What is the VAT in China

Sales tax China: What to consider for German dealers when importing

The Far East and especially China is an interesting area for traders, after all, many buy their products locally and others meet an enormous potential buyers there. That is why it makes sense to look at how sales tax or value added tax is structured in China in order to be able to enter into trade with the Asian state. We give an overview.

Patrick Moeller

Last Updated on October 12, 2020

Sales tax in China

First of all, it should be noted in principle: The tax laws in China have changed several times since the turn of the millennium and it cannot be ruled out that there will be further changes in the next few years. But: The changes are positive, as they are more and more adapting to global standards and are therefore easier for us to understand and apply.

The current tax rates in China have only been in effect since April 1, 2019. The sales tax known to us is called Value Added Tax (VAT) in China. There are currently four different tax rates:

  • 13%, 
  • 9%, 
  • 6% 
  • and 0%, which apply depending on the goods or services.

While the classic sale of goods is taxed at 13%, the export of goods, for example, is taxed at 0%.

The different sales tax rates in China in detail

https://www.bdp-team.de/china-consulting/chinesische-steuern-neue-steuersaetze-in-china-ab-2019

Consumption tax on luxury items

In addition to the sales tax known to us, a so-called consumption tax is also levied when certain items are sold or imported. This mainly affects items from the luxury segment. This regulation affects, for example, cigarettes, alcohol, jewelry, cars, motorcycles, cosmetics, etc. and, depending on the type of product, are also taxed at up to 45% (cigarettes).

Corporate income tax

In addition to sales and consumption tax, domestic and foreign companies in China are also subject to the so-called Corporate Income Tax (CIT) or corporation tax. This is based on a uniform tax rate of 25%. Exceptions are high-new-tech companies (15%) and small-profit companies (5% or 10%, depending on sales). Companies that are active in the environment or energy sector also have options for tax breaks. Every branch or permanent establishment of domestic and foreign companies is subject to this tax.

Environmental protection tax

In 2018, the new environmental protection tax came into force in China. This is intended to contribute to a green and sustainable tax system and burdens companies that are allowed to release environmentally harmful material into the environment. To do this, companies have to submit their environmental tax return to the responsible tax authority on a quarterly basis. The taxes due are calculated depending on the emissions.

Costs for German traders for goods imports from China

The export of goods is not charged with a VAT rate of 0% for Chinese companies - but that does not mean that there are no costs when importing the goods to Germany.

Import sales tax when importing from China

First of all, the import sales tax must be taken into account when importing the goods. Like the usual sales tax, this is 19% (or 16% in the second half of 2020). These 19% are added to the value of the imported goods. The import sales tax can, however, be claimed as input tax at the responsible tax office in Germany and therefore does not represent a tax burden. Because the tax is treated as a transitory item like sales tax, it is not economically relevant for German traders.

Customs when importing from China

If goods from China are imported into Germany, customs duties are usually due. Ultimately, they serve to protect the economy by artificially increasing the price of goods in order to adapt it to one's own economy. This is to prevent German consumers or companies from buying goods from abroad more cheaply than they are offered here on site. This supports the German economy.

The electronic customs tariff (EZT) forms the basis for calculating the duty. This enables the various customs offices within the European Community to assign the respective imported goods to the various countries and to find and apply the appropriate customs tariff. How high the duty is primarily depends on the invoice price. There are also various items such as commissions, packaging costs, license fees, transport or insurance costs. To do this, a customs declaration must be completed.

The invoice, the specified items and the customs declaration ultimately result in the corresponding customs duty taking into account the current exchange rate, which is added to the actual price of the goods.

Tax exemptions for foreign investments

The aforementioned taxes are per se to be paid by foreign subsidiaries in China. However, in order to attract investment from abroad, companies may benefit from tax exemptions or tax breaks. However, these vary greatly - depending on the industry or region, different discounts are possible here, which also change regularly.

The prerequisites are different values ​​in terms of investment volume, operating time or capital. While foreign investments used to be simplified very regularly, tax breaks are now mainly just

  • for the sectors of environmental protection,
  • Renewable energy
  • or possible for companies from the high-tech sector.

History of VAT in China

The current status quo with regard to sales tax in China is comparatively simple. Up until the major tax reforms of the past decade, there was another special form of sales tax in addition to the consumption tax.

Business tax

Until 2013, services in China were not subject to traditional sales tax, but rather to business tax. This was in the amount of 3% to 20% and applied to all services, with a few exceptions such as medical services or educational offers. However, unlike sales tax, business tax could not be claimed as input tax and was accordingly considered a cost for the company. Since 2013, however, all services have been subject to the value added tax and thus again to the classic sales tax.

Conclusion

The value added tax in China is currently in constant flux and it can be assumed that there will be further changes. Overall, however, the tax laws are on the way to adapting to international standards and are therefore now comparatively easy to understand and apply. For German traders, the customs issue is particularly relevant and must be taken into account. German companies that want to open a branch or permanent establishment in China should also deal with the other tax laws.