China

The basic corporate income tax (CIT) rate in China is 25%, applicable to resident enterprises and non-resident enterprises that maintain establishments or places of business in China where the relevant income is effectively connected with such establishments or places of business.

Other specific CIT rates to note (effective in 2026) are as follows:

• 20% (statutory low rate). Applies to non-resident enterprises without establishments or places of business in China, or with income not effectively connected to their Chinese establishments/places. Pursuant to State Council regulations, this income is actually taxed at a preferential rate of 10%.
• 20% (preferential rate, effective tax burden 5%). Applies to qualified small and low-profit enterprises (SLPEs) engaging in non-restricted/non-prohibited industries, with ≤300 employees, total assets ≤RMB 50 million (about USD 7,245,000.00), and annual taxable income ≤RMB 3 million (about USD 434,700.00). The policy is extended to December 31, 2027. The calculation is: Taxable Income × 25% × 20%, resulting in an effective tax rate of 5%. If annual taxable income exceeds RMB 3 million (about USD 434,700.00), the entire amount is taxed at 25%.
• 15% (preferential rate). Applies to state-supported high-tech enterprises, recognized technologically advanced service enterprises (extended to end-2027), and encouraged industry enterprises in western China (extended to end-2030, with main business income accounting for ≥60% of total income).
• 10% (preferential rate). Eligible key integrated circuit design enterprises and software enterprises encouraged by the state are exempt from corporate income tax for the first five years (starting from the profit-making year) and are subject to a reduced 10% tax rate in subsequent years. Applies to specific strategic emerging industry enterprises (e.g. integrated circuit and software enterprises).

As of March 2026, Chinese mainland has not implemented the OECD/G20 Pillar Two Global Minimum Tax (GloBE) rules for corporate income tax purposes and has not enacted domestic legislation for the Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR), or Undertaxed Payments Rule (UTPR).

Current Status (CIT):

• No domestic implementation. The current Enterprise Income Tax Law, its implementing regulations, and tax incentives (e.g. 15% rate for high-tech enterprises, SME preferences, exemptions for software/IC enterprises) do not include a mandatory 15% effective tax rate top-up mechanism under GloBE.
• Scope. Pillar Two applies only to large multinational groups with annual consolidated revenue ≥ EUR 750 million. China does not currently require domestic GloBE calculations or filings.
• Hong Kong SAR. Hong Kong enacted global minimum tax legislation in 2025, with IIR and QDMTT effective January 1, 2025, which is not synchronized with Chinese mainland.

Impact on Enterprises (CIT):

• Multinational groups with Chinese parent companies. Not subject to IIR/QDMTT in China and cannot benefit from the Ultimate Parent Entity (UPE) safe harbor domestically but must file top-up tax returns in foreign jurisdictions that have implemented Pillar Two.
• Foreign-invested enterprises in China. If their global group is within Pillar Two scope, low-taxed profits in China may be subject to top-up taxes by the parent’s jurisdiction or other applicable jurisdictions.

Resident enterprises

Taxation of ordinary income. Resident enterprises (incorporated in China or incorporated overseas with effective management in China) are subject to CIT on worldwide income (both China-source and foreign-source). Taxable income includes sales of goods, provision of services, transfer of property, dividends, interest, rentals, royalties, and so on, taxed at the standard rate of 25%.

Taxation of capital gains. Capital gains (e.g. from transfer of equity, real estate, movable property) are included in taxable income and taxed at the same 25% rate as ordinary business income; there is no separate capital gains tax.

Taxation of foreign-source income. Foreign-source income of resident enterprises is included in worldwide taxable income. Foreign income taxes paid may be credited against Chinese CIT (direct and indirect credit) within statutory limits to avoid double taxation.

Non-resident enterprises

Non-resident enterprises are incorporated overseas and have their effective management outside China, either: (1) with an establishment or place of business in China; or (2) without an establishment or place of business in China but deriving China-source income. They are taxed as follows:

1. With an establishment/ or place of business in China. Taxable at 25% on China-source income attributable to the establishment and on foreign-source income effectively connected with the establishment. Capital gains are included in taxable income and taxed at 25%.
2. Without an establishment or place of business, or where income is not connected with the establishment or place of business. Taxable only on China-source income (dividends, interest, rentals, royalties, property gains, etc.) at a withholding tax rate of 10% (statutory rate of 20%, reduced to 10% in practice). Capital gains (e.g. from transfer of Chinese equity or real estate) are taxed separately at 10% withholding tax.

China has a comprehensive system of indirect taxes, primarily consisting of value-added tax (VAT), consumption tax, and customs duty.

Value-added tax (VAT):

• Status: The largest tax in China, with the VAT Law effective from January 1, 2026.
• Tax scope: Sales of goods, services, intangibles, and real estate within China, plus importation of goods.
• Calculation:
  • General taxpayers: Output VAT−Input VAT, with standard rates of 13%, 9%, 6%; 0% rate for exports.
  • Small-scale taxpayers: Simplified method at 3% (5% for certain items).

Consumption tax:

• Purpose: Levied on selected luxury or harmful goods in addition to VAT to guide consumption.
• Taxable items: Tobacco, alcohol, cosmetics, jewelry, petroleum products, motor vehicles, high-end watches, etc.
• Calculation: Ad valorem, specific, or compound rates; it is an excise tax (price-inclusive) collected once at production/import stage.

Customs duty:

• Collection: Imposed by customs on imported/exported goods and articles.
• Calculation: Ad valorem, specific, or compound duties; imports are also subject to VAT and Consumption Tax collected by customs.
• Role: Protect domestic industries, regulate trade, and raise fiscal revenue.

