The 10th National People’s Congress passed the new Corporate Income Tax Law (“New Lawâ€) on 16 March 2007. The New Law provides a single income tax regime for both domestic and foreign investment enterprises (“FIEsâ€). The New Law will take effect on 1 January 2008. The following summarises the key aspects of the New Law and its impact on foreign investors. | |||
New CIT Rate The new standard corporate income tax (“CITâ€) rate is 25%. The reduced CIT rate of 20% would apply to small-scale and thin-profit enterprises and the preferential CIT rate of 15% is only available to high / new technology enterprises which require support from the State. | |||
TaxpayersThe New Law introduces the concepts of “tax resident enterprise†and “non-tax resident enterprise†to differentiate taxpayers:TaxpayersDefinitionTaxable IncomeResidentEnterpriseEstablished in China under PRC lawsEstablished under foreign laws but has its place of effective management in ChinaWorldwide incomeNon-residentEnterpriseEstablished under foreign laws, and has its place of effective management outside ChinaChina-sourcedincome Foreign enterprises established outside China without a “substantive presence†in China will need to determine whether their place of effective management is based in China. | |||
CIT Preferential PoliciesThe New Law grants tax preferential treatment on an industry basis rather than on a location basis. The main tax preferential polices in the New Law include:“Encouraged†high-tech enterprises are eligible for a reduced 15% CIT regardless of location in China;CIT exemption / reduction remains for specific technology transfer and investments in infrastructure, agriculture, forestry, animal husbandry and fishery industries;“Super deduction†is allowed for R&D expenses and salary expenses for employment of handicapped workers;CIT credit is granted to specific venture capital enterprises and investments in environmental protection, energy, water conservation and specific safety equipment.Some CIT preferential policies currently available exclusively to FIEs will be revoked, including:Five-year tax holiday for manufacturing FIEs;Extension of tax holiday to export-oriented FIEs;Reduced 15% / 24% CIT rate applicable to FIEs in special zones;CIT refund on reinvestment;50% CIT reduction for additional three years after the tax holiday for FIEs qualified as “technologically-advanced enterprisesâ€;CIT exemption for after-tax profit repatriation by foreign investors. | |||
Transition PeriodThe New Law allows for a five-year transition period. The transition arrangement is as follows:
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Withholding Tax RateThe New Law provides a flat 20% tax rate for dividends, interest, royalties, rentals, capital gains or other income derived by non-resident enterprises from sources in China. However, it is still uncertain whether:
It has been speculated that the current withholding tax exemption on dividends may be revoked and be taxed at 10%. The implementation rules may give the answer. | |||
Anti-tax-avoidance Measures Anti-tax-avoidance measures are tightened under the New Law as follows:
The anti-tax-avoidance provisions above are very broad and general terms. More details are expected in the impending implementation rules. | |||
Impact on Foreign Investors As the detailed implementation rules have not been released by the State Council, many points remain to be clarified. However, the New Law has provided the general principles which may change future investment strategies for foreign investors in China. Foreign investors are advised to re-examine their tax planning schemes to optimise tax preferential policies available under the old law prior to the effective date of the New Law to ensure their eligibility for tax benefits under the New Law. |
(source: SBA Stone Forest Corporate)