China’s Taxation Landscape: A Guide for Businesses

China’s Taxation Landscape: A Guide for Businesses

As a business operating in China, navigating the complex and evolving tax landscape can be a daunting task. With new regulations and incentives introduced regularly, it’s essential to stay up-to-date on the latest developments to ensure compliance and maximize opportunities.

Key Tax Developments for Businesses

• China introduced a new tax credit incentive to encourage overseas investors to reinvest their profits earned in the country.
• Clarifications were issued on the financial treatment of certain items under the newly implemented Company Law.
• The individual income tax (IIT) subsidy program for foreign talents in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) was officially launched in Shenzhen on June 1, 2025.
• Platform enterprises now face new reporting obligations and updated rules for tax declarations.
• Companies may apply a super pre-tax deduction for their first-half R&D expenses during the July tax filing period.

Tax Credit Incentive for Reinvested Profits by Foreign Investors

To promote long-term foreign investment in China, the Ministry of Finance, State Taxation Administration, and Ministry of Commerce jointly issued Announcement No. 2 of 2025, introducing a tax credit policy for foreign investors who reinvest profits earned from Chinese enterprises. Effective from January 1, 2025, through December 31, 2028, the policy allows eligible foreign investors to claim tax credits when profits distributed by domestic enterprises are reinvested into encouraged projects or enterprises within China.

Eligibility Conditions

• Source of funds: The reinvested profit must be actual dividends or equity income distributed by a domestic enterprise.
• Forms of investment: Includes capital increase, establishment of new enterprises, or equity acquisition from unrelated parties (excluding listed company shares, except strategic investment).
• Industry scope: The investee enterprise must fall within the Catalogue of Industries Encouraged for Foreign Investment.
• Holding period: The reinvestment must be held continuously for at least five years (60 months); early withdrawal triggers tax repayment.
• Fund flow: Profits must be transferred directly to the investee enterprise or equity transferor, without routing through third parties.

Implications for Businesses

The new tax credit policy for reinvested profits offers significant planning opportunities for foreign investors operating in China:

• Reduced tax burden and improved capital efficiency: Qualified reinvestments can lower overall tax liability by allowing foreign investors to offset corporate income tax, thereby improving the effective use of retained earnings.
• Stronger incentives for long-term investment: The requirement to hold reinvested equity for at least five years encourages stable, strategic investment planning and supports foreign companies in strengthening their onshore footprint.
• Compliance with fund flow and approval procedures is critical: To enjoy the tax benefit, companies must ensure that the distribution of profits and reinvestment paths are in strict compliance with regulatory requirements.
• Industry planning is essential: Only reinvestments into businesses listed in the Encouraged Catalogue qualify for the incentive. Enterprises should evaluate whether their reinvestment targets fall within these encouraged sectors.

Financial Reporting Issues Clarified for the Implementation of the New Company Law

On June 9, 2025, the Ministry of Finance issued Cai Zi [2025] No. 101, providing guidance on financial treatment issues arising from the implementation of the revised Company Law (effective July 1, 2024) and the Foreign Investment Law (effective January 1, 2020). Key financial treatment issues clarified include:

• Use of capital and surplus reserves to offset losses
• Loss coverage order and limits
• Corporate governance procedure
• Disclosure and creditor notification

Implications for Businesses

The new guidance clarifies transitional treatment of reserves and capital injections and brings financial reporting practices in line with the updated corporate governance framework:

• Enterprises, particularly those with foreign investments, are advised to review their accounting policies, board procedures, and shareholder disclosures to ensure compliance.
• Businesses should stay up-to-date on the latest regulations and updates to ensure accurate financial reporting and minimize potential risks.

GBA IIT Subsidy Launch in Shenzhen

Foreign professionals working in Shenzhen may once again benefit from a generous tax incentive under the GBA IIT Subsidy:

• The Shenzhen government has released detailed guidelines for applying for the IIT subsidy for the 2024 tax year, with the application window running from June 1 to July 31, 2025.
• The subsidy allows eligible overseas high-end and in-demand talent to receive a financial rebate for the portion of their IIT exceeding 15 percent of their taxable income.
• The maximum annual subsidy is RMB 5 million (US$690,000) and the amount exempt from further IIT.

