Legal address (virtual):

• Registration of a company to a legal address is not possible in all cities of China (possible in Shanghai, not possible in Shenzhen, Guangzhou);
• Low cost, payment only when buying an address;
• There are risks associated with high monetary and visa activity. When checking the migration service, bank, tax – problems may arise;
• To open a bank account, you still need to provide a contract for the lease of a real office. Bank employees visit the office during the account opening procedure.

A physical address is required when the company passes inspections by the relevant authorities:

• Opening a company account in a bank (checked by a bank employee);
• The PRC Tax Service;
• The Migration Service of the PRC;
• The police.

The registration address can be changed at any time. You can start by registering a company at a legal address, and change it to a physical address when needed.

• The authorized capital does not have to be deposited immediately;
• The authorized capital must be paid within 30 years from the date of registration of the company;
• In case of a lawsuit against the company, the court has the right to fine the company in an amount not exceeding the amount of the authorized capital;
• The recommended amount is not less than 1 million RMB and above (with the amount of the authorized capital of less than 1 million RMB, the company will face restrictions on opening invoices (fapiao) and the inability to acquire a legal address in most areas);
• In the future, you can change the amount of the authorized capital as well as the business scopes;
• For companies with 100% foreign capital (WFOE) there are some prohibited business scopes.

VAT (Value Added Tax)

VAT Difference Between Regular (一般 纳税人) and Small (小规模) Taxpayers：

1. VAT percentage:

• Regular Taxpayer has 4 levels of taxation: 13%, 9%, 6%, 0%.
• Small Taxpayer has a tax rate of 3% (at the moment, due to the pandemic, it has been reduced to 1%).

2. Method of calculating the tax base:

• Regular Taxpayer VAT is calculated using the formula:

Amount of accrued VAT – Amount of input VAT – Amount of tax relief

= Amount to pay VAT.

• Small Taxpayer VAT is calculated using the formula:

Income * Tax rate (3% / 1%).

3. Invoice differences (fapiao with value added tax):

• Regular taxpayer can open both a Special VAT invoice (special fapiao) and a regular value added invoice (regular fapiao), and can also open VAT invoices at four tax rate levels. Along with this, the recipient of the fapiao can deduct the amount of the input VAT at a 13% – 6% rate.
• Small taxpayer can only open a regular invoice (fapiao), and a fapiao recipient cannot deduct the amount of input VAT. If a Small Taxpayer wants to open a special fapiao, he has to go to the tax office, and he can also open a special fapiao for only 3% VAT.

4. Tax incentives:

• Regular Taxpayer does not have any VAT benefits.
• Beginning from 2019, Small Taxpayer with a profit of less than 300,000 yuan per season (quarter) and 100,000 yuan per month is exempt from VAT. And also the rest of the additional taxes are cut by half.

5. Determination of the taxpayer type:

• Registered companies automatically become Small Taxpayers if they do not apply for Regular Taxpayer status upon registration.
• A company can be recognized as an Regular Taxpayer by applying for this status. There are two ways to recognize taxpayer status:

– Availability of a permanent physical address;

– The company’s turnover exceeds RMB 5,000,000.

6. Difference in tax reporting methods:

• Regular Taxpayer submits reports monthly, in addition, VAT is submitted in a special system for VAT.
• Small taxpayer can submit reports both monthly and quarterly, and VAT does not have to be submitted through a special system.

Income tax (paid from the actual profit of the company)

• For Small Taxpayers – 3%.
• 5% on profit less than RMB 1,000,000.
• 10% on profit from RMB 1,000,000 to RMB 3,000,000.
• 25% on profit above RMB 3,000,000.

The company’s actual profit is the difference between the company’s income and expenses.

Income tax on salaries (employee payroll tax)

Income tax in China is progressive and is calculated according to a complex formula (the higher the salary, the higher the tax), exact amount of the payroll tax can be viewed here: https://www.gerensuodeshui.cn/.

The tax-free amount is RMB 5,000.

For example, with an employee’s salary of 8,000 yuan, income tax will only be paid on 3,000 yuan and will be 92 yuan per month.

The legal representative is not obliged to pay his own salary, and, accordingly, pay taxes on it.