China has had a personal income tax system since 1980, although the incomes of many Chinese continue to fall below the taxable amount. There are uniform rates for Chinese nationals and for foreigners, but expatriates who live in China for less than a year are only required to pay tax on the income they earn within the country, any income from elsewhere is tax free. Expatriates who are resident in China for more than a year, but no more than five years, have to pay tax on any income that is generated in, or remitted to China, while expatriates who live in China for more than five years have to pay tax on all their income, whether generated in China or elsewhere.

Different tax rates are levied on various categories of personal income, including wages, salaries, returns on investment, business profits and proceeds from property disposal. Progressive tax rates on income start from 5% for monthly income not exceeding RMB500, to 45% for income exceeding RMB100,000 per month.

Foreign businesses operating in China currently benefit from preferential corporate tax rates, introduced in the 1980s to encourage foreign investment in China. However, these rates are to be repealed from 2007 onwards, with a 5-year transition period for companies already located in China to allow them to adjust gradually to higher tax rates. Currently, the tax rate for domestic Chinese companies is around 33%, but a new lower flat rate is likely to be introduced.