1. To which aspects of taxation should I pay attention when running a small or medium-sized business in Mainland China?
The PRC Income Tax Law for Foreign Investment Enterprise and Foreign Enterprises 《中華人民共和國外商投資企業及外資企業所得稅法》 states that foreign firms are liable for the following types of taxation.
(a) Corporate income tax. Some important notes are that gains which arise from the disposal of an FIE's assets are generally included as part of its taxable income, although wear and tear allowances are granted on fixed assets and other capital assets that are used in the production of income. Bad debts that are written off in accordance with the relevant rules must be reported to the local tax authorities for examination and confirmation. Any entertainment expenses that are incurred in relation to the FIE's production and business operation must be backed up by reliable records or vouchers and are deductible within stipulated limits. Donations to approved charitable organisations are allowed as deductible expenses. However, foreign social insurance premiums for employees working inside Mainland China , fines and penalties, and management fees that are paid to related companies are not allowed as deductible expenses. The losses that were incurred by an FIE in previous years may be offset against profits in future years for a period not exceeding five years.
(b) Various categories of turnover tax. These include: (i) value-added tax (VAT) which is levied during the phases of production, distribution and importation; (ii) consumption tax on certain high-margin consumer goods; and (iii) transaction tax on services and the transfer of intangible property or sale of real property.
(c) Other taxes that are payable by FIEs include land VAT, deed tax, real estate tax, vehicle and vessel licence tax, stamp duty and customs duties.
(Note: There are various types of tax that are chargeable in the Mainland and the rules are complex. You should consult a PRC accountant for more information on taxation matters).
Under the Closer Economic Partnership Arrangement (CEPA), imports into Mainland China of products (except those that are prohibited in the Mainland) which are originated in Hong Kong are duty free from 1 January 2006 . More information on this zero-tariff policy is available from the website of the Trade and Industry Department of the Hong Kong SAR Government.
Hong Kong investors should also note the new Arrangement for the Avoidance of Double Taxation on Income and Prevention of Fiscal Evasion for Mainland China and Hong Kong , some general information on which can be found on the website of the Hong Kong Inland Revenue Department.