Taxation in Mainland China
What the company pays, what the expatriate pays — and the cliff dated 31 December 2027
Two things make Chinese taxation readable. The corporate side is simple and high: one rate, 25 %, with no provincial layer on top. The personal side is complicated and, for a foreign manager, unusually mild — but only because of three concessions that all expire on the same day. Nothing in this note matters more than that date.
The company
| Tax | Rate, and what governs it |
|---|---|
| Corporate income tax 企业所得税 | 25 % on worldwide profit for a resident company. There is no local or provincial tax on profits: the headline rate is the whole rate. |
| Small and low-profit enterprises | Taxable profit taken at 25 % of its amount, then taxed at 20 % — an effective 5 %. Three cumulative conditions: taxable profit ≤ RMB 3m, headcount ≤ 300, total assets ≤ RMB 50m. Claimed on filing, no prior approval. |
| High and new technology enterprises | 15 %, on certification. Real, and demanding: patents held, R&D ratios, share of qualifying revenue. |
| R&D super-deduction | Qualifying expenditure deducted at 200 % in the general case; 220 % for integrated circuits and machine tools, until 31 December 2027. |
Turnover taxes and the rest
| Tax | Rate, and what governs it |
|---|---|
| Value added tax 增值税 | 13 % goods · 9 % transport, construction, property, telecoms · 6 % modern and financial services · 0 % exports. Small taxpayers (turnover ≤ RMB 5m) at a 3 % levy rate, reduced to 1 % and exempt below RMB 100,000 a month, until 31 December 2027. |
| Surcharges on VAT | Urban maintenance and construction tax plus education surcharges, assessed on the VAT actually paid — roughly 12 % of it in a large city. |
| Stamp tax, land and property taxes | Stamp tax on listed contract types; real estate tax and land appreciation tax where property is held or sold. |
At RMB 3,000,000 of taxable profit the tax is RMB 150,000. At RMB 3,000,001 it is RMB 750,000. There is no tapering: the whole profit reverts to 25 %. A company approaching the line has a real interest in the timing of a deductible expense — and a real risk if it discovers the arithmetic in March, when the year is closed.
Guides in English still quote an effective 2.5 % on the first RMB 1m. That rate expired on 31 December 2022. Since 1 January 2023 a single 5 % applies across the whole RMB 3m band.
Getting the profit out
Withholding on payments leaving China is 10 % as a matter of domestic law — on dividends, interest, royalties and rents alike. The Mainland–Hong Kong Arrangement reduces the dividend rate to 5 %, and this is the single most valuable feature of a Hong Kong holding structure.
| Flow | No treaty | Hong Kong | Any other country, under its own treaty |
|---|---|---|---|
| Dividends | 10 % | 5 % for a beneficial owner holding at least 25 % directly; 10 % otherwise. Art. 10 of the Arrangement. | Commonly 5 % where the treaty grants a reduced rate to a substantial holding — frequently defined as 25 % — and 10 % in every other case. Read the article, not the average. |
| Interest | 10 % | 7 % | 10 %, reduced by a number of treaties. VAT at 6 % is withheld in addition, whatever the treaty says. |
| Royalties | 10 % | 7 %; 5 % for aircraft and ship leasing | 10 %, reduced by a number of treaties. VAT at 6 % in addition. |
China has concluded more than a hundred double taxation agreements, and their rates are not interchangeable: two European parents in the same group may face different withholding on the same dividend. The rate is read in the article of the treaty that applies to the recipient, never assumed from a neighbouring one. Treaty relief is also claimed, not granted automatically — the payer applies it under a self-assessment and record-keeping regime, and the file is what has to hold if it is examined afterwards.
No reduced rate is automatic, in any treaty. The parent must be a genuine beneficial owner — a company with its own substance, decisions and risk, not a conduit — and must produce a Hong Kong tax resident certificate. Since the fifth protocol a principal purpose test applies to the Hong Kong Arrangement, and the multilateral instrument has written an equivalent test into most of China’s other treaties. A holding company created a month before the distribution, with no staff and no other function, is exactly the case the test was written for.
Held entirely by a substantial Hong Kong company for more than twelve months, distributing the whole distributable result.
| Domestic 10 % | Arrangement 5 % | |
|---|---|---|
| Taxable profit | 2,000,000 | 2,000,000 |
| Corporate income tax at 25 % | (500,000) | (500,000) |
| Distributable | 1,500,000 | 1,500,000 |
| Withholding on the dividend | (150,000) | (75,000) |
| Received in Hong Kong | 1,350,000 | 1,425,000 |
| Total Chinese tax | 650,000 | 575,000 |
| Effective rate | 32.50 % | 28.75 % |
The same profit inside the small and low-profit regime would bear RMB 100,000 of corporate tax rather than 500,000 — and the dividend, being larger, RMB 95,000 of withholding at 5 %. Total Chinese tax: RMB 195,000, an effective 9.75 %. That is the measure of what expires at the end of 2027.
