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Corporate taxes and company's liquidation in China

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Taxes on companies in China

Corporate Income Tax, Value-Added Tax, Withholding Tax.

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Tax compliance requirements

Monthly and annual tax obligations, other requirements and penalties

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Company’s liquidation procedures

The liquidation of a company is a complex process governed by the Company Law

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Taxes on companies in China

China imposes several types of taxes on companies, with Corporate Income Tax (CIT) being the most significant. Chinese tax system is governed by the State Taxation Administration (STA) and local tax bureaus.


The taxes on companies are:

  • Corporate Income Tax (CIT): 25% standard rate.

  • Value-Added Tax (VAT): Ranges from 6% to 13% depending on goods/services.

  • Withholding Tax: 10% on dividends, royalties, and interest paid to non-residents.

  • Other Taxes: environmental protection tax, stamp duty, etc.

 

Corporate Income Tax (CIT)

  • Standard Rate:

    • 25% on worldwide income for resident companies.

  • Reduced Rates:

    • 15% for qualified high-tech enterprises.

    • 5% for small and low-profit enterprises.

  • Taxable Income:

    • Calculated as total revenue minus allowable deductions, losses, and exemptions.

    • Common deductions include operating expenses, wages, depreciation, and interest payments.

 

Value-Added Tax (VAT)

  • Overview:

    • Applied to the sale of goods and services.

  • Rates:

    • 13% for general goods, 9% for certain goods/services, 6% for modern services.

  • Filing:

    • Monthly or quarterly filing depending on the size of the business.

    • Input VAT can be credited against output VAT.

 

Withholding Tax

  • Applicability:

    • Levied on non-resident companies earning income from China.

  • Rate:

    • 10% standard rate, can be reduced under Double Taxation Agreements (DTAs).

  • Types of Income:

    • Dividends, royalties, interest, and capital gains.

 

Tax compliance requirements

 

Main Tax Obligations During the Financial Year

a. Monthly/Quarterly Tax Filings

  • Corporate Income Tax (CIT) Advance Payments:

    • Based on quarterly profit estimates, with a final reconciliation at year-end.

  • VAT and Additional Taxes:

    • Monthly or quarterly returns must be filed.

  • Withholding Tax Returns:

    • Filed when payments subject to withholding tax are made.

b. Annual Tax Return and Final Settlement

  • Annual CIT Return:

    • Must be filed by May 31st of the following year.

    • Reconciliation of quarterly payments with actual income and expenses.

  • Annual VAT Return:

    • A summary of the monthly/quarterly filings for the year.

  • Statutory Audit Requirement:

    • Required for all Foreign-Invested Enterprises (FIEs) and large enterprises.

    • Audit reports must be completed by April 30th.

 

Additional Compliance Requirements

a. Transfer Pricing Documentation

  • Requirement:

    • Companies with cross-border transactions must prepare documentation justifying pricing policies.

  • Documentation Deadline:

    • Submitted with the annual CIT return if requested by the tax authorities.

b. Tax Residency Certificate

  • Purpose:

    • Obtain for DTAs benefits and avoid double taxation.

  • Application:

    • Required for Chinese companies seeking tax benefits abroad.

c. Local Compliance

  • Environmental Taxes:

    • Applicable based on pollution levels.

  • Social Security Contributions:

    • Companies must contribute to employee social security funds monthly.

 

Penalties and Non-Compliance

  • Late Filing Penalties:

    • Fines and interest on unpaid taxes.

  • Audit and Investigations:

    • Tax authorities may conduct audits; penalties for underpayment or evasion can be severe.

  • Criminal Liability:

    • Severe cases of tax evasion can lead to criminal charges.

  •  

 

 

Company’s liquidation procedures

 

The dissolution and liquidation of a company in China is a complex process governed by the Company Law of the People’s Republic of China, the Enterprise Bankruptcy Law, and other relevant regulations. The process involves several stages, including decision-making, filing with authorities, debt settlement, asset distribution, and deregistration.

 

Reasons for Company Dissolution

A company in China can be dissolved for various reasons, including:

  • Voluntary Dissolution: Initiated by the shareholders when the company has fulfilled its business purpose, the shareholders decide to cease operations, or the duration of the company as stipulated in the Articles of Association has expired.

  • Mandatory Dissolution: Ordered by the authorities due to serious violations of law, revocation of the business license, or if the company is unable to continue operations due to financial or legal issues.

  • Merger or Split: The company is dissolved due to a merger with another entity or a split into multiple entities.

  • Bankruptcy: The company is unable to pay its debts and is declared bankrupt by a court.

