Companies Doing Business in China Get Two New Taxes in 2011 Page 1 of 1
Companies Doing Business in China Get Two New
Taxes in 2011
By Dr. Shan Nair Published: 2011-01-06
Happy New Year! Or, in the case of a large number of foreign companies with operations in China, perhaps the New
Year may not be so cheery.
Many foreign companies with operations in China will be hit with two new surtaxes that will affect their tax filings
starting in January 2011.
Foreign enterprises, foreign invested enterprises, and foreign individuals in China must now pay the Urban
Construction and Maintenance Tax as well as an Education Surcharge. Traditionally these taxes were only imposed on
domestic enterprises and Chinese individuals with foreign enterprises, but now all tax payers of China's indirect taxes
The surtax is calculated as a percentage of the actual amount of the Value Added Tax (VAT), the consumption tax and
the business tax paid by the taxpayers.
While the Education Surcharge is 3 percent across the board, the rate for the Urban Construction and Maintenance Tax
varies by location. In city areas like Shanghai and Beijing, the rate is 7 percent, while in county and township areas the
rate is 5 percent, and in other, less populated areas the rate is as low as 1 percent. According to the principle of tax
burden sharing, those who benefit, pay; those who benefit more, pay more.
The two surtaxes will increase the cost of doing business in China or with China. For example, a foreign enterprise
providing consulting services to a Chinese enterprise in Shanghai, will need to pay a business tax of 5 percent of the
service fee as well as an additional surcharge of 0.5% of the service fee [5% x (7% + 3%)].
The 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. It was just two years ago that China unified its enterprise
income tax law for the first time.
Foreign companies need to prepare to for the tax increase and review the effect on their business plans. These two
surcharges should start to apply to the tax filing of Foreign Invested Enterprises conducted in the month of January
2011, i.e. for transactions of December 2010 and not to the filing conducted in December 2010 for November 2010.
Shan Nair is Co-Founder and CEO of Nair & Co., a company that helps businesses expand internationally.
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