China Tax

China tax for business: the essentials

China tax affects every stage of an investment, from the first capital injection to the final exit. The system is built around enterprise income tax at a standard 25% rate, value added tax (VAT) under a new VAT Law in force since 1 January 2026, individual income tax at progressive rates of up to 45%, and a set of property, transaction and local taxes. Withholding taxes apply to dividends, interest, royalties and gains paid to non-residents, and tax treaties, including the arrangement with Hong Kong, can reduce them.

The rules are made at several levels. The National People's Congress enacts the tax statutes; the State Council issues implementing regulations; and the Ministry of Finance (MOF) and the State Taxation Administration (STA) publish the announcements and circulars that set most practical detail, including time-limited incentives. Local tax bureaus apply the rules and, in practice, their approach matters. For foreign companies and Chinese groups going abroad, China tax planning also has to work with Hong Kong, US, EU and ASEAN rules and with international standards such as the OECD's transfer pricing guidelines.

The China tax landscape in 2026

The table below sets out headline rates and rules most relevant to foreign-invested enterprises and cross-border investors. Rates are general; specific incentives, treaty relief and transitional rules can change the outcome.

Recent developments to watch

VAT Law. The VAT Law, adopted in December 2024, took effect on 1 January 2026, and its implementing regulations were published at the end of December 2025 as State Council Decree No. 826. The law largely codifies the previous regime but clarifies taxable transactions, the treatment of mixed supplies and the scope of exemptions, and requires preferential policies to be published and periodically evaluated.

Reinvestment credit. Under MOF, STA and MOFCOM Announcement No. 2 of 2025, foreign investors who directly reinvest profits distributed by Chinese resident enterprises into encouraged industries between 1 January 2025 and 31 December 2028 can credit 10% of the amount against tax payable, provided the investment is held for at least five years. This sits alongside the earlier withholding tax deferral for reinvested profits.

Tax administration reform. A draft revision of the Tax Collection Administration Law was submitted to the NPC Standing Committee for first reading on 2 November 2026. Reported changes include a cap on late payment surcharges, removal of the requirement to pay disputed tax before administrative review and stronger protection of taxpayer information. The final text and timing are still to be settled.

Data-driven enforcement. The STA's digital systems, regulations requiring internet platforms to report tax information on platform sellers (State Council Decree No. 810 of 2025) and the exchange of financial account information under the Common Reporting Standard give tax bureaus more data than before. Recent enforcement has focused on overseas income of resident individuals, related-party transactions and incentive claims.

Offshore trusts. MOF and STA Announcement No. 21 of 2026, effective 24 July 2026, with STA Announcement No. 15 of 2026 on administration, introduced the first dedicated individual income tax rules for offshore trusts. A resident's transfer of assets into such a trust is taxed as a disposal at market value, trust income is taxed on the resident settlor annually whether or not distributed, and distributions to residents from trusts settled by non-residents are taxed as interest, dividend and bonus income. A 90-day transitional window for earlier years closed in October 2026.

Global minimum tax. The STA has published country-specific guidance for Chinese groups on minimum tax rules adopted abroad. Chinese groups with operations in the EU, the UK, Hong Kong and other implementing jurisdictions need to assess top-up tax exposure there even where domestic rules have not changed.

China tax issues across the investment lifecycle

Entry and structuring

Choosing between a wholly foreign-owned enterprise, a joint venture, a branch or a representative office affects tax exposure and administrative burden. The holding jurisdiction determines treaty rates on dividends and gains, but treaty access now depends on beneficial ownership and the principal purpose test introduced through the multilateral instrument. Hong Kong holding companies remain common, but they need real substance and decision-making to support treaty claims.

Operations

During operations, the main issues are transfer pricing for intra-group goods, services and royalties, VAT on cross-border services, permanent establishment risk for offshore staff, deductibility of service fees and the documentation needed to support incentives such as the R&D super-deduction and high and new technology enterprise status.

Transactions

Acquisitions, disposals and group reorganisations raise questions of special tax treatment, indirect transfer rules, land appreciation tax on property-rich targets and stamp duty. Due diligence on a target's historical compliance and appropriate indemnities are essential.

