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Foreign Enterprise Income Tax

7 Foreign Enterprise Income Tax

TAXPAYERS

COMPUTATION METHODS

TAX REDUCTIONS AND EXEMPTIONS

TIME LIMIT AND PLACE FOR TAX PAYMENT

The Income Tax on the Enterprises with Foreign Investment and Foreign Enterprises (hereafter referred to as Foreign Enterprise Income Tax) is levied on the income of enterprises with foreign investment and foreign enterprises. The Income Tax Law of the People's Republic of China on the Enterprises with Foreign Investment and Foreign Enterprises (hereafter referred to as the Foreign Enterprise Income Tax Law) currently in force was passed and promulgated at the Fourth Session of the 7th National People's Congress on April 9, 1991, and came into effect on July 1, 1991. On June 30, 1991, the State Council promulgated the Detailed Rules and Regulations for the Implementation of the Income Tax Law of the People's Republic of China on the Enterprises with Foreign Investment and Foreign Enterprises, which came into effect on July 1, 1991.

Foreign Enterprise Income Tax is administered by the State Administration of Taxation (SAT). The revenue collected is shared between the Central Government and the local governments. In 2003, revenue from Foreign Enterprise Income Tax amounted to 70.54 billion yuan, accounting for 3.5% of the country's total tax revenue.

TAXPAYERS

Entities Subject to Tax

Taxpayers of Foreign Enterprise Income Tax fall into two main categories.

  • Enterprises with foreign investment: These include Sino-foreign joint ventures, Sino-foreign cooperative enterprises, and wholly foreign-funded enterprises.

    Where the head offices are in China, the enterprises shall pay tax on their worldwide income.

  • Foreign enterprises: These include foreign companies, enterprises, and other economic organizations that maintain establishments or places in China, and that are engaged in production or business operations, and those that have no establishments or places in China but that earn income from sources within China.

Establishments/Places

These include the following:

  • Establishments of management.
  • Business establishments.
  • Representative offices and factories.
  • Places for natural resource exploitation.
  • Places for engineering work related to contracted construction, installation, assembly, or prospecting.
  • Places for providing labor services and business agents (i.e., companies, enterprises, and other economic organizations, or individuals entrusted by foreign enterprises to conduct business operations).

Foreign Enterprises

These enterprises shall pay tax only on income earned from sources within China.

Where they derive income from construction, installation, assembly, prospecting, or the provision of consultation, management, or training services within China, the tax department may designate the payers of the engineering considerations and the service remunerations as the tax withholding agents.

Enterprises with Foreign Investment

Sino-foreign Cooperative Enterprises

Enterprises that are not legal entities may compute and pay tax in one of the following ways:

  • Independent accounting: Where each party pays its own income tax, the Chinese party should pay tax in accordance with the Provisional Regulations on Enterprise Income Tax. The foreign party should be regarded as a foreign enterprise that has establishments or places in China, and should pay tax in accordance with the Income Tax Law on the Enterprises with Foreign Investment and Foreign Enterprises.
  • Joint accounting: Where the company charter has been formulated for joint operation and management, unified accounting, and the joint bearing of profits/losses and investment risks, the enterprises may apply to the local tax authorities for approval to report and pay tax on a consolidated basis in accordance with the Income Tax Law on the Enterprises with Foreign Investment and Foreign Enterprises.
Enterprises with Investment from Overseas Chinese

Enterprises with investment from overseas Chinese, or compatriots from Hong Kong, Macao, or Taiwan are also subject to Foreign Enterprise Income Tax.

Activities Subject to Tax

Income derived from sources inside China as described below may be subject to tax.

Enterprises with Foreign Investment and Foreign Enterprises with Establishments/Places in China

  • Income derived from production or business operations.
  • Profits (dividends), interest (excluding interest from State treasury bonds), rental, royalties, or other income derived inside or outside China, where such income is effectively connected with the establishments/places.

Foreign Enterprises without Establishments/Places in China

  • Profits (dividends) obtained from the enterprises in China.
  • Interest on deposits or loans, interest on bonds (excluding interest from State treasury bonds), interest on payments made on behalf of the buyers, and interest on deferred payments derived inside China.
  • Rental on properties rented to and used by renters in China.
  • Royalties obtained from the provision of patents, technical know-how, copyright, and trademarks for use in China.
  • Gains from the transfer of properties in China such as houses, buildings and their attached facilities, and land-use rights.
  • Other income derived in China and specified as taxable by the Ministry of Finance.

Special Instances

  • Income from liquidation (i.e., the net value of the assets, or the remaining value of the existing assets, after undistributed profits, various expenses and liquidation fees have been deducted from the paid-in capital) derived by enterprises with foreign investment shall also be subject to tax.

Revenue Breakdown

At present, revenue comes mainly from enterprises with foreign investment and foreign enterprises that are engaged in the following industries:

  • Manufacturing.
  • Mining and digging.
  • Power generation and supply.
  • Construction.
  • Transportation.
  • Wholesaling and retailing.
  • Real estate.

