The unification of China's tax system for foreign invested enterprises, foreign enterprises and domestic enterprises has gone a step further. Commencing from 1 December 2010, foreign enterprises, foreign invested enterprises and foreign individuals will begin to pay city construction tax and education surcharge.

City construction tax and education surcharge are two types of surtaxes, levied on taxpayers who pay value-added tax ("VAT"), consumption tax and business tax. Specifically, each surtax is calculated as a percentage of the actual amount of the VAT, consumption tax and business tax paid by the taxpayers. The rate for education surcharge is 3%. Depending on the location, the rates for city construction tax differ:

  • In city areas, the rate is 7%,
  • In county and township areas, the rate is 5%,
  • In other areas, the rate is 1%.

Since their introduction in 1985 and 1986 respectively, the two surtaxes have been imposed on domestic enterprises and Chinese individuals. However, foreign enterprises, foreign invested enterprises and foreign individuals have been exempted from these two surtaxes. This recent change in law is another effort by the Chinese government to put domestic enterprises on an equal footing with foreign enterprises and foreign invested enterprises. In 2008, China unified its enterprise income tax law for the first time.

The two surtaxes will increase the tax cost of doing business in China or with China. For instance, assuming a city construction tax rate of 7%, a foreign enterprise providing consulting services to a Chinese enterprise will need to pay a business tax of 5% of the service fee as well as an additional surcharge of 0.5% of the service fee [5% x (7% +3%)].

For more information about the application of the two surtaxes, please contact Julie Zhang ( or Kevin Wang (

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