top of page

Comprehensive Guide to Corporate Income Tax (CIT) in China

Corporate Income Tax (CIT) in China, applicable to various business entities, is fundamental for foreign companies operating in the country. This guide provides an in-depth look into CIT, covering its framework, rates, calculation, and compliance requirements.


CIT Framework

China imposes a standard CIT rate of 25% on enterprises, with incentives for specific business types. Resident enterprises are taxed on worldwide income, while non-resident enterprises are taxed on China-sourced income.

Who Pays CIT?

CIT applies to all enterprises except individual proprietorships and partnerships.

  • Resident Enterprises: Companies established or managed within China, taxed on worldwide income.

  • Non-Resident Enterprises: Foreign companies with China-sourced income, taxed based on their establishment status in China.

CIT Rates

  • Standard Rate: 25%

  • Withholding Rate: 10% for non-resident enterprises without establishments.

  • Reduced Rates: 20% for small and low-profit enterprises, 15% for high-tech enterprises or those in special zones.

Calculating CIT

CIT payable is calculated as follows:

CIT PAYABLE = CIT TAXABLE INCOME x CIT RATE - TAX EXEMPTIONS OR REDUCTIONS BASED ON TAX INCENTIVES 

Taxable Income

Taxable income is calculated on an accrual basis through the direct or indirect method.

  • Direct Method: CIT TAXABLE INCOME= GROSS INCOME - NON-TAXABLE INCOME - TAX EXEMPT INCOME - DEDUCTIONS - ALLOWABLE LOSSES CARRIED FROM THE PREVIOUS TAX YEAR 

  • Gross Income includes sales, services, property transfers, dividends, interests, rents, royalties, gifts, and donations.

  • Non-Taxable Income encompasses financial allocations, government funds, and other state-stipulated incomes.

  • Tax-Exempt Income includes government bond interest, qualified equity investment gains, and non-profit organization income.


Deductions cover reasonable business expenses, such as costs, taxes (excluding CIT and VAT), losses, depreciation, amortization, inventory costs, and charitable donations (up to 12% of gross annual profit).


Specific expenses have deduction caps, such as employee welfare (≤14% of total salaries) and labor union funds (≤2% of total salaries).


CIT Compliance

Annual Compliance Procedures

Foreign Invested Enterprises (FIEs) must complete annual compliance procedures, including a preliminary audit, annual audit report, and CIT reconciliation.

  1. Preliminary Audit: Conducted in late year to identify potential issues, allowing corrections before the final audit.

  2. Annual Audit Report: Includes audit opinion, financial statements, and explanatory notes, completed before May 31.

  3. CIT Reconciliation: Adjusts accounting profits to taxable income, involving an Annual CIT Reconciliation Report submitted online.

Documentation and Language

Financial reports must be in Chinese and RMB-denominated. Proper documentation supports financial and tax records.

Regional Variations and Practical Tips

  • Regional Differences: Compliance requirements may vary by region. For example, Shanghai requires a taxable income adjustment sheet, while other cities may not.

  • Engage Professionals: Utilize qualified accountants and tax agents.

  • Stay Updated: Regularly check for updates from local tax bureaus.

  • Prepare Early: Conduct preliminary audits to address potential issues.

Bridging CAS and IFRS

Converting Chinese Accounting Standards (CAS) to International Financial Reporting Standards (IFRS) involves analyzing and mapping differences, typically in two phases:

Phase One: Analysis and Preparation

  1. Identify differences in accounting treatment.

  2. Confirm accounting policies.

  3. Analyze report formats and disclosure requirements.

  4. List differences and prepare adjustment entries.

Phase Two: Implementation

  1. Match sub-ledger accounts under CAS with those under IFRS.

  2. Set up formula links between accounts.

  3. Post adjusting entries.

  4. Generate IFRS financial statements.


Understanding and complying with CIT regulations in China is essential for foreign businesses. By adhering to the framework and preparing adequately, companies can ensure they meet all legal obligations and maintain financial health.



Can Woodburn help you?

 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.


Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

Talk to an expert


Schedule a 30-mins complimentary, no-obligation call to see how Woodburn can help you. Book a call with our Head of Business Advisory - Kristina Koehler-Coluccia.

Topics we can advise on include:

  • Company Registration

  • Cloud Accounting & Financial Reporting

  • Cloud Payroll Services

  • Tax & Audit Services

  • Recruitment

  • Employer-of-Record

  • Visa Application

  • Trademark Registration

  • Switch to Woodburn

  • Partner with Woodburn (cross referral) 

Our calls are automatically scheduled via Zoom - or via Teams, WeChat or WhatsApp upon direct request. 

Our advisory calls are available from Monday-Friday from 8am to 5pm CEST and Wednesday until 9pm CEST.

 



Comments


Woodburn Accountants & Advisors is one of China and Hong Kong’s
most trusted business setup advisory firms

bottom of page