COMPUTATION METHODS

General Framework

Taxable Items

Income from Production and Business Operations

This refers to income derived by enterprises with foreign investment and foreign enterprises from production and business operations in industries such as those described below:

  • Manufacturing.
  • Mining.
  • Communications and transportation.
  • Construction and installation.
  • Agriculture, forestry, animal husbandry, fisheries.
  • Water conservancy.
  • Commerce.
  • Finance.
  • Services.
  • Exploration and exploitation.
  • Other trades.
Other Income

This includes profits (dividends); interest income; rental income; income from leasing or alienation of property; income from the provision or transfer of patents, technical know-how, trademarks, and copyright; and other non-business income.

Basic Formulas

Taxable Income

When calculating their taxable income, enterprises with foreign investment and foreign enterprises should add the gross income derived from their in-China institutions and places engaged in production and business operations, and other income in a tax year, then deduct costs, expenses, and losses.

Tax Year

The tax year starts from January 1 and ends on December 31.

Foreign enterprises that face difficulties in computing their taxable income based on the tax year as stipulated under the Tax Law may apply to the relevant local tax offices for approval to use their own 12-month fiscal year as the tax year.

Where taxpayers start their businesses at some other point in the year, or where their businesses have been in operation for less than 12 months in a tax year because the businesses underwent mergers or closures during the year, the actual operating period shall be taken as the tax year.

Formulas for Various Industries

Manufacturing

Taxable income = (Sales profit + Other business profit) + (Non-business income − Non-business expenses)

Sales profit = Net sales of the products − Sales cost of products − Tax on sales of products − Sales expenses − Administrative expenses − Financial expenses

Commerce

Taxable income = (Sales profit + Other business profit) + (Non-business income − Non-business expenses)

Sales profit = Net sales − Cost of sales − Tax on sales − Sales expenses − Administrative expenses − Financial expenses

Services

Taxable income = Net business income + (Non-business income − Non-business expenses)

Net business income = Gross business income − Tax on business income − Business expenses − Administrative expenses − Financial expenses

Note that these formulas do not factor in price-exclusive Value-Added Tax (VAT) at all.

Taxable income for other trades shall be computed based on the principles outlined in the formulas prescribed above.

Special Instances
  • For foreign air transportation and ocean shipping enterprises engaged in international transportation and shipping businesses, the taxable income shall be 5% of the gross income generated from transport and shipping services for passengers and cargo loaded in China.
  • For foreign enterprises that have no establishments/places in China but that generate income in China in the form of profits, interest, rental, royalties or other income, or for foreign enterprises that have establishments/places in China but whose income in the form of profits, interest, rental, royalties or other income, is not effectively connected with the establishments/places, the taxable income shall be their total income.

    In computing taxable income, Business Tax paid on royalties in accordance with Chinese tax laws may be deducted.

    Where foreign enterprises derive income within China from the transfer of such properties as houses, buildings and their attachment, or from the transfer of land-use rights, the taxable income shall be the balance of the transfer proceeds after deducting the original value of the properties.

  • Where foreign enterprises are unable to provide the necessary vouchers to verify the original value of the properties, the relevant local tax offices shall appraise the value for them in account of practical situation.

Chargeable Period

Taxable income is computed on an accrual basis (i.e., income is charged to the period during which it was earned, whether or not money has been received), rather than on a cash basis (where income is charged to the period during it was actually received).

The period to which income should be charged varies, depending on the nature of the business.

Sales of Products or Commodities

Where payments are made in instalments, revenue may be realized on the date that the invoice is issued following delivery of the goods, or on the dates agreed upon in the contracts for the purchasers to make payment.

Construction/Installation/Assembly, Provision of Labor Services

Where the projects last more than 1 year, revenue may be realized based on the progress of the projects, or on the amount of work completed.

Processing/Manufacturing of Large Machinery Equipment/Vessels for Others

Where the projects continue consecutively for more than 1 year, revenue shall be realized based on the progress of the projects or the amount of work completed.

Sino-Foreign Cooperative Enterprises

Where they share their products, revenue shall be realized at the time the shared products are obtained.

It should be valued in such a manner that it is on a par with the selling price to third parties or with the market price at that time.

Donations

Where donations are received by enterprises with foreign investment or foreign enterprises having establishments/places in China, the following rules should be observed when computing taxable income:

  • Non-monetary donations of assets: Such donations of assets (including fixed assets, intangible assets, and other goods) should be valued at reasonable prices, and accounted into the relevant asset items.

    Such income shall be subject to Enterprise Income Tax in the current year.

    Where the amount is so high that the enterprises face difficulties in paying the tax at one time, it may be rescheduled in equal portions over 5 years, upon approval by the relevant local tax offices.

  • Monetary donations: These should be accounted at one time into the income for the current year.

    Such income shall be subject to Enterprise Income Tax in the current year.

Payables

Where payment is not requested by the creditors for 2 years after the payables come due, the payables should be accounted into the income for the current year.

Such income shall be subject to Enterprise Income Tax for the current year.

Deductible Items

When computing the taxable income for Foreign Enterprise Income Tax, enterprises may deduct the following items:

Worker-Related Expenses

  • Wages paid to employees may be deductible, after the relevant local tax offices have examined the relevant documents submitted by the taxpayers and have granted approval.
  • Medical insurance premiums, pension insurance premiums (excluding the overseas social insurance premiums of foreign employees working in China), house reserve funds, and employee education expenses that are withdrawn by the taxpayers in accordance with State rules may be deductible.