 

Decision-Making and Initial Procedures

  1. Shareholders’ Resolution:

    • Voluntary Dissolution: A resolution must be passed by the shareholders’ meeting. This typically requires a two-thirds majority vote unless the Articles of Association specify a different requirement.

    • Documentation: The resolution must clearly state the reasons for dissolution and appoint members of the liquidation committee.

  2. Liquidation Committee Formation:

    • Appointment: Upon deciding to dissolve the company, the shareholders must form a liquidation committee within 15 days. The committee is usually composed of shareholders, directors, or other appointed individuals.

    • Role of the Liquidation Committee: The committee is responsible for managing the liquidation process, including asset valuation, debt settlement, and distribution of remaining assets.

  3. Public Announcement:

    • The company must publish a public announcement in a newspaper recognized by the local Administration for Market Regulation (AMR) within 60 days of the decision to dissolve. This announcement informs creditors of the dissolution and instructs them to declare their claims within a specified period (usually 45 days).

 

Liquidation Process

  1. Asset Inventory and Valuation:

    • The liquidation committee is responsible for preparing an inventory of the company’s assets, liabilities, and contracts. This includes a detailed valuation of all assets.

    • The committee must also notify known creditors in writing about the dissolution and invite them to file claims.

  2. Debt Settlement:

    • Priority of Payments: The company’s debts are settled in the following order:

      1. Liquidation Expenses: Costs related to the liquidation process, including legal and administrative fees.

      2. Employee Wages and Social Security: Outstanding salaries, benefits, and social insurance contributions.

      3. Taxes: Unpaid taxes and related penalties.

      4. Secured and Unsecured Creditors: Any remaining funds are used to settle debts with secured creditors first, followed by unsecured creditors.

    • Negotiations: The liquidation committee may negotiate with creditors to settle debts, including reaching agreements for partial payment or debt forgiveness.

  3. Asset Disposal:

    • Sale of Assets: The liquidation committee may sell off the company’s assets to raise funds for debt repayment. The sale of assets must be conducted in a fair and transparent manner.

    • Distribution of Remaining Assets: After settling all debts, any remaining assets are distributed among the shareholders according to the Articles of Association or proportionate to their capital contributions.

 

Deregistration and Filing with Authorities

  1. Final Liquidation Report:

    • After completing the liquidation process, the liquidation committee must prepare a final liquidation report, which includes detailed accounts of the liquidation activities, asset distribution, and debt settlement.

    • The report must be approved by the shareholders or the court (in case of bankruptcy) before proceeding with deregistration.

  2. Tax Clearance:

    • The company must undergo a tax audit conducted by the local tax bureau. The audit ensures that all taxes have been settled, and no liabilities remain.

    • Upon completion of the audit, the company receives a tax clearance certificate, which is required for deregistration.

  3. Deregistration with the Administration for Market Regulation (AMR):

    • Application: The liquidation committee submits an application for deregistration to the AMR, along with the final liquidation report, tax clearance certificate, and other required documents.

    • Review and Approval: The AMR reviews the application and, if satisfied, approves the deregistration, effectively terminating the company’s legal existence.

    • Cancellation of Seals: The company must return and cancel all official company seals (chops) with the Public Security Bureau.

  4. Cancellation of Bank Accounts and Licenses:

    • The company must close all corporate bank accounts and cancel any special licenses, permits, or registrations obtained during its operation.

    • The company must also deregister with the Social Insurance Bureau, Customs, SAFE (State Administration of Foreign Exchange), and other relevant authorities.

 

Bankruptcy Liquidation (if applicable)

If a company is insolvent and cannot repay its debts, it may enter into bankruptcy proceedings:

  • Filing for Bankruptcy: The company or creditors can file a petition for bankruptcy with the local People’s Court.

  • Court Appointment of a Liquidator: The court appoints a liquidator to manage the bankruptcy liquidation, which follows similar procedures as voluntary liquidation but under the supervision of the court.

  • Creditor Meetings: Creditors are invited to meetings to discuss and approve the liquidation plan.

 

Legal and Compliance Considerations

  1. Liability of the Liquidation Committee:

    • Members of the liquidation committee have a fiduciary duty to act in the best interest of the company and its creditors. Failure to do so may result in personal liability.

    • If the liquidation committee fails to perform its duties, creditors or interested parties can request the court to intervene.

  2. Statutory Time Limits:

    • The entire dissolution and liquidation process should be completed within a reasonable timeframe. Delays or negligence can result in fines or other legal consequences.

  3. Legal Challenges and Disputes:

    • Creditors or shareholders may challenge the actions of the liquidation committee if they believe the process was not conducted fairly or legally. Disputes may be resolved through negotiation, arbitration, or litigation.

 

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