Keywords: foreign enterprises, domestic
enterprises, construction tax, VAT
The unification of China's tax system for foreign invested
enterprises, foreign enterprises and domestic enterprises has gone
a step further. Commencing from 1 December 2010, foreign
enterprises, foreign invested enterprises and foreign individuals
will begin to pay city construction tax and education
City construction tax and education surcharge are two types of
surtaxes, levied on taxpayers who pay value-added tax
("VAT"), consumption tax and business tax. Specifically,
each surtax is calculated as a percentage of the actual amount of
the VAT, consumption tax and business tax paid by the taxpayers.
The rate for education surcharge is 3%. Depending on the location,
the rates for city construction tax differ:
In city areas, the rate is 7%,
In county and township areas, the rate is 5%,
In other areas, the rate is 1%.
Since their introduction in 1985 and 1986 respectively, the two
surtaxes have been imposed on domestic enterprises and Chinese
individuals. However, foreign enterprises, foreign invested
enterprises and foreign individuals have been exempted from these
two surtaxes. This recent change in law is another effort by the
Chinese government to put domestic enterprises on an equal footing
with foreign enterprises and foreign invested enterprises. In 2008,
China unified its enterprise income tax law for the first time.
The two surtaxes will increase the tax cost of doing business in
China or with China. For instance, assuming a city construction tax
rate of 7%, a foreign enterprise providing consulting services to a
Chinese enterprise will need to pay a business tax of 5% of the
service fee as well as an additional surcharge of 0.5% of the
service fee [5% x (7% +3%)].
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
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