People

Expatriate staff, executive equity awards, high-net-worth families and offshore trusts each have specific rules. Since July 2026, residents who settle offshore trusts are taxed on settlement and on trust income each year, and enforcement on overseas income has increased, so family structures designed before these rules need review.

Exit and repatriation

Profit repatriation, capital reductions, liquidations and share sales each carry different tax costs. Planning ahead allows groups to use treaty rates, reinvestment incentives and restructuring reliefs where they are available.

Dividends can only be paid out of after-tax profits once statutory reserves have been set aside, and the remittance bank will ask for tax filing evidence before sending a payment of more than a set amount abroad. Capital reductions and liquidations can return capital without withholding tax, but the distribution of accumulated profits within a liquidation is taxed like a dividend. Sales of shares by a non-resident seller are subject to 10% withholding on the gain unless a treaty exemption applies, and the buyer is responsible for withholding.

Incentives worth knowing

Chinese tax incentives are mostly targeted at technology, manufacturing, small businesses and specific regions. The most widely used include:

• High and new technology enterprise status, which brings a 15% EIT rate for companies that meet requirements on core intellectual property, R&D spending, technical staff and revenue from qualifying products or services.
• The R&D super-deduction, which allows qualifying R&D expenses to be deducted at 200% of the actual amount, or amortised at 200% when capitalised as intangible assets, under rules made permanent in 2023.
• Small low-profit enterprise relief, with an effective 5% rate on taxable income of up to RMB 3 million for qualifying businesses, currently until 31 December 2027.
• Regional incentives, including 15% rates for encouraged industries in the Hainan Free Trade Port, parts of the western region and certain zones such as Qianhai in Shenzhen and Hengqin in Zhuhai, each with its own catalogue and substance requirements.
• Reinvestment incentives for foreign investors: the withholding tax deferral for profits reinvested in China and the 10% reinvestment credit for 2025 to 2028.

Incentives are rarely automatic. Most require self-assessment, a retained documentation file and, in some cases, prior recognition. Tax bureaus review them after the event, so the evidence must be gathered as the activity happens.

The annual compliance cycle

Deadlines move when they fall on public holidays, and the tax bureau publishes an annual filing calendar. Groups with several Chinese entities often centralise filings in a shared service centre while keeping each entity's records locally available for inspection.

Our China tax services

Our China tax practice is organised around eleven areas. Each page below explains the rules in more detail and how we help.

• Tax advisory and planning: holding structures, treaty access, incentives, profit repatriation and supply chain design for inbound and outbound groups.
• M&A and restructuring tax: special tax treatment for reorganisations, transaction structuring, step plans and reliefs from land appreciation tax and deed tax.
• Indirect transfers and non-resident tax: offshore disposals of Chinese assets, withholding obligations and treaty relief for non-resident investors.
• Transfer pricing: related-party pricing, contemporaneous documentation, advance pricing arrangements and mutual agreement procedures.
• Tax disputes: tax inspections, audits, administrative review and litigation strategy, coordinated with licensed PRC counsel.
• Tax due diligence: identifying historical exposures in targets and translating findings into price, indemnity and insurance terms.
• IPO and financing tax: pre-listing reorganisations, shareholder tax compliance and tax aspects of debt and equity financing.
• Real estate tax: land appreciation tax, deed tax, property tax and structuring for property acquisitions and disposals.
• Individual income tax and executive incentives: expatriate tax, equity awards and executive remuneration.
• Private client tax: tax residence, overseas income reporting and wealth planning for families.
• Offshore trusts and individual income tax: the 2026 rules taxing settlement, annual trust income and distributions to resident beneficiaries.

Cross-border perspective: Hong Kong, the US, the EU and ASEAN

Most Chinese tax questions we see have a second jurisdiction attached. For inbound investors, the question is how Chinese withholding, indirect transfer and permanent establishment rules interact with the investor's home tax system, foreign tax credit rules and controlled foreign company regimes. For Chinese groups going abroad, the question is how outbound structures, often through Hong Kong or Singapore, will be taxed in China under controlled foreign company and residence rules, and how they fare under destination-country rules such as interest limitation, anti-hybrid rules and the global minimum tax.