    Other employee welfare expenses may be deducted directly, up to 14% of the total deductible wages.

Technology Development Expenses

Where such expenses incurred in China by enterprises with foreign investment have been increasing at a rate of 10% or more, 50% of the actual expenses incurred in the current year may be deducted from the taxable income for the current year, upon approval by the tax department.

Such deductions are in addition to the direct deductions.

Treatment of expenses incurred by foreign enterprises with establishments/places in China that are engaged in production and business operations shall be based on the principles outlined above.

Entertainment Expenses

Such expenses made for public relations that are related to production and business operations may be deducted up to the limits listed below, upon the production of verifiable records or vouchers.

  • Net annual sales of less than 15 million yuan: The limit is 0.5% of net sales.
  • Net annual sales of more than 15 million yuan: The limit is 0.3% of net sales.
  • Annual business revenue of less than 5 million yuan: The limit is 1% of business revenue.
  • Annual business revenue of more than 5 million yuan: The limit is 0.5% of business revenue.

Bad Debts

For practical need, enterprises with foreign investment and foreign enterprises engaged in credit and leasing businesses may draw bad-debt provisions that do not exceed 3% of the annual balance of outstanding loans, or 3% of the balance of the receivables at year-end. Such provisions are deductible for the year.

Where the accounts receivable have an agreed time limit, the receivables will be treated as bad debts after that point. Creditors and accounts receivable for sales on commission that have no expiry date shall not be withdrawn any bad-debt provisions.

Where the actual bad-debt losses incurred exceed the bad-debt provisions drawn in the previous year, the excess portion may be accounted into the losses for the current year.

Where the bad-debt provisions drawn exceed the actual bad-debt losses incurred in the previous year, the excess portion should be accounted into the taxable income for the current year.

Receivables that have been already listed as losses, and that have been recovered entirely or partially in subsequent years, should be re-accounted into the taxable income for the year in which the receivables were recovered.

Property Losses

Net losses arising from inventory losses, damage to and scrapping of fixed assets and current assets; bad-debt losses; and extraordinary losses resulting from unexpected events such as natural disasters and civil lawsuits may be deducted when computing Foreign Enterprise Income Tax for the current period.

Treatment of such losses incurred by foreign enterprises having establishments/places in China that are engaged in production and business operations shall be based on the principles outlined above.

Donations, Research Grants

  • Donations of a public benefit and relief nature in China1 made by enterprises with foreign investment and foreign enterprises may be deducted in their entirety.
  • Funds granted by enterprises with foreign investment and foreign enterprises through nonprofit social organizations or government organs within China to science and research institutes not affiliated with the enterprises, for research and development work, may also be deducted in their entirety.

Others

  • Borrowings: Where the borrowings are for production and business operations, and where the interest paid is reasonable (i.e., the rate does not exceed the rate on commercial loans), the borrowings may be deductible, after the relevant local tax offices have examined the relevant documents provided by the taxpayers and granted approval.
  • Foreign-exchange gains/losses: Where such gains or losses are made in the course of preparation for opening or in the course of production and business operations, they should be listed appropriately as profits or losses in the matching period.

1 Donations made through non-profit social organizations or State organs within China to public-benefit causes such as education, the Red Cross, or civil affairs, and/or to poor or areas hit by natural disasters. Donations made directly to the benefiting recipients are not included.

  • Insurance premiums: Where the taxpayers incur such expenses in the course of purchasing property, or take out responsibility insurance policies from insurance institutions for the purpose of reducing risks, the expenses may be deducted on an actual basis if they fall within the scope defined by insurance laws and regulations.
  • Overhead expenses: Where foreign enterprises with establishments/places in China pay to their head offices reasonable overhead expenses incurred in connection with these establishments/places, the expenses may be deductible, after the local tax department has examined the supporting documents provided by the enterprises and granted approval.
  • Tax paid overseas: Where foreign enterprises pay income tax overseas on profits (dividends), interest, rental, royalties, or other income earned outside China that are effectively connected with their establishments/places in China, such tax is usually deductible, unless otherwise stipulated by the State.
  • Asset depreciation/amortization: This is discussed in greater detail in later sections.

Non-Deductible Items

When computing taxable income, the taxpayers are not allowed to deduct the following items, unless otherwise stipulated by the State:

  • Spending on the acquisition or construction of fixed assets.
  • Spending on the transfer or development of intangible assets.
  • Interest paid on capital.
  • Various taxes paid on income.
  • Fines paid arising from unlawful operations or losses sustained from confiscated property.
  • Interest paid arising from the late payment of various taxes or fines.
  • The portion of losses arising from natural calamities or accidents that is covered by insurance indemnity.
  • Donations and contributions other than those utilized in China for public welfare or relief purposes.
  • Royalties paid to the head office.
  • Other expenditure not related to production or business operations.

Fixed Assets

Under the Foreign Enterprise Income Tax Law, fixed assets refer to houses, buildings, machines, mechanical apparatus, transportation tools, and other equipment, and appliances and tools related to production and business operations that have a useful life of more than 1 year.

