What is the difference between VAT and corporate income tax?

VAT is a transaction tax collected on each sale and credited for VAT paid on purchases — the company is effectively a collector for the state. Corporate income tax is a profit tax: revenue minus deductible costs, at 25% standard. A company can owe VAT on healthy sales while having little CIT due, and vice versa.

Can I deduct costs without a fapiao?

Generally no. For CIT deductions, costs must be evidenced by compliant invoices (or limited equivalents such as payroll records and customs documents). A valid fapiao is practically indispensable for both VAT credit and CIT deduction, which is why invoice discipline is the first thing any China finance function gets right.

What is the small-profit preference and can a foreign-owned company use it?

Yes — nationality of the investor is irrelevant. Companies with annual taxable income under RMB 3 million, staff under 300, and total assets under RMB 50 million currently pay an effective 5% CIT on the first RMB 3 million (reduced computation: 25% of income taxed at 20%). Many WFOEs qualify in early years.

China VAT and Corporate Income Tax: What a Foreign-Owned Company Actually Pays

Two taxes run the system

Strip away the surcharges and withholdings and every China entity lives with two taxes: corporate income tax (CIT) on profit, and value-added tax (VAT) on transactions. Foreign-owned companies are taxed the same as domestic ones in both respects — there is no “foreigner surcharge”, and since the Foreign Investment Law, no approval layer either. What trips up new investors is not the rates but the mechanics: invoicing, filing rhythm, and the documentation the tax bureau expects before you spend a deductible yuan.

Corporate income tax: 25%, with real ways to pay less

The standard rate is 25% of taxable profit, computed quarterly with prepayments and trued up at annual settlement (企业所得税汇算清缴) by 31 May of the following year.

The preferences that matter in practice:

Preference	Rate / effect	Typical beneficiary
Small-profit companies	Effective 5% on first RMB 3m taxable income	Early-stage WFOEs (assets < RMB 50m, staff < 300)
Hainan Free Trade Port	15% CIT for encouraged industries	Trade, services, regional HQ in Hainan
Western development	15% CIT in designated western provinces	Manufacturing, infrastructure
High-new technology enterprise (HNTE)	15% CIT nationwide	Tech entities with qualifying R&D and IP

⚖ Legal source

Enterprise Income Tax Law, Arts. 4, 28 — 25% standard rate; 15% rate for high-new technology enterprises and other qualified entities; Caishui [2023] No. 12 and successor notices — small-profit reduced computation (effective 5% on the first RMB 3 million), repeatedly extended; Hainan Free Trade Port master plan (June 2020) — 15% CIT for encouraged industries.

VAT: collected on value added, driven by invoices

VAT rates by category:

13% — sale of goods, imports, processing and repair
9% — transport, construction, real estate leasing and sale, agricultural inputs, utilities
6% — most modern services: consulting, legal, software, licensing of IP

The mechanism: output VAT on your sales minus input VAT on your purchases = the VAT you remit. A trader buying at 13% and selling at 13% remits tax only on the margin; a consultancy charging 6% on labour-heavy services has little input credit and remits closer to the full 6%.

Two consequences foreign owners underestimate:

Price quotes are usually quoted excluding VAT — a “RMB 100” invoice becomes RMB 113 with VAT at 13%. Build this into pricing and margins from the start.
General vs small-scale taxpayer status. Small-scale taxpayers (annual sales under RMB 5 million) pay a simplified levy — currently around 1% under preferential policy instead of the full rates — but cannot issue 13%/9% VAT invoices their customers can credit. B2B customers will pressure you into general taxpayer status; which status serves you depends on your customer mix.

Fapiao and Golden Tax IV: the system watches itself

China’s invoice (fapiao) system is not a bookkeeping formality — it is the tax administration. Every VAT invoice is issued through the tax authority’s system and carries a unique number tied to your taxpayer ID. Since Golden Tax IV went live, the system cross-checks invoices, declarations, social insurance, and bank flows in near real time; anomalies — margins out of line with the industry, round-figure consulting fees, invoices issued after hours — are flagged automatically.

Practical rules that follow:

No fapiao, no deduction — for VAT credit or CIT.
Never buy invoices or use another company’s — criminal, not civil, exposure.
Related-party service fees, royalties, and management fees to the overseas parent get scrutinised: they must correspond to real services or real IP, priced at arm’s length, and be consistent with your transfer-pricing documentation (required for related-party transactions above the filing thresholds).

The filing calendar

Obligation	Frequency	Deadline
VAT and surcharges	Monthly (general taxpayer) or quarterly (small-scale)	15th of following period
CIT prepayment	Quarterly	15 days after quarter end
CIT annual settlement	Annually	31 May
Individual income tax withholding (staff)	Monthly	15th of following month
Stamp duty, others	Per transaction or periodic	Varies

Surcharges on VAT — urban maintenance and construction (7% in cities, 5% in county towns, 1% elsewhere), education surcharge (3%), local education surcharge (2%) — are computed on the VAT paid and add roughly 12% on top of it in municipal locations.

Get the first year right

The expensive mistakes are front-loaded: choosing the wrong taxpayer status, under-pricing because VAT was ignored, poor invoice collection from suppliers, and casual related-party charges to the parent. A competent bookkeeping agency handles the compliance calendar cheaply; the structuring decisions — status, scope, transfer pricing documentation — are the ones to take with your lawyer and tax adviser before the first invoice is issued.