Implications for Businesses

The GBA IIT subsidy provides a significant tax benefit for foreign professionals working in Shenzhen:

• Eligible overseas high-end and in-demand talent can receive a financial rebate for the portion of their IIT exceeding 15 percent of their taxable income.
• The maximum annual subsidy is RMB 5 million (US$690,000) and the amount exempt from further IIT.
• Businesses should encourage their employees to apply for the subsidy to reduce their tax burden.

New Reporting Requirements for Internet Platform Enterprises

On June 20, 2025, the Administrative Measures for Tax-Related Information Reporting by Internet Platform Enterprises were officially issued and came into effect under State Council Decree No. 810:

• Covered entities include not only e-commerce platform operators but also other profit-oriented legal or unincorporated organizations that provide online business venues, transaction matching, or information publishing services in support of digital economic activities.
• Internet Platform Tax Information Reporting Obligations Category Description Scope of information reporting Required reporting includes:
• Platform domain name, business type, and operator’s unified social credit code (to be filed within 30 days of the rule taking effect or starting internet operations); and
• Quarterly reporting: identity and income information of operators and workers (to be submitted in the month following the end of each quarter).
• Exemptions:
• Workers engaged in convenience services (e.g., delivery, transportation, domestic help) who enjoy preferential tax treatment; and
• Information already submitted via withholding or proxy filings.
• Requirement on data quality:
• Platforms must verify the authenticity, accuracy, and completeness of submitted data; and
• Platforms are not liable for incorrect data caused by operator or worker misconduct.
• Tax audit cooperation:
• Platforms must provide requested tax-related information, such as contracts, transaction records, payment accounts, and logistics details truthfully, in the format and timeline specified by tax authorities.
• Incompliance:
• Failure to report within the required timeframe;
• Concealment, false reporting, underreporting, or inaccurate/incomplete data due to platform fault; and
• Refusal to provide information.
• Penalties:
• Fines ranging from RMB 20,000 to RMB 100,000; and
• In serious cases, platforms may be ordered to suspend operations and fined between RMB 100,000 and RMB 500,000.

Implications for Businesses

The new reporting requirements set high expectations for digital tax governance:

• Enterprises should proactively assess and prepare for the new compliance requirements:
• Integrate tax compliance into business operations: Design transaction flows and settlement models with reporting obligations in mind to minimize future correction costs.
• Invest in IT system upgrades: Automate data collection and aggregation to ensure reporting accuracy and timeliness.
• Build internal tax teams or engage qualified service providers: Establish dedicated tax reporting functions or partner with third-party advisors for compliance support.
• Ensure “three-stream consistency”: Align transaction flow, cash flow, and invoice flow to withstand future audits.
• Prepare for the first quarterly submission in October 2025: Complete system testing and data validation by late September. Prioritize historical data cleaning, interface development, and staff training.

New Rules for Tax Declaration on Behalf of Platform Workers

On June 26, 2025, the State Taxation Administration issued the STA Announcement [2025] No. 16, introducing detailed procedures for internet platform enterprises handling individual income tax (IIT) withholding and value-added tax (VAT) proxy filing on behalf of their platform-based workers:

• Platform enterprises must withhold and prepay IIT for workers providing labor services (e.g., live streaming, tutoring, medical care, delivery, consulting, etc.).
• The withholding formula is: Tax payable = [Cumulative income − (Cumulative income × 20%) − Exempt income − Basic deduction (RMB 5,000/month) − Other deductions] × Tax rate − Quick deduction − Tax relief − Previously prepaid tax.
• Execution: Follows the cumulative withholding method under 2018 Announcement No. 61.
• VAT declaration: Exemption policy: Small-scale taxpayers with monthly revenue ≤ RMB 100,000 are exempt from VAT; otherwise, a reduced 1% rate applies (down from 3%).
• Self-filing threshold: Workers with revenue > RMB 5 million in 12 consecutive months must register as a business and self-file VAT.
• Proxy filing: Real-name verification and written authorization required; declarations due by the 15th of the month following income; and if multiple platforms are involved, submit a Summary Proxy Filing Form.
• CIT deductibility: To deduct labor payments to workers from taxable income: Keep IIT withholding forms and payment receipts; keep VAT proxy filing forms and payment receipts; and retain supporting documents proving transaction authenticity (e.g., service contracts, payment records).
• Risk warning: Labor costs may not be deductible without sufficient documentation verifying the authenticity of the service.

