China taxes three things: people, companies, and goods and transactions. Which rates and rules apply to you depends on your entity type, residency status and business activity, so no two businesses face quite the same bill.
The good news is, once you break it down, it’s perfectly manageable. In this guide, we’ll walk you through how the system actually works, the tax rates in China you’ll pay, how the Chinese mainland compares with Hong Kong, and what it all means for foreign businesses.
How Does China’s Taxation System Work?
In China, the national government sets tax rules, while local governments collect them. The State Taxation Administration (China’s equivalent of HMRC) oversees the system, while local tax bureaus handle the day-to-day admin: registrations, filings and collection. So while the headline rules are mostly the same everywhere, how they’re applied can vary slightly from city to city.
The taxes themselves fall into three broad buckets:
| Tax type | What it covers |
|---|---|
| People | Individual Income Tax (IIT) |
| Companies | Corporate Income Tax (CIT) |
| Goods and transactions | Value Added Tax (VAT) and related levies |
Your obligations depend on your residency, your entity type (WFOE, joint venture, representative office) and what your business does.
Business-Relevant Tax Categories
Of the 18 or so taxes China levies, most businesses only ever deal with a handful:
- Corporate Income Tax (CIT) is the big one. This is tax on your company’s profits, and every registered business in China pays it.
- Value Added Tax (VAT) is charged on sales of goods and services, much like U.K. VAT.
- Individual Income Tax (IIT) isn’t a company tax as such, but if you employ staff (or pay yourself a salary), you’ll be withholding this from wages every month.
Beyond those, there are situational taxes you may bump into depending on what you do: stamp duty on certain contracts, consumption tax on specific goods, customs duties if you import, and local surcharges that piggyback on your VAT bill.
What Are the Tax Rates in China?
Corporate Income Tax Rates
China’s Corporate Income Tax is 25%. But many businesses pay far less:
- Small and low-profit enterprises pay an effective rate of just 5% on annual taxable income up to 3 million yuan (roughly £330,000), under a preferential policy running to the end of 2027.
- Qualifying high-tech enterprises pay a reduced 15% rate, though you’ll need official certification, and it has to be renewed.
| Business Type | Rate |
|---|---|
| Standard rate | 25% |
| Small and low-profit enterprises (taxable income up to 3 million yuan) | 5% effective, confirmed until end of 2027 |
| High and New Technology Enterprises (HNTEs) | 15% |
| Encouraged businesses in certain regions (e.g. Hainan Free Trade Port) | 15% |
Vat Bands
VAT in China is charged at different rates depending on what’s being sold, not who’s selling it, so a single business offering both goods and services may need to apply more than one rate across its own invoicing. Many exports are zero-rated, which is a meaningful benefit for foreign businesses using China as a manufacturing or sourcing base to sell onward internationally.
| Rate | Applies to |
|---|---|
| 13% | Most goods |
| 9% | 5% effective, confirmed until end of 2027 |
| 6% | Consulting and other modern services |
| 0% | Most exports (zero-rated) |
Worth knowing: If your annual sales are under 5 million yuan, you’re likely a small-scale taxpayer rather than a general one. Small-scale taxpayers pay a flat simplified rate of 3% on turnover instead, with no input VAT deduction.
Individual Income Tax
China’s system is progressive: the more you earn, the higher the band, across seven brackets. It’s technically the employee’s tax bill, not the company’s, but as the employer you’re responsible for withholding it from wages each month and paying it over to the tax authorities.
The Differences Between China and Hong Kong’s Tax Systems
The Chinese mainland and Hong Kong run completely separate tax systems. Hong Kong’s system is generally simpler and lighter. That doesn’t automatically make it the right choice; where you should base yourself depends on where your customers, staff and operations actually are. But it’s a comparison worth understanding before you commit. Here’s how they differ.
| Chinese mainland | Hong Kong | |
|---|---|---|
| VAT | 13% / 9% / 6% bands | None |
| Capital gains tax | Applies in most cases | None |
| Corporate tax basis | Worldwide income | Territorial (Hong Kong-sourced only) |
| Profits tax rate | 25% standard, incentives vary | 8.25% / 16.5% two-tiered |
Fewer Categories
Hong Kong simply levies fewer types of tax. Several of the mainland’s staples don’t exist there at all. Most notably, there’s no VAT (or any sales tax) and no capital gains tax.
What does that mean in practice? Less compliance. Fewer registrations, fewer filings, fewer invoices to manage.
Simpler Rates
Hong Kong’s rate structure is also more straightforward. Its profits tax (the equivalent of corporate income tax) uses a simple two-tiered system: 8.25% on the first 2 million Hong Kong dollars of profits, and 16.5% on everything above. Compare that with the mainland’s standard 25% rate plus a patchwork of preferential rates, certifications and time-limited incentives.
On the mainland, the rates can be lower if you qualify, but working out whether you do takes more effort.
Worth knowing: If you have cross-border revenue, or export goods from the Chinese mainland, where your profit is “sourced” can change your tax bill significantly. Get professional advice before assuming either way.
Chinese Taxes on Foreign Businesses
If you set up a foreign-invested enterprise (a Chinese company with overseas owners), it’s treated as a Chinese tax resident, so it pays CIT on worldwide profits just like a local firm. If you don’t set up locally but still earn money from China, watch out for permanent establishment rules: enough activity on the ground, and China can tax you anyway.
Then there’s withholding tax. When money leaves China as dividends, royalties or interest, the Chinese payer must “withhold” 10% and hand it to the tax authorities before the rest reaches you.
| Payment type | Rate |
|---|---|
| Dividends | 10% |
| Royalties | 10% |
| Interest | 10% |
Double taxation agreements: China has treaties with over 100 countries, including the U.K., that can cut withholding rates (often to 5% on dividends) and stop you being taxed twice on the same income.
Chinese Taxation Support from Kinyu
If you’ve made it this far, you’ll have gathered that China’s tax system is navigable, but not something to wing. Rates, incentives and filing rules change regularly, they’re applied locally, and the penalties for getting it wrong are unforgiving.
That’s where Kinyu’s China Desk comes in. We help foreign businesses of every size get set up and stay compliant, including:
- Payroll solutions to handle IIT withholding, social insurance and monthly filings for your China-based staff.
- Employer of Record services so you can hire in China without setting up an entity, while we take on the compliance burden.
- Tax and compliance guidance, from choosing the right structure to claiming treaty benefits, in the Chinese mainland and Hong Kong alike.
Ready to make your China operation simple? Get in touch with the Kinyu team and we’ll help you work out exactly what you owe, where and how to keep it as painless as possible.
