- Legal authority
- Resident and non-resident
- Taxation on foreign investment enterprises
- Taxation on foreign enterprises
- Tax incentive
- The PRC Tax Law for Foreign Investment Enterprises and Foreign Enterprises its Detailed Implementation Regulations
- The PRC Tax Levy and Administration Law and its Detailed Implementation Regulations
Tax residents and non-tax residents
FIE's are tax residents under the PRC Tax Law and therefore they are subject to tax on world-wide income. FE's are non-tax residents and therefore subject to income derived from sources inside China only. Non-residents are not entitled to the benefit of avoiding double tax on income, as provided under the fax treaty entered into between the PRC and other countries.
Taxation on Foreign Investment Enterprises (FIE)
Tax rates applying to FIE's
||Other parts of the PRC
||Special Economic Zones and the free trade zones (FTZ) located within
||National Economic technology development zones and the FTZ's located within
||Open areas and cities and Provincial economic development zones
|Production type FIE's
|Non-production type FIE's
Local Income Tax
Except for FIE's located in the SEZ, all FIE's shall be subject to a local income tax of 3% unless it is exempted.
The tax year starts from the first day in the calendar year and ends with the last day in the calendar year.
Ascertainment of taxable amount is based on the accrual principle.
- Taxable amount = Profit from sale of goods + other profits + non-business receipts minus non-business expenses,
- Profit from sale of goods = net amount on sale of goods - costs of goods sold - sales tax - (selling expenses + administrative expenses + finance expenses),
- Net amount on sale of goods = gross amount on sales of goods - sales discount - sales returns,
- Costs of goods sold = current period costs of goods + opening stock - closing stock,
- Current period costs of goods = current period production costs + opening semi-finished goods + opening finished goods - closing semi-finished goods - closing finished goods,
- Current period production costs = current period direct materials consumed + direct wages + direct expenses.
Taxation on fixed assets
Assets with costs exceeding RMB2,000 that have a useful life of more than one year are classified as fixed assets.
Depreciation of assets is calculated by the straight-line method. The total depreciation amount for a fixed asset is the historical cost after a deduction of 10% residual value. Annual depreciable amount charged to production costs is arrived at by dividing the costs net of residual value by the prescribed minimum number of years in use.
Taxation on foreign enterprise (FE)
Foreign enterprises are classified into two types: Foreign enterprises with a taxable presence in the PRC, and Foreign enterprises without a taxable presence in the PRC.
A taxable presence means that a particular foreign enterprise has set up or deemed to have set up a permanent establishment in the PRC. Foreign enterprises that have a permanent establishment in the PRC shall be subject to tax on all PRC-source income. A permanent establishment may include a representative office, a construction site, a mineral extraction site, a factory or a fixed place of business.
Foreign enterprises with a permanent establishment in the PRC
According to the PRC Income Tax Law for Foreign Investment Enterprise and Foreign Enterprise and its Implementation Regulations, Representative offices are considered to be permanent establishments set up inside China by non-resident foreign corporations1. RO's are subject to tax on all income derived from within the PRC irrespective of whether they are paid inside the PRC 2.
The presence of an RO is an extension of its activities from the home country to the host country. If there is a bilateral tax treaty between the PRC and other countries, all the income of the RO's is not taxable in the host country if the duration of the RO's presence in the PRC is less than 183 days in the calendar year. A tax planning opportunity may exist by taking advantage of the 183-day rules in the year of establishment and termination 3.
- Article 3 of the Implementing Regulations of the PRC Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises provides that the term "establishment or sites" shall refer to management establishments, business offices, operating offices and places, factories, places of extraction of natural resources, sites for contracted projects such as construction, installation, assembly or exploration projects, sites for the delivering services and business agents.
- Article 1 of the PRC Income Tax Law for Foreign Investment Enterprises and Foreign Enterprises.
- Mauritius has a tax treaty with the PRC, under which the period of granting the income tax exemption extends to 12 months for the permanent establishment set up by Mauritius corporations inside the PRC.
Foreign enterprises that do not have a permanent establishment in the PRC
Foreign enterprises that do not have a permanent establishment in the PRC are subject to withholding tax on following category of income:
- (a) Rent,
- (b) Interest,
- (c) Royalty, and
- (d) Dividend.
Dividend income tax is specifically exempted under the PRC Tax Law for Foreign Investment Enterprises and Foreign Enterprises.
A foreign enterprise that is resident of a country with which the PRC has a tax treaty is subject to withholding tax at a reduced tax rate of 10%. If the foreign enterprise is not a resident of a country with which the PRC has a tax treaty, the foreign enterprise will be subject to a withholding tax at 20% on the above-mentioned category of income except for dividend income.
Production-type Foreign Investment Enterprises with an operating period exceeding 10 years are eligible for tax exemption in the first 2 years of operation and 3 years of tax concession at half rates commencing in the third year of operations. The tax breaks (exemption and concession) shall get started in the first profit-making year of the operation.
Foreign Investment Software Enterprises are also granted the same tax concession as that received by production type enterprises.
Reduction in tax rate
Foreign investment enterprises will be subject to a lower income tax rate of 15% if they are located in the 5 special economic zones.
Refund on re-invested profits
Foreign investment enterprises will be entitled to refund on re-invested profits if the profits are used to expand the scales of operation by increasing the registered capital, or used to invest in a newly set up foreign investment enterprise. However, the newly invested enterprise must at least have an operating period of 5 years. The refund will be made on 40% of the income tax already paid by the first foreign investment enterprise.
Carry-forward of tax losses
Foreign investment enterprises can use its tax loss to offset future profits. The carry-forward of tax loss is valid for a period of 5 years commencing at the year when the loss is incurred.
Exemption on imported equipment
Foreign investment enterprises will be exempted from the duty and VAT on the equipment imported within the amount of approved total investment. But the said equipment, which is bonded goods, is subject to monitoring and control by the local customs over a period of 5 years in respect of their use. The equipment cannot be pledged, rented, disposed of during the above-mentioned period unless the foreign investment enterprise pays all the import duty and VAT, plus interests that accrue from the date of import to the date of change in use.