Welcome to the Chinese market! To help you navigate the initial financial landscape, here are four fundamental differences between the Chinese tax system and what you might be used to internationally.
Ⅰ.The "Invoice" (Fapiao) is Unique
In China, an invoice (known as a Fapiao) is not just a receipt or a simple bill. It is a legal document issued by the tax authorities. Businesses must use a standardized format and system to issue Fapiaos to their customers.
Ⅱ. VAT: It's About the "Special" Invoice
While the principle of Value-Added Tax (VAT) in China is similar to other countries (you pay tax on the value you add), the calculation method has a critical detail.
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You calculate your monthly VAT payable as: Total Output VAT (from your sales) — Input VAT (from your purchases) .
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However, you cannot deduct all your purchase costs. You can only deduct Input VAT if you have received a compliant "VAT Special Invoice" from your supplier. If you only receive a "Regular Invoice" or a receipt, you cannot claim that Input VAT as a credit, even if you paid VAT on the purchase.
III.Corporate Income Tax (CIT): The "True Cost" Principle
This is crucial for managing your company's tax burden. For a business expense to reduce your taxable profit, it must meet two conditions:
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1. Be Real: The expense must be actually incurred for business purposes.
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2. Have a Valid Fapiao: You must have a legally compliant Fapiao to support it.If an expense is real (e.g., you paid for consulting) but you lack a valid Fapiao, you can still record it in your accounting books. However, during the annual CIT filing, you cannot deduct this expense from your taxable income. This means your taxable profit will be higher than your accounting profit, leading to a larger-than-expected corporate income tax bill.
IV.IIT for Resident vs. Non-Resident
The way your employees are taxed depends on their residency status.
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For Non-Resident Individuals: Tax is calculated and withheld on a monthly basis. It's straightforward.
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For Resident Individuals: Tax is calculated on an annual basis. Throughout the year, tax is withheld monthly as a prepayment. After the year ends (typically in March-June), employees file an annual reconciliation. Depending on their total annual income and prepayments, they may either receive a tax refund from the government or need to pay any remaining tax owed.
V.Stamp Tax: Taxable Agreement Signing
To save as much stamp tax as possible for the company, the VAT amount included in the contract should be listed separately and clearly when signing the contract.
We hope this helps you get started on the right foot. Have questions about your specific situation? Call our hotline at 86+189 1629 8482 (English service available).
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Set up in 2009
Focus on Tax& Accoounting
wcx@ruanyinchina.com
86-189 1629 8482
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