeks to improve business environment with changes in tax laws

China’s tax laws and regulations have undergone significant changes in recent years due to the country’s rapid economic growth and development. The Chinese government has been working to modernize its tax system and make it more transparent, efficient, and effective to support business growth and development.

As a result, tax rules and rates in China have been subject to frequent changes, as the government seeks to improve the investment environment and stimulate economic activity.

Last April, China’s State Taxation Administration (STA) launched a cross-border tax service for non-resident enterprises, by adding a functional module in the nationwide online tax filing system, E-tax China, through which overseas enterprises can directly register for tax, make filings, and attend to settlement online for domestic equity transfers.

Non-resident enterprises can register using an E-mail address and then upload certificates. After verification, they can obtain the Identification Code of Non-resident Enterprise, which is available nationwide. The online cross-border tax service platform supports both Chinese and English. Meanwhile, the enterprises don't need to fill out forms and they can calculate tax due with a smart tax calculator.

“Non-resident enterprise” refers to an enterprise which is established and actually managed in a jurisdiction other than China, either having an office or premises established in China, or having income derived from China but with no office or premises therein.

China has been optimizing the international business environment for taxation and trying to remove barriers for cross-border tax payment.

The STA’s program is specifically applicable to non-resident enterprises which obtain equity transfer income from non-listed companies (not including restricted shares) in China with no withholding agents and need to file enterprise income tax (EIT) and Stamp Duty through Electronic Tax Services.

The E-tax system provides services such as contract information collection, intelligent judgment of tax obligations, tax calculation, and cross-border tax payment.

There was much anticipation for this online tax service, which will save overseas taxpayers the burden of on-site visits and tax filings to some extent.

Though the new system will facilitate the process, it is still necessary to maintain a proactive communication channel with the local tax authorities to discuss the pathways to make cross-border tax payments unless the taxpayer can use UnionPay for tax settlement.

Although the pre-filing review and approval by the tax authority are not legally required under the current regime, given the immaturity of online tax payment function and tax filing experience generally, it is important to communicate with the tax authority beforehand and to reach a consensus on the pertinent matters to secure tax certainty for the overseas taxpayers, such as the reasonableness of the equity transfer price and the tax basis therein.

It is also important to note that E-filing is not applicable if the taxpayer wishes to claim the special tax treatment granted to overseas taxpayers under STA Bulletin No. 72, or if the taxpayer would like to claim tax treaty benefits under a tax treaty/arrangement signed by China with the taxpayer’s home tax jurisdiction. It is still necessary for taxpayers with such needs to make on-site visits to the tax authority.

Besides the E-Tax initiative, the Chinese government decided to extend or optimize other current tax policies.

Last March, China’s State Council announced the extension or renewal of a range of supportive tax and fee cut policies, such as the increase of the super-deduction ratio for R&D expenses. To further encourage investment in R&D activities and to better support sci-tech innovation, the existing pre-tax additional deduction ratio of R&D expenses for eligible companies has been increased from 75% to 100%.

The newly introduced policy will be implemented as a long-term incentive with no expiration date specified.

Additionally, the provisional zero-tariff policy for the importation of coal has been further extended by the Customs Tariff Commission of the State Council. This policy was to expire on March 31, 2023 and has now been extended to December 31, 2023.

The zero-tariff policy for coal importations was first introduced in April 2022 to strengthen the security of energy supply in response to the overseas inflation of coal prices.

For logistic enterprises, the policy of half-reduced urban land use tax on land used for qualifying bulk commodity storage facilities, which was introduced to promote the development of logistic industry and initially set to expire at the end of 2022, will be extended to the end of 2027.

From January 1, 2023, to December 31, 2027, the urban land use tax on land used or leased out by a logistics enterprise for storage facilities (owned or leased) for the purpose of storing commodities traded in large quantities will be reduced by 50%.

A logistics enterprise is an enterprise engaged in warehousing storage and transportation services and registered as such. Commodities in large quantities include grain, cotton, oil, sugar, fruits, meat, seafood, fertilizer, coal, raw oil, ferro or non-ferro metals, plastic, and construction materials.

To be eligible for the reduction, the surface of the facilities must exceed 6,000 square meters.

Foreign companies should keep up to date with the latest tax policy changes and incentives to ensure they can fully benefit from them.

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