Taxpayers Classification in China
For those who want to establish a company in China, one of the factors to keep in mind concerns the level of taxation and the taxpayers classification that the Chinese regulator puts in place.
With this guide we wanted to clarify the basic aspects of the taxpayers classification in China so that foreign investors willing to enter the market know what to expect.
Simply put, the Chinese Tax Bureau classifies foreign companies according to different thresholds and identifies two types of taxpayers, Small-Scale Taxpayers and Ordinary Taxpayers. The fact of belonging to one or the other of these classes represents a discriminating factor for the application of different levels of taxation and it is therefore important to fully understand the difference between the two classes and the tax liabilities envisaged for each of them.
In general, all the companies with an annual turnover of less than RMB 5 million are classified as a Small-Scale Taxpayers, while those with a higher annual revenue fall in the General Taxpayers class.
Main difference between Small-Scale Taxpayers and General Taxpayers in China
For a company operating in China, the main difference of belonging to the category of Small-Scale Taxpayers or to that of General Taxpayers, concerns the payment of VAT.
In fact, all companies in China are subject to the payment of the Value Added Tax (VAT) based on their taxable revenue. The actual amount of the payment varies according to belonging to one of the two categories mentioned above.
Small-Scale Taxpayers
A Small-Scale Taxpayer in China is subject to a uniform VAT rate of 3% of their total revenue. Although the amount of VAT imposed is low, small taxpayers cannot issue VAT invoices and cannot credit input VAT, nor do they have the right to VAT export exemptions and refunds.
Small-Scale Taxpayers cannot issue special VAT invoices, but can only issue ordinary invoices: if they need to issue special VAT invoices, they have to first ask for a permit from the tax agency (unless they operate in certain sectors). They are required to pay their taxes quarterly.
Lastly, as every company in China, Small-Scale Taxpayers are also subject to an Income Tx of 25% of their net profit.
General Taxpayers
The payment of VAT for General Taxpayers is variable and is regulated by different rates for the various industries.
Companies selling or importing goods (except for some special listed goods) or providing processing or repair services are subject to a 13% of VAT.
For companies in the real estate sector or providing basic construction, transportation, postal or telecommunication services, or selling special products, the VAT is 9%.
If a business provides modern services such as IT, cultural or creative services, financial services or other value-added telecommunication services or other life services, the imposed VAT is 6%.
General Taxpayers can credit input VAT and can apply for VAT export exemptions and refunds. In addition, they can choose to issue ordinary or special VAT invoices, and must pay taxes monthly.
They are also required to pay a 25% income tax of the net profit.
Possibility of Choice
As mentioned above, the system automatically divides companies into the two contribution classes according to their annual taxable income (i.e. whether it is more or less than RMB 5 million). However, there is also the possibility for companies with an annual income below the required ceiling and for those that have established their activity recently, to voluntarily apply to be considered as General Taxpayers as long as they are able to provide their accounting in order, valid and legitimate.
Therefore, if your business needs special VAT invoices and your suppliers or service providers can issue you special VAT invoices, it would be good to apply to be considered a General Taxpayer. Same applies if the company is focused on export and want to claim a VAT refund.
But, if your customers and suppliers do not need special VAT invoices, or if they are not so inclined to provide them, then you should choose to remain a Small-Scale Taxpayer.
If you would like to learn more about this or other topics related to taxation for companies in China, you can refer to the official website of the State Taxation Administration which can be reached at this link.
Also, you can feel free to contact us directly to learn more about this or other issues related to how to do business in China: send us an email at the address

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