Resident enterprises are either established under the laws of the PRC or founded outside, but with a place of effective management in China in the sense of a management which is substantial and has overall management control over manufacturing and business operations. The place of effective management is where the main assets are gained, accounting and other books are held, the shareholder meetings take place and where half of the senior management staff is located. Resident enterprises have to pay CIT within and outside of PRC, which is slightly different to other countries.
China does not distinguish between ordinary business income and capital gains. Overseas income derived by resident enterprises shall also be included in the taxable income for CIT purposes. However, foreign income taxes that have been already paid could be deducted or credited when calculating CIT.
Resident enterprises are subject to CIT on their global income. Basically, it is the taxable income which is the gross income minus non-taxable income, tax exempted income, carried forward losses and other deductions. All points will be explained further.
- Gross Income includes but is not limited to sales income, service income, asset transfer income, dividend income, interest income, rental income, royalty income, donation income and other income in both monetary and non-monetary nature.
- Non-taxable income
- Tax-exempt income, which includes interest on state debt, income to non-profit organizations and dividend income from a resident enterprise.
- Forward carried losses can be carried forward for a maximum of 5 years.
- Other deductions include real and reasonable expenses related to income generating activities, for example costs, expenses, taxes, losses and other expenses incurred during the course of generating income. Deduction of expense Items should be related to the acquiring incomes such as salary, staff welfare, education, advertising expenses, entertainment expenses and donation to qualified institutions.
The Statutory corporate income tax is 25 per cent but there are several reductions:
China offers several tax reductions in order to stimulate related industries and regions.
1. High and New Technology Company(HNTE)
The company must be a resident of China for over one year and also owns intellectual property for core technologies used in their products or gives their Chinese subsidiaries a global exclusive license for at least 5 years. Also a sufficient R&D department is a must and needs qualified personnel. At least 10% – 30% of them must have obtained a bachelor degree or above. Besides the company must develop in one of these areas:
- Electronic information technology
- Biological and new pharmaceutical technology
- Aviation and aerospace technology
- New material technology
- High technology service industry
- New energy and energy conservation technology
- Resources and environmental technologies
- High and new technology for traditional industries innovation
The HNTE status is granted by provincial tax authorities for companies located in those provinces. It offers a tax reduced rate of 15 % and is valid for three years. It can be renewed every three years.
2. R&D Expenditures
Another reduction can be made is with the R&D expenses incurred in the development of new technologies, products and processes as far as it is not an intangible asset. The super deduction can be an additional 50% from the R&D expenses. Requirements are HR personnel cost, costs for evaluation of R&D results, clinical trial costs, maintenance testing & repair cost, samples and models & testing equipment cost.
3. Salary of Disabled Personnel Cost
An additional 100% of salary expenses paid to disabled personnel can be deducted from taxable income.
4. Fixed Assets
- Fixed assets susceptible to fast obsolescence due to technological progress.
- Fixed assets in the state of strong vibration and high corrosion throughout the years. In the case of adapting a shorter-period depreciation method, the minimum term of deprecation shall not be less than 60% of the depreciation duration as set forth in article 60. In the event of using an accelerating depreciation method, fixed assets shall be depreciated using the double declining balance method or sum of the years digits method method.
5. Small or Low Profit Enterprises
In order to fulfill the requirements, an enterprise must have less than 300,000 RMB in annual taxable income, less than 10 million RMB in total assets, less than 80 employees and not be engaged in prohibited or restricted industries. An exception is provided for manufacturing companies, which may have less than 100 employees and a maximum of 30 million RMB in total assets. For small or low profit enterprises the tax rate is 20%, but you can get an additional 50% CIT reduction if you have less than 60,000 RMB annual taxable income.
6. Income Subject to Tax Reduction or Exemption
Agriculture, forestry, animal husbandry and fishery project income are exempt.
Infrastructure projects and environmental protection, energy and water saving investments are exempt for the first three years, and enjoy three years of 50% reduction afterwards.
Technology transfer income is exempt up to 5 million RMB annually and a 50% reduction for any amount which exceed 5 million RMB.
7. 15% Tax Rate for Western Regions
Companies in western regions such as Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Ningxia, Qinghai, Xinjiang, Inner Mongolia and Guangxi can profit from the reduced tax rate.
In order to benefit from all tax reductions and file your CIT according to the regulations, you should consult a tax advisory. There are also other areas you need to consider when doing CIT compliance.
We would suggest that you to review internally and prepare a CIT Annual Settlement Checklist, which should be reviewed by a tax specialist within the company. If compliance is given, take action accordingly and consult our tax experts from Ecovis in order to meet the Deadline 31 May 2014.
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
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