Hong Kong deserves special mention. The mainland-Hong Kong arrangement offers reduced withholding rates and capital gains protection in some cases, and Hong Kong's territorial system is attractive for regional holding and treasury functions. But treaty benefits depend on beneficial ownership and substance, and the STA's beneficial owner rules look closely at conduit companies. The same scrutiny applies to holding companies in Singapore, the Netherlands and other treaty jurisdictions.

For US investors, interactions between Chinese tax and US rules on foreign tax credits, GILTI-style regimes and check-the-box elections need joint planning. EU groups face their own controlled foreign company rules, Pillar Two and public country-by-country reporting. ASEAN supply chains raise questions about China-ASEAN trade agreements, VAT on exports and the location of procurement and principal functions.

Outbound Chinese groups face a further layer. Chinese resident enterprises are taxed on worldwide income, with credits for foreign tax under detailed limitation rules, and China's controlled foreign company rules can attribute undistributed profits of low-taxed foreign subsidiaries. Outbound investment also needs filings with the NDRC, MOFCOM and SAFE, and the tax structure must be consistent with what those filings describe. A structure that saves tax abroad but cannot be reconciled with Chinese filings creates a compliance gap that tends to surface on exit or on a later inspection.

Common China tax pitfalls for foreign investors

1. Relying on treaty rates without substance. Holding companies with no staff or decision-making face beneficial ownership challenges.
2. Service fees without support. Management and service fees paid offshore are often challenged unless benefits are documented and pricing is supported.
3. Overlooking indirect transfer reporting. Offshore sellers sometimes forget that selling a holding company can be taxable in China.
4. Incentives without files. Incentive claims without contemporaneous evidence are reversed on inspection, often with late payment surcharges.
5. Expatriate tax drift. Days in China, home-country payroll and equity awards create IIT obligations that are easy to miss.
6. Late repatriation planning. Accumulated profits and trapped cash are more expensive to extract once a business is winding down.

Each of these can be managed with a regular review that compares the group's actual operations with its documentation. Tax bureaus increasingly use data analytics to select cases, so consistency between filings, contracts, invoices and financial statements is itself a form of protection.

How we work on China tax matters

A China tax project usually follows four stages. First, we map facts: the group structure, cash flows, contracts and the commercial objective. Second, we identify the Chinese rules and the rules of other relevant jurisdictions, using official sources such as the State Taxation Administration, the Ministry of Finance and the national law database. Third, we compare options with modelled outcomes, including cash tax, compliance cost and risk. Fourth, we document the chosen approach and plan implementation, including filings and the evidence needed to defend it.

A simple example: a European manufacturer holds its Suzhou subsidiary through a Hong Kong company with no staff and wants to repatriate several years of retained profits while expanding a second plant. Mapping the facts shows that the 5% treaty rate may be hard to defend, but that reinvesting part of the profits into the new plant, if the project falls within the encouraged catalogue, could qualify for withholding deferral and the 10% reinvestment credit. The remaining profits could be paid as dividends after the Hong Kong company's role is strengthened or the holding structure is simplified. Each option is then costed for tax, timing and risk.

Throughout, we coordinate with accountants, auditors and licensed PRC tax and legal advisers. Where a PRC legal opinion, a filing with the tax bureau, a ruling application or representation in a dispute is needed, it is provided by licensed PRC professionals, and we manage the work so that the Chinese and offshore elements fit together.

How TRW & Co helps

From our Shenzhen office, we help multinational groups, investors, founders and families understand China tax and design structures that work across borders. We advise on Hong Kong, international and other non-PRC law aspects, provide information on the Chinese tax environment, build and compare structuring options, negotiate tax provisions in transaction documents and manage multi-jurisdiction projects. Where PRC tax opinions, filings, rulings or representation before tax authorities and courts are needed, we work with licensed PRC law firms and tax advisers and coordinate the full workstream. Related areas include fund tax structuring and reinvestment incentives. To discuss a China tax question, contact us.