Articles that are not used mainly as equipment for production and business operation may be deductible based on the actual value used if they have a unit value of less than 2,000 yuan, or if the useful life does not exceed 2 years.

Valuation Principles

In general, the valuation of fixed assets should be based on their original cost.

  • Assets purchased: The original cost shall be the purchasing price plus freight, installation fees, and other relevant expenses incurred before use.
  • Assets self-produced/self-constructed: The original cost shall be the actual expenses incurred in course of production or construction of the assets.
  • Assets used for investment: The original cost shall be, when considering depreciation, the reasonable price agreed upon in the contracts or the price appraised based on market prices, plus relevant expenses incurred before use.
  • Assets received as gifts: Such assets may be properly valued and depreciated.
  • Assets obtained through borrowings: Where the enterprises obtain borrowings for the acquisition or construction of the assets, the interest incurred on the borrowings before the assets are used shall be included in the original cost.
  • Assets expanded/rebuilt/renovated: Where the taxpayers, in the course of utilizing the fixed assets, incur expenses on expansion, replacements, rebuilding and/or technical renovations that increase the value of the assets, the expenses should be added to the original cost.

For enterprises with foreign investment and foreign enterprises, the depreciation period to be applied to their fixed assets and the deduction of salvage value are treated in the same manner as for domestic enterprises, except that the salvage value should not be less than 10% of the original value.

Depreciation Principles

In general, the depreciation period may be properly prolonged for fixed assets whose useful life may be prolonged. The computation of depreciation should be adjusted accordingly.

Where the taxpayers need to shorten the period due to special reasons, they should apply to the relevant tax department for approval.

No depreciation shall be allowed for fixed assets that remain in use after the full depreciation period.

Where assets are transferred or disposed of, the balance of the proceeds received after deducting the net value to be depreciated, salvage value and handling fees shall be treated as profits or losses for the current year.

Where the taxpayers obtain used assets whose remaining useful life is shorter than the depreciation period specified by tax law, the taxpayers may compute depreciation based on the remaining useful life, after they apply to the relevant tax department and are granted approval.

Accounting Methods

The depreciation of fixed assets is usually computed using the straight-line method. The formulas are the same as those for Enterprise Income Tax (please refer to Chapter 6: Enterprise Income Tax under the section on tax computation methods). Other methods may also be chosen upon approval by the tax authorities.

Depreciation Periods

The following items have minimum depreciation periods:

  • Houses and buildings: 20 years.
  • Machinery and mechanical apparatus: 10 years.
  • Electrical equipment: 5 years.
  • Automobiles: 5 years.
Special Instances
  • Software purchases: The useful life for the depreciation or amortization of software purchased by taxpayers may, upon approval by the tax department, be shortened, down to a minimum of 2 years.
  • Production equipment of integrated circuit enterprises: The useful life of such assets may be shortened, down to a minimum of 3 years.

Intangible Assets

Valuation Principles

In general, the value of such assets should be based on their original cost:

  • Assets transferred: The original cost shall be the actual payments made based on reasonable prices.
  • Assets self-developed: The original cost shall be the actual expenses incurred in the course of development.
  • Assets for investment: The original cost shall be the reasonable price agreed upon in the contracts (or agreements).
  • Assets transferred/developed: Where the taxpayers obtain borrowings for the transfer or development of the assets before they are utilized, the interest paid on the borrowings shall be included in the original cost.

Amortization Principles

In general, amortization shall be computed using the straight-line method.

  • Assets for investment or transfer: Such assets may be amortized based on the useful life agreed upon in the contracts (or agreements).

    Where there is no agreed-upon useful life, or where the assets are self-developed, they shall be amortized over a period of not less than 10 years.

  • Expenses incurred during the preparation period: Such expenses should be amortized over a period of not less than 5 years, starting from the month following the commencement of production or business operations.

Special Regulations Governing Computation

Below are listed some special scenarios under which computation may have to be adjusted:

  • Where an enterprise with foreign investment invests in another enterprise inside China, the profits (dividends) obtained from the enterprise being invested in may be excluded from the taxable income of the investing enterprise.
  • However, expenses and losses incurred in the course of investment shall not be deductible from the taxable income of the investing enterprise.
  • Where the taxpayers are unable to provide complete and accurate evidence of costs and expenses, or to correctly work out their taxable income, the relevant local tax offices shall assess the profit ratios and the taxable income based on the profit levels achieved in the same trade or similar trades.
  • Where the taxpayers are unable to provide complete and accurate evidence of income, or to correctly report their income, the relevant local tax offices shall assess the taxable income using the method of cost (expense) plus reasonable profit.
  • Treatment of business transactions between establishments/places set up in China by the taxpayers to engage in production or business operations, and their associated enterprises shall follow the arm's length principle.
  • Where payment or receipts are not charged in line with this principle, and have thus reduced the taxable income of the taxpayers, the relevant tax offices shall make reasonable adjustments to the taxable income.
  • Annual losses incurred by establishments/places set up in China by enterprises with foreign investment or by foreign enterprises may be carried forward to offset income for the following tax year. If the losses exceed the income for the following tax year, the losses may be carried forward to subsequent years (maximum: 5).
  • The formulas used are the same as those used for Enterprise Income Tax (please refer to Chapter 6: Enterprise Income Tax under the section on tax computation methods).
  • Where accounting practices adopted by establishments/places set up by the taxpayers to engage in production or business operations contravene State tax provisions, the taxable income shall be computed in accordance with the relevant tax provisions.

