Major Points of the New Enterprise Income Tax Law of P.R. China Go back »
2007-04-23 | Nanjing
Major Points of the New Enterprise Income Tax Law of P.R. ChinaA. Scope of Application
Article 1 of the New Tax Law provides that 'Enterprises and other organizations that gain incomes within the territory of the People's Republic of China (??ereinafter referred to as 'Enterprises') are taxpayers of the enterprise income tax, who shall pay enterprise income tax according to the stipulations of this law.
Article 2 of the New Tax Law divides enterprises into two categories: 'Resident enterprises' and 'Non-resident enterprises'. 'Resident enterprises' refer to those enterprises that are established according to law within China or established according to the laws of foreign counties (regions) but with their actual management organs located within China 'Non-resident enterprises' refer to those enterprises that are established according to the laws of foreign countries (regions) without their actual management organs located within China but with their representative offices/places within China, or with no management organs or representative offices/places located within China but with incomes sourced from China.
Article 3 of the New Tax Law provides that resident enterprises shall pay enterprise income tax on the incomes gained within and outside of China. Non-resident enterprises that have their representative offices/places in China shall pay enterprise incomes tax on the incomes gained by their representative offices/places within China and on those incomes gained outside of China which are actually related to those representative offices/places. Non-resident enterprises that have no representative offices/places in China, or those non-resident enterprises that have their representative offices/places in China but have incomes which have no actual relationship with such representative offices/places, shall only pay enterprise income tax on those incomes that are sourced from China.
B. Tax Rate
Article 4 of the New Tax Law provides that the enterprise income tax rate shall be 25%. For those non-resident enterprises that have no representative offices/places in China, or those non-resident enterprises that have their representative offices/places in China but have incomes which have no actual relationship with such representative offices/places, the enterprise income tax rate shall be 20%.
Based on the above provisions of the new tax law, it is clear that starting from January 1, 2008, the new tax rate shall be equally applied to domestic companies, sino-foreign joint venture companies and solely foreign funded companies because they are all defined as 'Resident enterprises' according the new tax law However, the new tax law allows certain exceptions which I will discuss hereunder.
C. Special Pretax Deduction Items
In addition to a list of detailed pretax deduction items, there are some special items that the new tax law allows to be deducted prior to taxation. Those special deductions include:
(1) Donation for commonweal purpose. Article 8 of the new tax law provides that an enterprise shall be allowed to deduct payment of donation for commonweal purpose prior to taxation up to 12% of its annual total profits;
(2) According to Article 30 of the new tax law, enterprises are allowed additional deduction of Costs for developing new technologies, new products and new technological crafts and costs for paying salaries to handicapped employers and other kind of people that the state encourages enterprises to employ. Regarding 'Additional deduction of such costs, what percentage of additional costs are allowed to be deducted prior to taxation, the new tax law does not mention. Such issues will be further covered in the implemental rules to be prepared and promulgated by the State Council in the near future. According to 'Notice Concerning Preferential Enterprise Income Tax Policies for Enterprises to Developing New Technologies' issued by the Finance Department and the State General Tax Bureau on September 8, 2006, enterprises are allowed to deduct prior to taxation 100% of costs related to the development of new technologies, new products and new technological crafts in accordance with relevant regulations. On top of that deduction, they are further allowed to deduct an additional 50% of such costs actually incurred.
D. Preferential Tax Incentives
Chapter 4 of the New Tax Law provides a series of preferential tax benefits, which includes the following:
- Enterprises engaged hi-technology development which are particularly supported by the state in shall be provided with 15% of the enterprise income tax rate. Please note that based on previous regulations, only those hi-tech enterprises that are located in state-level hi-tech development zones are provided such preferential tax benefits. A major change in this new tax law is that any enterprises engaged in hi-technology development will be provided with the same preferential tax benefits even if they are not located in state-level hi-tech development zones.
- Small scale enterprises with low profits that accord with criteria shall be provided with 20% of the enterprise income tax rate;
- Projects and industries that are particularly supported and encouraged by the state
shall be provided with preferential enterprise income tax treatment;
- Enterprises shall be exempted from tax on the following incomes:
(a) interests gained from purchasing state bond;
(b) dividend and capital bonus gained from investment among resident enterprises that accord with criteria;
(c) dividend and capital bonus gained by non-resident enterprises that have their representative offices/places in China through their investment in resident enterprises on the condition that such dividend and capital bonus are actually related to the representative offices/places;
(d) incomes gained by non-profit organizations that accord with criteria.
- Tax on the following incomes of enterprises can be reduced or exempted:
(e) incomes gained by undertaking projects of agriculture, forestry, husbandry and fishery;
(f) incomes gained by investing in public infrastructure projects particularly supported by the state;
(g) incomes gained by undertaking projects related to environmental protection, energy and water saving, which accord with criteria;
(h) incomes gained by transferring technologies that accord with criteria
In addition, Article 29 of the new tax law provides that the autonomous organs of the minority autonomous regions can decide to provide enterprises located in such autonomous regions with tax reduction or exemption up to the proportion shared by the local autonomous regions. Such decisions must be submitted to the autonomous regional or provincial government for approval.
E. Other Provisions
Article 57 of the new tax law provides that enterprises, which were established upon approval prior to the promulgation of this new tax law and which were provided with preferential tax incentives in accordance with previous laws and administrative regulations, shall be provided with a five-year transitional period, during which their tax rates shall be gradually transited to the tax rates set forth in the new tax law.
It should be pointed out that that the above preferential incentives are the principles to be applied, which need to be further defined with detailed implemental rules, for example, the underlined wordings in above paragraphs. It can be expected that such implemental rules would be promulgated by the State Council prior to the implementation of the new tax law on January 1, 2008.