Implications for Businesses

The new rules for tax declaration on behalf of platform workers offer lower IIT burden for workers through cumulative withholding:

• Lower IIT burden for workers through cumulative withholding: The shift from a flat 20–40 percent withholding rate on single transactions to a cumulative method allows workers to apply the RMB 5,000 monthly deduction and enjoy progressive rates (3–45 percent), reducing upfront tax pressure.
• Stricter VAT compliance and data segmentation: Platforms must accurately report revenue by source and platform. Refund errors within the same month can be corrected by the platform; errors from past periods require the worker to initiate correction.
• Refund handling must match original transactions: Where simplified tax calculation is applied, rebates or returns must be deducted from current taxable revenue. Excess tax from returns may be carried forward to offset future tax liabilities. Refunds must be traceable to original transactions.
• Enhanced data reporting and record-keeping obligations: Platforms should ensure the authenticity and completeness of original data. Previously reported information does not need to be duplicated. Also, a platform enterprise should keep a record of real-name verifications, transaction logs, settlement documents, and tax filing history.

Advanced Manufacturing VAT Super Deduction Policy

On May 2025, the Ministry of Industry and Information Technology, MOF, and STA jointly released a notice clarifying the eligibility and application procedures for the VAT super deduction policy for advanced manufacturing enterprises in 2025:

• The policy supports technological innovation and manufacturing development, targeting general VAT taxpayers recognized as high-tech enterprises whose manufacturing business accounts for over 50 percent of total sales and who meet R&D investment thresholds.
• Applicants must have a clean tax compliance record.
• Application process: Enterprises must apply via the High and New Technology Enterprise Certification Management System.
• Eligibility period: Valid until the end of the enterprise’s high-tech qualification, up to April 30, 2026.
• Filing structure: Parent companies must apply on behalf of their branches, but both must independently meet the manufacturing criteria.

Implications for Businesses

The VAT super deduction policy for advanced manufacturing enterprises offers significant benefits for high-tech companies:

• Eligible enterprises can enjoy a VAT super deduction for up to 50% of their VAT payable on eligible expenses.
• Applicants must meet specific criteria, including high-tech enterprise status and R&D investment thresholds.
• Businesses should review their qualification status, prepare timely submissions, and ensure internal compliance to maximize policy benefits and minimize risks.

Enhanced Tax Scrutiny on the Medical Procurement Sector

In 2025, tax authorities are intensifying regulatory oversight over the healthcare procurement sector, focusing on full-chain, transparent monitoring:

• Verifying invoice authenticity and business legitimacy in drug, high-value consumable, and equipment procurement;
• Detecting issuance or acceptance of fraudulent invoices;
• Strengthening “four-flow comparison” (invoice, capital, logistics, and contract consistency) through inter-departmental data sharing;
• Cross-checking declared revenue with public medical insurance procurement prices to detect inflated costs or hidden income;
• Leveraging digital tools such as electronic invoicing and traceability codes to enhance compliance enforcement;
• Applying a blacklist system for violators and enforcing joint penalties to raise the cost of non-compliance.

Implications for Businesses

The enhanced tax scrutiny on the medical procurement sector requires healthcare companies to review their procurement practices, validate documentation, and ensure strict alignment with tax and compliance obligations:

• Healthcare companies should review procurement practices, validate documentation, and ensure strict alignment with tax and compliance obligations.
• The use of electronic invoicing and traceability codes can enhance compliance enforcement.
• The application of a blacklist system for violators and joint penalties can raise the cost of non-compliance.

About Us

Dezan Shira & Associates assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Haikou, Zhongshan, Shenzhen, and Hong Kong. We also have offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Dubai (UAE) and partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh, and Australia. For assistance in China, please contact the firm at china@dezshira.com or visit our website at www.dezshira.com.

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