Tax Rates and Computation of Tax Payable

In general, a flat rate is used for Foreign Enterprise Income Tax.

The tax payable shall be computed by applying a 30% rate to taxable income. The local tax payable shall be computed by applying a 3% rate. Thus, the aggregate tax rate is 33%.

Foreign enterprises that have no establishments/places in China, but that derive profits, interest, rental, royalties, or other income from sources in China, or foreign enterprises that have establishments/places in China but whose income is not effectively connected with these establishments/places, shall pay tax on such income at a rate of 20%. At present, however, income from interest, rental, royalties, or other income is taxed at lower rate of 10%.

Tax payable = Taxable income × Applicable tax rate

Example

A joint venture has taxable income of 6 million yuan for the year.

Tax payable = 6 million × 30% = 1.8 million yuan

Local tax payable = 6 million × 3% = 180,000 yuan

Example

A foreign bank that has no establishments/places in China obtains interest income of 10 million yuan within China.

Tax payable = 10 million yuan × 10% = 1 million yuan

Example

A foreign company owns a building with an original value of 5 million yuan. Its China office sells the building on the company's behalf, receives an income of 10 million yuan, and pays relevant taxes and charges of 2 million yuan.

Taxable income = 10 million yuan − 5 million yuan − 2 million yuan = 3 million yuan

Tax payable = 3 million yuan × 10% = 300,000 yuan

Exchange Rate Conversions

Enterprise Income Tax is computed in yuan terms. Where income is earned in foreign currencies, for tax payments, the amounts should be converted into yuan at the basic exchange rates (or at the rates derived in accordance with the relevant regulations) quoted by the People's Bank of China on the last day of the month for taxpayers that make monthly prepayments, and on the last day of the quarter for taxpayers that make quarterly prepayments.

Where taxpayers make quarterly prepayments, they should convert the income into yuan based on the rates quoted on the last day of the quarter.

In the final settlement at the end of the tax year, the tax prepaid in quarterly installments shall not be converted again. Only the balance of the foreign currency income earned over the whole year on which the tax has not been paid shall be converted into yuan, based on the exchange rates quoted on the last day of the year.

Where the taxpayers obtain income in the form of non-monetary assets or equity, the value of these items shall be computed based on prevailing market prices and the tax assessed accordingly.

Foreign Tax Credits

Credit Limits

Where enterprises with foreign investment have already paid foreign income tax (excluding cases where compensation has been obtained after paying the tax, and where the tax has been borne by others on behalf of the taxpayers) on income derived from sources outside China, the enterprises may, when computing the Foreign Enterprise Income Tax payable, credit the foreign income tax against income tax payable.

However, the creditable amount shall be limited to the amount of income tax payable computed according to Chinese tax law. This tax credit limit shall be computed on a per-country basis and not on a per-item basis.

Foreign income tax credit limit = (Total income tax payable computed according to Chinese tax law on worldwide income × Income from sources from a foreign country) ÷ Total income from worldwide sources

Carry Forwards

Foreign income tax actually paid by enterprises with foreign investment on income from outside China may be credited against the income tax payable unless the amount exceeds the limit prescribed by the formula provided above.

Where the foreign income tax paid exceeds the limit stipulated, the taxpayers shall not be allowed to credit it against the tax payable or to deduct it from the taxable income. However, the excess portion may be carried forward to subsequent years (maximum: 5).

Example

A Sino-foreign joint venture obtains taxable income of 30 million yuan from sources within China. It also obtains taxable income of 10 million yuan from a branch it has set up in country A, and has paid income tax equivalent to 3.6 million yuan in country A.

Credit limit = ({30 million yuan + 10 million yuan} × 33% × 10 million yuan) ÷ (30 million yuan + 10 million yuan) = 3.3 million yuan

Aggregate tax payable = ({30 million yuan + 10 million yuan} × 33%) − 3.3 million yuan = 9.9 million yuan

The tax actually paid overseas is 3.6 million yuan, but the credit limit is 3.3 million yuan. The difference of 300,000 yuan may only be carried forward to subsequent years for credit.

TAX REDUCTIONS AND EXEMPTIONS

The main tax reductions and exemptions granted are discussed in the following sections.

Where the actual operations of enterprises with foreign investment last less than the length of time specified by law, the enterprises shall pay back any tax reductions or exemptions granted, unless they have incurred heavy losses arising from natural disasters or unexpected accidents.

Enterprises of a Production Nature

Where enterprises with foreign investment of a production nature are engaged in the industries listed below, and are scheduled to operate for a period of not less than 10 years, the enterprises shall be granted exemptions for the 1st and 2nd years after the year in which they begin to make profits.

They shall also be granted a 50% reduction for the 3rd, 4th, and 5th years.

