Israel – China Tax Treaty

Business Activity in China

As expected, China’s economy has been inconsistent following the pandemic; however, its GDP is expected to increase 5.1% by the end of 2023 and another 5.4% by the end of 2024 which is faster than most major countries around the world including the United States. In addition, China was recently ranked as the second largest economy in the world reaching over $17 Trillion. This steady growth mainly derives from its massive population. Despite the fact that China is one of the world leaders in manufacturing products, its most lucrative sectors are on the industrial side such as Copper Ore’ Mining.

China is currently Israel’s 2nd largest trading partner in the world and its biggest trading partner in East Asia. In 1992, Israel – China trade was around $50 million and in 2022 trade between the reached $24 billion; this was an 11.6% increase from the year prior which suggest this growing relationship will continue to increase over time.

Bilateral agreements between China and Israel

1. Investment Encouragement and Protection Agreement
2. Double Taxation Convention  

Investment Encouragement and Protection Agreement

On January 13, 2009, the Investment Encouragement and Protection Agreement was formed. The purpose of this agreement was to provide reciprocal protection of investments to help stimulate business initiative.

To read the agreement in English click here.

Convention on the Prevention of Double Taxation between Israel – China

 The original agreement between the Governments of Israel and China regarding the avoidance of double taxation was signed in 1995 and entered into force on January 1, 1996.

To read the agreement in English click here.

Applicability of the MLI

China and Israel both signed and ratified the MLI, which means that there is an automatic exchange of information between the two countries. China and Israel signed the MLI in 2017. Israel ratified it in 2019 and China in 2022.

Residency for tax purposes in China

Residency of an Individual

An individual who stayed in China for more than 183 days in the tax year in question will be considered a resident of China for the purpose of paying tax. If the individual has domicile in China, he can also be considered a resident of China.
In addition to the information above, according to the State Taxation Administration, the criteria for determining the tax liability of foreign workers will follow the “six-year rule.” This means that if a foreign worker resides in China for a continuous period of six years without leaving the country, they will be required to pay capital gains taxes on their property regardless of where they are in the world. To reset the six year “clock” an individual must leave the country for 30 days or more. In addition, to be eligible for the six year rule this residence needs to be considered a main residence and not an investment property.

Residency of a company

 An entity will be considered resident for tax purposes in China if it is incorporated in China or has its place of effective management (POEM) in China. This means that if the key management decisions or day-to-day operations of the company occur in China, it will be subject to taxation on its global income as per the tax regulations in China.

The tax system in China:

The country’s Tax Authority is called the State Taxation Administration (STA).

Click here for the official website of the country’s tax authority.

Income taxation: progressive tax depending on annual taxable income (in CNY):

• 0-36,000 = 3%
• 36,001-144,000 = 10%
• 144,001-300,000 = 20%
• 300,001-420,000 = 25%
• 420,001-660,000 = 30%
• 660,001-960,000 = 34%
• 960,001 and above = 45%

Taxation of companies and branches:25%

VAT: standard rate of 13%. there are reduced rates of 9, 6, and 3%.

Capital gains tax: 20% for individuals. In relation to companies, capital gains tax is imposed on the realized gains and is subject to taxation at the applicable tax rate.

Withholding Tax

Inheritance and Estate Tax

There is no inheritance tax in China.

Relocation

For the largest country in the world by population, China hosts a very small Jewish population of approximately 2,500 people.

Nonetheless, China is a hotspot for expat workers; some of the most popular professions for foreigners include: Teachers, Supply-Chain Managers, IT and Engineers. Companies often send multi-lingual workers to China to connect global businesses. Many find China an attractive place to not only work but live with its natural beauty, enthralling food, and diverse culture.

Real Estate Taxation

1. Property Tax – In urban areas, property tax applies to residential and commercial properties owned by individuals and entities. The tax rate for residential properties is progressive, ranging from 1% to 3% of the property’s assessed value. Commercial properties are subject to a standard rate of 1.2%. However, property tax is not uniformly implemented across all cities in China, and some areas may have different regulations.
2. Land Use Tax –  This tax is applicable to the use of state-owned land for construction purposes. It is based on the area of land occupied and the local government’s land pricing standards. The tax rate ranges from 1% to 30% of the land’s appraised value, depending on factors such as location and land use category.
3. Stamp Duty – Stamp duty is levied on the transfer or sale of real estate properties. The rate varies based on factors like property type, location, and transaction value. The duty can range from 0.5% to 5% of the property’s sale price.
4. Value-Added Tax (VAT) – VAT applies to the sale of commercial properties. The tax rate is generally 6% but can vary depending on the location and type of property.
5. Individual Income Tax – When individuals sell properties they own, they may be subject to individual income tax. The tax rate depends on the length of ownership, with a higher tax rate applied to properties held for shorter periods.

Types of business entities

1. Wholly Foreign-Owned Enterprise (WFOE) – A WFOE is a limited liability company fully owned by one or more foreign investors. It allows foreign companies to have complete control and ownership over their operations in China.
2. Joint Venture (JV) – A JV is a business entity formed through a partnership between a foreign investor and a Chinese entity. Both parties contribute capital, share profits, and have shared management responsibilities. JVs can be either equity JVs, where both parties invest capital, or contractual JVs, which involve cooperation through contractual agreements.
3. Representative Office (RO) – An RO is a non-profit entity established by a foreign company to engage in market research, promotion, and liaison activities in China. It does not have legal status as a separate entity and is limited in the scope of its operations.
4. Foreign-Invested Partnership (FIP) – FIPs are business entities formed by two or more foreign investors or a combination of foreign and Chinese investors. FIPs operate under a partnership agreement and have unlimited liability for the partners.
5. Limited Liability Company (LLC) – LLCs in China can be either domestic or foreign invested. They offer limited liability protection to the shareholders and can have multiple shareholders. LLCs can be established by both Chinese and foreign investors.
6. State-Owned Enterprise (SOE) – SOEs are business entities that are wholly or partially owned by the government. They play a significant role in strategic sectors and industries in China and are subject to government regulations.

Incentive Law

China is an attractive country to invest in for several reasons. Over the past few decades, China has shown fast and steady growth in their economy. Additionally, the country boasts the largest population in the world which encourages many to invest in more lucrative industries such as healthcare, technology, etc. The Chinese government promotes investments in commercial and entrepreneurial by providing attractive financial incentives such as tax breaks, low-cost government loans, grants, and subsidies. Although the government generally favors state owned companies over those that are foreign, these financial opportunities help ignite business growth throughout the country. Successful companies such as Alibaba have grown and flourished from the financial support China and other financial institutions provide for them.