Writers: Khalil Luo / Victor Tu
Would you lease a car that you own back to your company? This is not considered the same as the company leasing the car from a car dealer. This is creating a self-rental arrangement between you and your firm. And why would you want to do that? And what are the Major Taxes in the PRC accomplished with your leasing behavior.
Answering the question why you would do that, it might prove to be a better tax position since you are reducing the profit of your company which is subjected to self-employment expenditures. Or in most cases, the WFOE could not apply for car mortgage from the car dealer unless it is applied by a Chinese Employee. For example, when you are in the early stages of running the business. The vehicle usage and depreciation expenses are indeed expenses related to the company's income. If they are not included in the company's costs, the company's profits will be inflated, and not only will it pay more Corporate Income Tax (CIT), but you will also pay more Individual Income Tax.
The major taxes applicable to vehicle leasing back from individual in China are as follows:
Category | Rate | Memos |
Value-added tax | 1% | The rate for small-scale VAT payers is 3%. From 1 January 2023 to 31 December 2027, the VAT rate for small-scale VAT payers is reduced from 3% to 1%. |
Urban Maintenance and Construction Tax | 7% or 5% | These three taxes are imposed at a certain rate on the amount of China's indirect taxes, which is levied by reference to the Value Added Tax (“VAT”) and Consumption Tax (“CT”) , 50% off from 2023 to 2027 |
Educational surcharges | 3% | |
Local educational surcharges | 2% | |
Individual income tax | 20% | The following deductions are provided for rental income: |
Stamp Tax | 0.10% | Property leasing (other than finance lease) |
NOTE: As it is a very common business behavior, of course, you will need to issue invoice to the other party in your renting contract. In China, fapiao (meaning invoice) is a tax receipt and works as an important accounting voucher for taxpayers to support the legitimacy of their economic activities. Individuals can ask for invoice issuing from the tax authority where the residential premise address registered at.
This might take a bit of getting used to so we will start with the basic assumption:
The lease agreement is ￥10,000 RMB
Category | Rate | Rental income: CNY 10,000 |
Value-added tax | 1% | 10,000×1%=100 |
Urban Maintenance and Construction Tax | 7% or 5% | 100*(7%+3%+2%)×50%=6 |
Educational surtax | 3% | |
Local educational surtax | 2% | |
Individual income tax | 20% | 10,000*(1-20%)×20%=1,600 |
Stamp Tax | 0.10% | 10,000×0.1%=10 |
Total: | 17.16% | 1,716.00 |
The 17.16% tax burden looks high, however , if the car owner is the shareholder as well, it compares to the 25% Corporate Income Tax and 20% Dividends Tax, it is still worth it.