  • Machine-building and electronics.
  • Energy (excluding oil and natural gas exploitation).
  • Metallurgical industry (excluding exploitation of rare metals and precious metals).
  • Chemicals and building materials.
  • Light industries.
  • Textiles and packaging industries.
  • Medical apparatus and pharmaceutical industries.
  • Agriculture, forestry, animal husbandry, and fisheries.
  • Water conservancy.
  • Construction.
  • Communications and transportation (excluding passenger transportation).
  • Development of science and technology.
  • Geological survey and industrial information consultation.
  • Maintenance and repair services for production equipment and precision instruments that are used directly in the course of production.
  • Other industries recognised by the State (e.g., construction, installation, assembly project design, and the provision of labor services for projects; feeding; breeding; plantations; research and development of production technology; the provision of direct services such as transportation and storage for clients using the taxpayers' own means of transportation or storage facilities).

Newly established software enterprises may enjoy this preferential treatment without restriction or being subject to an operational period.

Enterprises in Special Regions, Zones, or Areas

Western and Other State-Specified Areas

  • Enterprises with foreign investment in the western and middle areas that are encouraged by the State may enjoy a tax rate of 15% rate for 3 years after the expiration of statutory tax holidays involving 2-year exemptions and 3-year reductions.
  • If they are export-oriented enterprises as defined by the State, they may enjoy a tax rate of 10%.
  • Enterprises with foreign investment in State-specified western and other areas that are engaged mainly in State-encouraged industries may enjoy a lower tax rate of 15% during the period from 2001 to 2010 if income from their main business constitutes more than 70% of their total income, after the tax authorities have approved their applications for reduction.
  • Where newly established enterprises are engaged in transportation, electrical power, water conservancy; postal services, or radio and TV broadcasting; where their operational period exceeds 10 years; and where income from these businesses constitutes more than 70% of their total income, the enterprises may be granted exemptions for the 1st and 2nd years following the year in which they begin making profits, after the tax authorities have approved their applications for exemptions. The enterprises may also be granted 50% reductions for the 3rd, 4th, and 5th years.
  • Where enterprises with foreign investment are engaged in agriculture, forestry, or animal husbandry, or where they are established in remote, underdeveloped areas, the enterprises may be granted a reduction amounting to 15%–30% of the tax payable for another 10 years following the period for exemptions and reductions has expired, after the SAT has approved their applications for reductions.

Designated Zones

  • Dividends, interests, rentals, royalties, and other income derived by foreign enterprises in Special Economic Zones (e.g., Shenzhen, Zhuhai, Shantou, Xiamen, Hainan), Economic and Technological Development Zones (i.e., various cities so designated by the State Council), Coastal Economic Open Zones (i.e., various cities, counties and districts so designated by the State Council), and other open areas approved by the State, may be granted exemptions or a reduced tax rate of 10%.

    In addition, where the enterprises provide funds or equipment under special preferential terms, or transfer advanced technology, further exemptions or reductions may be granted at the discretion of the Provincial Governments or Municipal Governments in the locales where their establishments are situated.

  • For enterprises with foreign investment established in Special Economic Zones, for foreign enterprises having establishments/places in Special Economic Zones that are engaged in production or business operations, and for enterprises with foreign investment of a production nature in Economic and Technological Development Zones, a 15% tax rate may be applied.
  • For enterprises with foreign investment of a production nature that are established in Coastal Economic Open Zones, in the old urban districts of cities where Special Economic Zones or Economic and Technological Development Zones are located, or in the open cities approved by the State Council, and for enterprises with foreign investment established in National Tour and Holiday Resorts, a 24% tax rate may be applied.
  • For enterprises with foreign investment of a production nature that are established in Coastal Open Economic Zones or Special Economic Zones, or in the old urban districts of cities where the Economic and Technological Development Zones are located, and that are engaged in technology- or knowledge-intensive projects involving foreign investments of more than US$30 million and long return periods, a 15% tax rate may be applied, upon approval by the SAT.
  • Foreign banks, banks with Chinese and foreign joint investment, and other financial institutions established in Special Economic Zones and other areas approved by the State Council may be eligible for a 15% tax rate, where the capital input by the foreign investors or the operating funds of the branches appropriated by the head office exceed US$10 million, and where the period of operation exceeds 10 years.

    Moreover, these taxpayers may apply for and, upon approval by the relevant local tax offices, enjoy exemptions for the 1st year following the year in which they begin making profits, and 50% tax reductions for the 2nd and 3rd years.

  • Where enterprises with foreign investment are recognized as new and high-technology enterprises, and are established in the State New and High-Tech Industry Development Zones approved by the State Council, a 15% tax rate may be applied.

    In addition, Sino-foreign joint ventures that are scheduled to operate for a period of not less than 10 years shall be granted exemptions for the 1st and 2nd years following the year in which they begin making profits.

  • Where enterprises with foreign investment are established in Special Economic Zones, and where they are engaged in the services industry, the enterprises may be granted exemptions for the 1st year following the year in which they begin making profits, upon approval by the relevant local tax office.

    They may also be eligible for 50% reductions for the 2nd and 3rd years, where the foreign investment exceeds US$5 million, and where the operational period exceeds 10 years.

  • Enterprises with foreign investment of a production nature that are established in Bonded Zones approved by the State Council, and that are engaged in export-processing businesses may enjoy a 15% tax rate.