Withholding Tax (WHT) under China’s CIT is a source-withholding mechanism targeting non-resident enterprises (NREs) deriving China‑source income not effectively connected with an establishment or place of business in China. It is not a separate tax but a special collection method for CIT.

Applicable scope and taxable income. Applies only to NREs with:

• no establishment/place of business in China but deriving China‑source income; or
• an establishment/place of business in China but income not effectively connected with that establishment.

Taxable income types. The following types of income are taxable in China:

• Dividends, bonuses, and other equity investment income.
• Interest, rentals, royalties.
• Gains from transfer of Chinese property (equity, real estate, land use rights, etc.).
• Other passive China‑source income.

Tax rates. The applicable tax rates are as follows:

• Statutory rate: 20%; effective rate: 10% withholding tax (reduced by regulation).
• Tax treaty benefits: Lower rates (e.g. 5% for dividends, 6%–7% for interest/royalties) may apply under double tax agreements (DTAs) if the NRE qualifies as the beneficial owner.

Special policy. Reinvestment deferral: NREs using China‑sourced profits for direct reinvestment in non‑prohibited projects may qualify for WHT deferral (tax payable upon exit).

China has a General Anti‑Avoidance Rule (GAAR) under the CIT regime, codified in Article 47 of the CIT Law, Article 120 of the CIT Implementation Regulations, and the Measures for General Anti‑Avoidance Management (Trial) (SAT Order No. 32). It targets tax‑avoidance arrangements lacking reasonable commercial purpose and designed primarily to obtain tax benefits.

Scope and core conditions:

• Applicability: Primarily applies to cross‑border transactions/payments. It does not apply to purely domestic arrangements or illegal tax acts (tax evasion, fraud, refusal to pay tax, etc.).
• Definition of tax‑avoidance arrangement (both required):
  • Purpose test: The sole or main purpose is to obtain a tax benefit (reduction, exemption, or deferral of CIT).
  • Substance test: The arrangement is formally compliant but inconsistent with economic substance, used to circumvent tax obligations.
• Typical scenarios:
  • Abuse of tax incentives, tax treaties, or corporate forms.
  • Use of tax havens/low‑tax jurisdictions to set up shell companies with no real operations.
  • Other cross‑border arrangements without reasonable commercial purpose (e.g. indirect offshore equity transfers).
• Priority Rule: Specific anti‑avoidance rules (transfer pricing, Controlled Foreign Corporation, thin capitalization, etc.) apply first; GAAR is a residual measure.

Taxpayer obligations:

• Burden of proof: The taxpayer must demonstrate the arrangement has reasonable commercial purpose and economic substance.
• Consequence: If adjusted, the taxpayer must pay back taxes plus statutory interest (no late payment surcharge).

The most frequent issues leading to tax controversies for enterprises in China are:

• Transfer pricing and related-party transactions. Whether prices for related-party transactions comply with the arm’s-length principle is the top source of disputes, especially for cross-border services, royalties, interest, and intercompany purchases and sales.
• Pre-tax deduction of expenses. Disputes over whether costs, expenses, losses, commissions, advertising, and R&D expenses are genuine, legitimate, relevant, and deductible for corporate income tax purposes.
• Beneficial ownership and tax treaty application. Challenges to non-resident enterprises’ claim to treaty benefits for dividends, interest, and royalties based on the beneficial ownership test.
• Income recognition. Timing and amount of taxable income, including lump-sum income, instalments sales, deemed sales, and government grants.
• Capital transactions. Calculation of gains from equity transfers, cost basis, conditions for special tax treatment in reorganizations, and taxation of indirect offshore equity transfers.
• General Anti-Avoidance Rule (GAAR) and reasonable commercial purpose. Whether arrangements lack reasonable commercial purpose and constitute impermissible tax avoidance.
• VAT and input tax credit. Eligibility of input VAT credits, invoice compliance, risks of fake invoices, deemed sales, and classification of mixed sales/dual operations.

The legislative frameworks governing tax controversy resolution in China include:

• Tax Collection and Administration Law. The basic procedural law for tax disputes, covering inspection, collection, preservation, and the “pay first, apply for reconsideration later” principle.
• Corporate Income Tax Law. The substantive basis for determining tax liabilities, income, deductions, and related-party transactions.
• Administrative reconsideration laws and rules. Provide an administrative remedy; tax assessment disputes must go through reconsideration before litigation.
• Administrative Procedure Law and judicial interpretations. Establish judicial remedies as the final way to resolve tax controversies.
• Special anti-avoidance and cross-border rules. Include GAAR and Mutual Agreement Procedure for special tax adjustments and cross-border tax disputes.

In China, mediation is available as an alternative for tax disputes, but arbitration is not applicable to tax administrative controversies. Available mechanisms include:

• Tax administrative reconsideration mediation. Under the Rules on Tax Administrative Reconsideration, mediation is voluntary for disputes involving discretionary acts, administrative compensation, and administrative rewards during the reconsideration process; a signed mediation agreement is legally binding.
• Judicial mediation. Courts may mediate in tax administrative litigation cases involving administrative compensation or indemnification.
• Mutual Agreement Procedure (MAP). Under tax treaties, taxpayers may request competent authorities of two jurisdictions to resolve cross-border disputes such as double taxation and transfer pricing.
• Advance Pricing Arrangement (APA). Enterprises and tax authorities agree on transfer pricing methods in advance to prevent transfer pricing disputes.