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Taxes in China: What Foreign Founders Should Know About Revenue Growth and Incentives

China's tax revenue grew 5.9% in the first eight months of 2026, slightly above GDP growth. Learn the factors behind this and what it means for foreign founders, plus key SME tax breaks.

Tax Revenue Growth Outpaces GDP Slightly

According to data from China's tax authorities, tax revenue collected by tax departments (excluding import VAT, consumption tax, tariffs, and tonnage tax collected by customs, and before export tax rebates) rose 5.9% year-on-year in the first eight months of 2026. This compares with a 5.4% increase in nominal GDP in the first half of the year, meaning tax growth was 0.5 percentage points higher. Huang Lixin, director of the Tax Science Research Institute at the State Taxation Administration, attributes this slight difference to three main factors.

Three Factors Driving Tax Growth

1. Price Increases

The producer price index (PPI), which is closely linked to tax revenue, turned positive in March 2026 after 41 months of negative growth. It then accelerated, rising 2% cumulatively in the first eight months. This boosted nominal tax revenue. However, the impact of prices on GDP growth is measured differently: the GDP deflator was estimated at 0.7% in the first half, so price effects on tax and GDP growth differ.

2. Capital Market Activity

An active stock market drove up several taxes. In the first eight months, average daily A-share trading volume reached 2.7 trillion yuan, up 72.8% from the same period last year. This led to a 82% increase in securities transaction stamp duty and a 59.7% rise in personal income tax on restricted stock transfers. Tax revenue from the securities industry grew 65.6%, while insurance and other financial industries saw increases of 14.6% and 18.5%, respectively. Other sectors also benefited from investment gains. However, Huang notes that securities transactions and related investment income represent transfers of existing assets, not newly created value, so they boost tax revenue but generally do not add to current GDP.

3. Policy Adjustments

The new Value-Added Tax Law and its implementing regulations took effect on January 1, 2026, bringing adjustments to tax policies. The government also standardized some tax preferences that no longer align with high-quality development goals, which increased tax revenue. These policy changes do not directly affect GDP growth.

Huang concludes that these factors combined explain why tax revenue growth modestly exceeds GDP growth, while overall tax growth remains consistent with the growth of the tax base, reflecting the resilience and vitality of China's economy.

Who Pays Taxes in China?

Chen Binkai, vice president and professor at the Central University of Finance and Economics, specializing in income distribution and development economics, points out that large enterprises contribute the bulk of tax revenue, while small and micro enterprises (SMEs) benefit from numerous tax incentives and thus contribute a significantly smaller share.

In the first eight months, the top 10,000 taxpayers accounted for nearly half of all tax revenue, and the top 1 million taxpayers accounted for about 90%. All other enterprises, including SMEs, contributed only around 10%.

This is largely due to a series of tax and fee reduction policies for SMEs. For example, small-scale VAT taxpayers with monthly sales below 100,000 yuan are exempt from VAT, and eligible small low-profit enterprises face an effective corporate income tax rate of just 5%. Chen notes that these policies have played a crucial role in lowering the tax burden on the vast number of small and micro enterprises.

What This Means for Foreign Founders

If you are registering a company in China, understanding these dynamics can help you plan your tax strategy. The strong tax revenue growth, driven partly by policy changes and capital market activity, indicates a robust tax environment. However, the significant tax advantages for SMEs are particularly relevant for startups and smaller foreign-invested enterprises.

• SME tax benefits: Ensure your company qualifies for VAT exemptions and reduced corporate income tax rates if applicable. For instance, if your monthly sales are below 100,000 yuan, you may be exempt from VAT. Small low-profit enterprises may enjoy a 5% effective corporate income tax rate.
• Capital market activity: If your business involves securities transactions or investment income, be aware that these are subject to specific taxes such as stamp duty and personal income tax on stock transfers. These are not directly linked to GDP but can affect your tax liabilities.
• Policy updates: The new VAT Law and adjustments to tax preferences mean you should stay informed about compliance requirements. Standardized tax incentives may affect sectors that previously enjoyed certain benefits.

Overall, China's tax system offers substantial incentives for small and micro enterprises, making it an attractive environment for foreign founders establishing a presence. However, it's essential to consult with local experts to navigate the specifics.

This summary is based on information published by the relevant Chinese government website and is general information, not legal or tax advice.

For assistance with company registration and ongoing operations in China, foreign founders can contact ChinaMNC on WhatsApp / WeChat at +86 153 1898 8535.