Enterprises that Re-Invest

In the Same Enterprise or Other Enterprises

Where foreign investors re-invest profits earned from enterprises with foreign investment in the same enterprises to increase the registered capital, or where the foreign investors invest the profits as capital to open another enterprise with foreign investment whose operational period is scheduled to exceed 5 years, 40% of the tax paid on the re-invested profits may be rebated, upon approval by the relevant tax department.

Where the operation lasts less than 5 years, the tax rebate should be paid back to the tax offices. An exception is allowed where the foreign investors transfer the re-investment to companies over which they have direct or indirect ownership, or in which they have a 100% shareholding, in the process of a group restructure for the purposes of reasonable business.

In Export-Oriented or Advanced Technology Enterprises

Where foreign investors directly re-invest in China to open or expand export-oriented enterprises or advanced technology enterprises whose operational period is scheduled to exceed 5 years, tax paid on the re-invested profits may be fully rebated.

Where the enterprises fail to meet the criteria for export-oriented enterprises or where they have not been recognized as advanced technology enterprises within 3 years of the commencement of production or business operations, 60% of the tax rebate should be paid back.

By Way of Reserves

Where enterprises with foreign investment, under a resolution passed by the board of directors, make re-investments using public reserves or development funds, or reserve funds withdrawn from the after-tax profits as specified by the State rules to increase the registered capital of the enterprises, the portion belonging to the foreign investors may also enjoy re-investment rebates.

Computation of Rebates

Rebates on re-investment are calculated using the following formula:

Rebate = Re-investment amount ÷ (1 − {Previously applicable Foreign Enterprise Income Tax rate + Local income tax rate}) × (Previously applicable Foreign Enterprise Income Tax rate)

Where foreign investors use the after-tax profits for 1 tax year from enterprises with foreign investment to make one or more direct investments, the accumulated re-investment amount that can be used to claim a rebate shall be limited to the amount computed using the following formula:

Limit on re-investment amount = (Taxable income for the tax year in which the enterprise booked the after-tax profits − Foreign Enterprise Income Tax amount actually paid by the enterprise for the year) × (Percentage of equity held by the foreign investor in the enterprise for the year or the distribution percentage)

Enterprises Producing for Export

After the statutory exemption and reduction periods expire, enterprises with foreign investment that are engaged in production for export may be eligible for 50% reductions of the tax computed at the statutory rate for the current year, if the value of their exports for the year amounts to more than 70% of total annual production.

Enterprises located in Special Economic Zones and Economic and Technological Development Zones, and other enterprises already subject to a 15% tax rate may be granted a 10% rate if they satisfy the appropriate criteria.

Enterprises Engaged in Advanced Technology

After the statutory exemption and reduction periods expire, advanced technology enterprises with foreign investment that continue to be certified by the relevant departments as advanced technology enterprises may be eligible for 50% reductions of the tax computed at the statutory rate for 3 years.

Enterprises whose tax rate would be less than 10% after the 50% reduction may enjoy a 10% rate.

Interest Income

  • Interest earned on loans made to the Chinese Government or State banks by international financial organizations (e.g., International Monetary Fund, World Bank) shall be exempt from tax.
  • Interest earned on loans made at a preferential interest rate to State banks by foreign banks shall be exempt from tax.

Technology Transfer/Development Income

Royalties earned by foreign enterprises for the supply of technical know-how in the following areas may be exempt from where the technology supplied is advanced or the terms are preferential:

  • Scientific research.
  • Exploitation of energy resources.
  • Development of the communications industry.
  • Agricultural, forestry, and animal husbandry production.
  • Development of important technologies.

Activities Encouraged by the State

Local Determination of Reductions or Exemptions

For sectors and projects encouraged for foreign investment, reductions, or exemptions may be determined by the People's Government of the province/autonomous region/municipality directly under the State Council after considering local conditions and practical needs.

At present, most areas grant reductions or exemptions to enterprises with foreign investment, in particular those of a production nature. The exemptions or reductions are normally synchronized with the tax holiday period.

Additional Projects

Where enterprises with foreign investment are engaged in projects encouraged by the State, and where the tax authorities at the provincial level have granted their applications for exemptions or reductions, they may enjoy periodic exemptions or reductions on income derived from additional investment projects that extend beyond scope of the original contracts, if they satisfy either of the following criteria.

  • The increment in the new registered capital owing to the additional investment reaches US$60 million or more.
  • The increment in the new registered capital owing to the additional investment reaches US$15 million or more, and amounts to 50% or more of the original registered capital.

Enterprises Purchasing China-Made Machinery

The scenarios described below apply to enterprises with foreign investment.

However, foreign enterprises with establishments/places in China that are engaged in production or business operations may also obtain tax credits on their purchases of China-made machinery in accordance with the principles outlined below.

Within the Total Investment Sum

Where enterprises with foreign investment are engaged in investment activities that are in line with State Council rules, and where they purchase China-made machinery with funds within the total investment sum, 40% of this machinery investment may be credited against the increase in tax for the year in which the purchase was made over the tax for the previous year.

Where the increase is not enough to offset the investment, the balance of the investment may be carried forward to subsequent years (on the basis of the enterprise income tax in the year before the year of purchasing the machinery) for a maximum of 5 years.

