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After Shanghai WFOE registration, you may need to consider tax related issues of the WFOE you registered. While even before the WFOE registration, you can take such tax issues into consideration. No matter what processes you are going through, it’s necessary to have a good knowledge of the tax in Shanghai, where your company located in. This article is to introduce Shanghai WFOE tax liabilities for your references.
1.Enterprise Income Tax (EIT)
In practice, the Enterprise Income Tax shall be paid monthly or quarterly (depending on the scale of the taxpayer) within 15 days of the end of month/quarter, and be reviewed and settled by the tax bureau at the year-end (within 5 months starting 12/31). Normally, the EIT is calculated on the base of “Enterprise Income”, profit before tax (PBT) generated in a month/quarter, or a contract price for services provided in China by companies without legal entities registered in China. The tax bureau can exercise their right to apply a tax rate after assessment.
EIT = Profit Before Tax or Contract Price x Applicable Profit Tax Rate x Applicable EIT Rate
The profit rate ranges from 15 percent to 50 percent, depending on the type of services provided. Specifically, the profit rate shall be:
From 30% to 50% for management services; and
From 15% to 30% for services such as design and consulting;
More than 15% for other services;
(Please note that the profit rate category and the effective rate is chosen by the local tax office.)
According to China’s Corporate Income Tax Law, the Applicable EIT Rate can be as high as 25 percent for foreign enterprises.
For instance, the guiding profit rate for services is 15-30%.
Therefore, EIT = PBT (e.g. contract price) x 15-30% (applicable profit tax rate decided by the tax bureau) x 25% (applicable EIT rate).
2.Value Added Tax (VAT)
VAT percentage in China varies according to the scope of activity of the company. The standard rate of VAT in China is 17% for trading activities and 6% for consulting activities. In addition, VAT can be deductible for WFOE companies.
The three rules of deductible VAT:
-The WFOE must be a general taxpayer before it could claim VAT deduction during the course of business.
-Only special VAT fapiao (Chinese receipts) can be used for deduction.
-The WFOE must have some revenue to pay VAT for. The WFOE must generate legal income within the capacity of the entity in order to deduct a VAT fapiao from the total VAT amount to be paid on its income.
In China, once you paid the tax (any tax), there is a very low chance of getting it back directly. Unless the company files for tax administration review. In other words, the company must ask the tax bureau to correct a mistake. In addition, a Chinese fapiao is only valid during 360 days for deduction.
Withholding Tax
Withholding taxes are applicable in case the profits made in China are to be transferred abroad.
When a Chinese company wants to send money to a foreign entity, a Service Agreement must be concluded to confirm the transaction. In general, a withholding tax of around 10% is applied on the amount of the contract. In China, the final rate could only be assessed after carefully examination of the contracts and the invoice.
This withholding tax consists of the Enterprise Income Tax (EIT) which varies according the tax officer decision (usually around 20-25%), the VAT (from 6-17% according to the scope of activity of the Service Agreement), and a surtax (11-13% depending on location of the tax bureau in China). According to the country where the money to remitted, a tax discount for the amount of EIT paid in China can be applied according to eventual existing double taxation agreement.
Regarding the Chinese VAT and surtax, it is usually not recoverable in other countries. Finally, another option is to pay income tax on the WFOE result in China and then repatriate dividends abroad.
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