Member Article

Defining your strategy and analysing the market are crucial when making the decision to invest in China, but the tax efficiency of the business has its own specific issues and investors should not neglect them either.

The Chinese tax system has particular characteristics that you must get to know before investing.

In this informative note, we will address some basic aspects of value added tax and the invoicing system. However, it will always be necessary to go into much more detail and to consult a specialist in each individual case.

Value added tax (VAT) and the invoicing system known as fapiao are two of the main sources of revenue for the Chinese government.

China is attracting more and more foreign investors as it continues to enjoy above-average levels of growth, even in pandemic situations such as the one triggered by COVID-19.

VAT is a tax that applies to a range of services in China, such as the sale purchase and of goods, manufacturing and repair services, the import and export of goods to and from China and, in general, all transaction-related services. The rates may vary depending on the taxpayer's sales revenues, the type of goods and the sector.

To implement greater transparency in the system and to combat tax evasion, the Chinese government has created an invoicing mechanism capable of controlling/registering all transactions.

Thus, in deciding to set up a company in China and to opt for the most common type of limited liability company, your company will have the tax status of a "small-scale taxpayer" and will be prevented from offsetting VAT on expenses. However, if the company achieves a certain turnover (as a rule around RMB 800,000 over one tax year), it can claim or offset the VAT on purchases of goods and services. Moreover, the company must then be classified as a "general taxpayer".

"To implement greater transparency in the system
and to combat tax evasion, the Chinese government
has created an invoicing mechanism capable of
controlling/registering all transactions."

Invoicing of RMB 800,000 per year is the limit set for most cities in China, but this amount may vary, so it is essential to confirm in advance the amount applicable in the city where the company is registered.

For taxpayers with general status, VAT is paid monthly, while for small-scale taxpayers, VAT must be paid quarterly.

On 1 April 2019, the VAT rate applicable to taxpayers with general status was reduced and currently stands at 13%, which is the standard VAT rate for the sale of goods and services.

However, this rate is reduced to 6% for specific activities such as financial services, insurance, telecommunications, Internet, technology and consultancy.

The rate is 9% for retail trade, entertainment services, hotels, restaurants, catering services, real estate and construction, the post office, transport and logistics.

Alongside this reduction in VAT rates, there have also been reforms to cut red tape in tax operations and procedures.

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