Before you get into Chinese market
or an industry, it is critical for you to develop a deep understanding regarding its tax environment. The Chinese government sometimes regulates specific industry or product/service markets by favorable or unfavorable tax policies. As a result, you need to be in a position to be able to take advantage of privileged tax policies, find the best solution through proper tax planning, avoid any complicated tax rule pitfalls, and accurately project returns of your investment.
Corporate Income Tax:
The corporate income tax rate for foreign-invested enterprise
based in special economic zones or foreign enterprise that has set up an establishment or place to engage in production or business operations in special economic zones is 15%. Foreign-invested enterprises are free from the local portion of the corporate income tax.
Two-year Exemption and Three-year Half Reduction:
Productive enterprises engaging in industries, transportation (excluding passenger transportation), agriculture, forestry and animal husbandry with an operation tenure for over 10 years can be exempted from corporate income tax for two years since the first profit-making year and pay half of corporate income tax from the third through the fifth year if they file such an application to the taxation authority and hence receive approval.
Five-year Exemption and Five-year Half Reduction:
Sino-foreign joint ventures that invest in constructing ports and wharfs with an operation tenure of over 15 years are entitled to, if they so apply to and are approved by the taxation authority, exemption of corporate income tax for five years since the first profit-making year and 50% reduction from the sixth through the tenth year.
One-year Exemption and Two-year Half Reduction:
Service enterprises with foreign investment exceeding US$5 million and an operation term of over 10 years are entitled to, if they so apply to and are approved by taxation authority, exemption of corporate income tax for the first profit-making year and 50% reduction from the second through the third year.
Foreign-invested export-oriented enterprises, after the expiration of the universal tax incentives as stipulated in tax laws, may enjoy a privileged income tax rate at 10% for the year when over 70% of their products are exported and their foreign exchange account is in surplus.
Advanced Technology Enterprise:
Enterprises that have been recognized as Advanced Technology Enterprises enjoy a preferential corporate income tax rate at 10% for three years following the expiration of the universal tax incentives as stipulated in tax laws.
Reinvestment of Profits:
If the foreign investors of a foreign-invested enterprise reinvest their profits into the enterprise, using the profit to increase the registered capital or to establish another enterprise with an operation tenure of over 5 years, they will be entitled to 40% refund of the corporate income tax derived from the reinvested profits if they apply to and are approved by the taxation authority. If the reinvestment is used to establish an export-oriented enterprise or advanced technology enterprise with an operation tenure of over 5 years, they will enjoy an incentive of 100% refund.
If the R&D investment of foreign-invested enterprises in that year in China represents a 10% increase against the previous year, the investment can be exempted from taxes. Additionally, an equivalent of 50% of the actual R&D cost can be deducted from the taxable income in that year with the verifications of Tax Authorities.
Import of Equipment:
Except commodities listed in The List of Import Commodities without Tax Exemption for Foreign Investment Project, equipment imported to be used in foreign investment projects that are encouraged in the Catalogue of Industries for Guiding Foreign Investment are exempted from tariffs and import VAT. Technologies, necessary parts and accessories that are attached to the equipment as shown in the contract are also exempted from the above tax obligations.
Purchase of Domestically Produced Equipment:
If a foreign-invested enterprise that falls within the encouraged category as listed in the Catalogue of Industries for Guiding Foreign Investment
purchases domestically made equipment in accordance with relevant conditions stipulated by the State, 40% of the equipment investment can be deducted from the increment of corporate income tax that year from the previous year. If the increment realized in the year the equipment is purchased is insufficient to offset the equipment expenditure, the increment realized in later years can be used by the enterprise to pay for the equipment cost. However it should be made within 5 years.
Additionally the VAT resulted from such equipment can also be exempted unless they are in the List of Import Commodities without Tax Exemption for Foreign Investment Project and the List of Import Commodities without Tax Exemption for Domestic Investment Project if necessary requirements are met.
Import of Upgrading Equipment, Technology and Parts and Accessories:
If foreign-invested enterprises that fall within the encouraged category as listed in the Catalogue of Industries for Guiding Foreign Investment, foreign-invested R&D centers, advanced technology and export-oriented enterprises import equipment (excluding whole set equipment and production line) and attached technology, parts and accessories, the tariffs and import VAT can be exempted if the following requirements are met:
The importation is within the production and business scope that have originally been approved;
The equipment is used for the upgrading of the said enterprises;
The equipment is not produced in China or although available in China, the performance is poor;
The money used to pay the import is sourced from funds outside the total investment volume (i.e., corporate reserve, development fund, depreciation, after-tax profits);
The equipment is not included in the List of Import Commodities without Tax Exemption for Domestic Investment Project.
Tax exemption, reduction and refund are to be carried out for export goods of foreign invested enterprises. The calculation way for these tax incentives is: duty free for the value added in the last procedure to the export goods of manufacturing enterprises; the tax amount after the above-mentioned tax favors is the surplus after a calculation of F.O.B and the difference between tax rate and tax reimbursement rate, it is to be drawn back from the total income taxes of the enterprise, the rest of the income taxes shall offset expenditure taxes of goods sold domestically; in case it is not enough to meet the offset, the reimbursement institutions shall take care of the reimbursement.
Our experienced tax professionals can provide you tax advice services before, during the course of or following your investment in China
. We can work with you as your tax advisor on a retainer or ad hoc basis.
There are lots of different treatments between the prevailing accounting system and tax system in China . The objective of the accounting system is to present financial statements on a true and fair basis, while the tax system represents state sovereignty. Many foreign investors are confused and put off by the differences between the two systems.
Chinese tax authorities require all Foreign Invested Enterprises ("FIEs") perform a tax reconciliation by the end of April each year. By tax reconciliation, tax authorities require additional payment for under-paid Corporate Income Tax ("CIT") or refund over-paid CIT during the prior year.
Based on our statutory financial statement audit or tax audit, we can propose relevant tax adjustments, prepare complicated tax filing documents, and do tax filing for you on a timely, accurate and legal basis.
Edited 1 time(s). Last edit at 04/20/2015 06:14AM by Tomlee.