Where enterprises with foreign investment are enjoying exemptions and reductions in accordance with the relevant laws and administrative regulations, creditable periods that fall within the tax holidays may be prolonged for a maximum of 7 years.

Within the Total Investment Sum

Where enterprises with foreign investment purchase China-made machinery using funds beyond the total investment sum, and where they utilize advanced and suitable new technology, new crafts, new equipment, or new materials to transform the original facilities and production technology for the purposes listed below, 40% of the machinery investment may also be credited against the increase in tax for the year in which the purchase was made over the tax for the previous year.

  • Improving economic efficiency and product quality.
  • Diversifying or updating products.
  • Expanding exportation.
  • Decreasing costs.
  • Saving energy.
  • Optimizing comprehensive use of resources.
  • Tackling waste residues, waste water, or waste gas.
  • Labor protection.

Transfers or Leasing

Where the machinery purchased is transferred or leased within 5 years of the purchase, the credited amount should be paid back, at the time of the transfer or lease.

Others

  • Profits obtained by foreign investors from enterprises with foreign investment may be exempt from tax.
  • Interest, rental, royalties, and other income derived from within China by foreign enterprises that have no establishments/places in China, or that have establishments/places in China but whose income from such items is unconnected with these establishments/places, shall be subject to a 10% rate, except for those foreign enterprises that enjoy exemptions.
  • Enterprises with foreign investment of a production nature that are engaged in energy, transportation, or port construction, or eligible integrated circuit manufacturing enterprises, may enjoy a reduced tax rate of 15%, upon approval by the SAT.
  • Sino-foreign joint ventures engaged in port and dock construction enjoy a 15% tax rate.

    Those whose operational periods exceed 15 years may, upon approval by the SAT offices at the provincial level in the locales where the enterprises are situated, enjoy exemptions from the first profit-making year to the fifth, and 50% reductions from the sixth year to the tenth.

TIME LIMIT AND PLACE FOR TAX PAYMENT

Time Limits for Payment

When Prepayments are Due

Tax and local tax payable shall be computed on an annual basis, and paid in advance to the relevant local tax offices in quarterly installments. The taxpayers should file their quarterly tax returns for prepayment and prepay the tax within 15 days of the end of each quarter.

Annual tax returns and final accounting statements (regardless of gains or losses) should be filed within 4 months of the end of the tax year, and the final settlement should be made within 5 months of the end of that tax year.

Any payments made in excess shall be refunded to the taxpayers, and any payments not made in full shall be paid by the taxpayers.

The quarterly prepayments should be based on the actual amount of profits in each quarter. Where the taxpayers face difficulties in doing so, the taxpayers may make prepayments based on one-quarter of their taxable income for the previous tax year, or based on some other method approved by the relevant local tax offices.

Places for Payment

Consolidated Payments

Cross-Area Chain Enterprises

Where enterprises with foreign investment run chain operations that cross several jurisdictions, the headquarters shall be responsible for reporting and paying tax on a consolidated basis.

Enterprises with 2 or more Business Operation Units

Where foreign enterprises have set up 2 or more business operation organizations in China, the enterprises may select one of these organizations to carry out consolidated reporting and payment of income tax.

The selected organization shall be responsible for monitoring the business operations of the other organizations. It shall also keep complete accounting records and vouchers that correctly reflect the revenue, costs, expenses, and profits and losses of all the organizations.

To apply for consolidated reporting and payment, the selected organization should submit its application to the local tax authorities for examination.

  • Where all the organizations are located within the same province/autonomous region/municipality directly under the State Council, approval should be sought from the tax department at the provincial level.
  • Where the organizations are not located within the same province/autonomous region/municipality directly under the State Council, approval should be sought from the SAT.

    Where the various organizations are subject to different tax rates, the taxable income for each should be computed fairly, and tax should be paid at different rates.

  • Where any profit remains after offsetting the profits and losses between the various organizations, consolidated tax should be paid by the organization at the rate applicable to the profit-making organization.
  • Where there is a loss, the business organization may offset the losses against profits earned in later years.

Any profits remaining after such offsets have been made shall be subject to tax at the rate applicable to the organization.

The amount used for the offsets shall be taxed at the rate applicable to the organization that has devoted profits for offsetting against the losses of the loss-making organization.

Enterprises Merged/Spun off/Terminated

Enterprises that have undergone mergers, spin-offs, or terminations at some point during the tax year shall settle their income tax liability up to that point with the relevant local tax offices within 60 days of the cessation of production or business operations.

At that time, any excess payment shall be refunded, and any deficiency made good.

Withholding Agents

For foreign enterprises that have no establishments/places in China but that have income in the form of profits, interest, rentals, royalties, and/or other income derived within China, and for foreign enterprises that have establishments/places in China but whose income in the form of profits, interest, rentals, royalties, and/or other income is not effectively connected with the establishments/places, the taxpayers shall be those who are paid the income, while those who pay the income shall be become the tax withholding agents, and shall pay tax on behalf of the taxpayers.

The tax shall be withheld from each payment made by the payers. The withholding agents should, within 5 days, turn the taxes withheld on each payment over to the State Treasury, and submit a withholding income tax return to the relevant tax offices.

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