The employer’s other bill
Social insurance and the housing fund are the cost most often left out of a budget. In Shanghai the employer pays roughly 25.7 % to 27.4 % of the contribution base for the five social insurance branches, and the employee 10.5 %; the housing fund adds 5 % to 7 % on each side. The base is capped — RMB 37,731 a month in Shanghai and RMB 36,348 in Beijing from 1 July 2026 — which is what keeps the burden on a senior salary finite.
Foreign employees are in principle liable to all five branches. Bilateral agreements exempt nationals of a number of countries from some of them. In Shanghai the practice long treated affiliation of foreign staff as optional, on the strength of a 2009 municipal notice whose validity expired on 15 August 2021; the position has not been harmonised since, and enforcement differs between districts. Treat it as a contingent social liability, never as an acquired economy.
The individual
Individual income tax is levied on a consolidated basis — salary, independent services, author’s and IP royalties in one comprehensive income — withheld monthly on a cumulative basis and settled annually between 1 March and 30 June.
| Annual taxable income (RMB) | Rate | Quick deduction |
|---|---|---|
| 0 – 36,000 | 3 % | 0 |
| 36,000 – 144,000 | 10 % | 2,520 |
| 144,000 – 300,000 | 20 % | 16,920 |
| 300,000 – 420,000 | 25 % | 31,920 |
| 420,000 – 660,000 | 30 % | 52,920 |
| 660,000 – 960,000 | 35 % | 85,920 |
| above 960,000 | 45 % | 181,920 |
Taxable income is the gross less the standard allowance of RMB 60,000 a year, the employee’s own social insurance and housing fund contributions, and the additional itemised deductions — children’s education and childcare at RMB 2,000 a month each, support of parents at RMB 3,000, housing rent at RMB 1,500 in Shanghai, Beijing, Shenzhen and Guangzhou, continuing education, mortgage interest, and major medical expenses.
Residence, and the six-year rule
An individual present in China for 183 days or more in a calendar year is a tax resident for that year, and taxed on worldwide income. But foreign-source income paid by a foreign payer is only reached once the individual has been resident for six consecutive years — and a single absence of more than thirty consecutive days in any of those years resets the count to zero. It is the one piece of Chinese tax planning that costs nothing and is forgotten most often. Below 90 days in a year, employment income borne by a foreign employer and not charged to a Chinese entity is not taxed at all; between 90 and 183 days, the Chinese workdays are.
A foreign employee resident in China may choose, instead of the itemised deductions, the non-taxable allowances regime: housing, children’s schooling, language training, home leave, relocation and meals, exempt on production of genuine invoices. The choice is exclusive and annual. Separately, the annual bonus may still be taxed under a separate monthly-converted scale, and the Greater Bay Area subsidy refunds, in the nine Guangdong cities, the individual income tax above an effective 15 % for qualifying overseas talent.
All three expire on 31 December 2027. They have been extended before, three times, and may be extended again — but a package negotiated in 2026 on the strength of them should say what happens if they are not.
A worked example — an expatriate manager on RMB 720,000
Gross annual package of RMB 720,000 (RMB 60,000 a month), married, one child, employer contributions excluded. Four configurations, the same money.
| Configuration | Taxable income | Tax | GBA subsidy | Net burden |
|---|---|---|---|---|
| Shanghai — itemised deductions | 618,000 | 132,480 | — | 132,480 · 18.40 % |
| Shanghai — expatriate allowances | 408,000 | 70,080 | — | 70,080 · 9.73 % |
| Greater Bay Area — itemised deductions | 618,000 | 132,480 | 39,780 | 92,700 · 12.88 % |
| Greater Bay Area — expatriate allowances | 408,000 | 70,080 | 8,880 | 61,200 · 8.50 % |
Three things follow. The allowances regime is far more powerful than the Bay Area subsidy — it halves the burden where the subsidy takes off a third. The two are partly substitutable: the more the allowances reduce taxable income, the smaller the subsidy becomes, since the 15 % reference applies to a reduced base. And if the allowances lapse at the end of 2027 while the subsidy survives, a manager in the Bay Area moves from 8.50 % to 12.88 % while one in Shanghai moves from 9.73 % to 18.40 %. The Bay Area absorbs about half the shock — which is a location argument in itself, subject to the subsidy expiring on the same date.
How we help
We size the capital and the transfer pricing before the first filing, because the small-profit threshold is a cliff and the beneficial-owner test is applied to the structure as it stands, not as it was intended. We prepare the Hong Kong tax resident certificate and the substance file that goes with the 5 % dividend rate, rather than claiming it and arguing afterwards. We model the expatriate package both ways — allowances and itemised deductions — and we write the 2028 scenario into the assignment letter, so that the concession expiring is a contract question and not a surprise. And we do not treat the Shanghai social insurance practice as a saving.