Preferential Tax Treatment
China has now reduced its tax incentives considerably. Prior to 2008 effectively all foreign invested enterprises were entitled to some form of tax incentive and as result of which their effective tax rate was far less than the 33% listed in the then law. Despite the removal of many tax incentives, several still remain. We outline a few of the more important ones below.
High Tech Enterprises
The most generous remaining preferential tax treatment is probably the tax incentives given for enterprises that obtain high tech status. Under Article 28 of the EITL approved high tech enterprises are entitled to a reduced tax rate of 15%.
High Tech enterprises are those that that have their own independent, core intellectual property rights and at the same time meet the following conditions:
- The product (service) falls within the scope of the High and New Technology Areas Entitled to the Key Support of the State;
- The proportion of research and development expenses in the sales revenues is not lower than the prescribed proportion;
- The proportion of the income from high and new technology products (services) in the total income of the enterprise is not lower than the prescribed proportion.
In 2008 the Chinese tax authorities issued two circulars providing implantation guidance for indentifying and approving high tech status: Circular 172 (Guo Ke Fa Huo [2008] No. 172) and Circular 362 (Guo Ke Fa Huo [2008] No. 362).
According to Circular 172, an enterprise must meet the following requirements to qualify as a high tech enterprise:
- Be established within mainland China;
- Have been established for more than one year;
- Continuously conduct research and development (R&D) activities and convert any intellectual property (IP) developed into products and/or services; and
- Own the rights its core IP and carry out business in one of the “Encouraged High Technology Areas”.
Circular 362 outlines standards and measurement methods to be satisfied to obtain high tech status. It lists and defines qualified R&D expenditure, clarifies certain controversial issues (such as “exclusive rights”) and provides criteria for determining qualified R&D projects, personnel and revenue. Importantly, in accordance with Circular 362, the potential Chinese high tech enterprise must hold the worldwide rights to the IP.
Small-scale taxpayer incentives
Specified “small scale taxpayers” are entitled to obtain a concessionary tax rate of 20%. A small-scaled low-profit enterprise is defined in the EIT Regulations as:
- an industrial enterprise
a) engaged in industries other than those restricted or prohibited by the State;
b) has an annual tax payable of not more than RMB300,000;
c) assets valued at less than RMB 30 million; and
d) less than 100 employees; or
- an enterprise not being an industrial enterprise which has
a) an annual tax payable of not more than RMB100,000;
b) assets value less than RMB 30 million; and
c) employs less than 80 employees
Environmental protection, water or energy saving projects.
Pursuant to Article 27 of the EITL income environmental protection, water or energy savings projects are entitled to preferential tax treatment. Environmental protection, water or ergy savings projects includes the processing of public sewage, the processing of public garbage, the comprehensive exploitation and utilization of firedamp, the renovation of technologies of saving energy or discharging wastes, the desalination of sea water, etc (see Article 88 of the EIT Regulations).
An enterprise’s income in relation to a qualifying projects is exempt for the first 3 years and receives a 50% discount for the next three years.
Environmental protection, water or energy saving equipment
Under Article 100 of the EIT Implementing Regulations 10% of the amount invested in certain specified equipment may be credited against the EIT payable by the enterprise. Any excess may be carried forward for five tax years. The specified equipment satisfying this incentive is listed in the following catalogues:
- Catalogue of Special Equipments Dedicated to Environmental Protection Entitled to Preferential Income Tax Treatment,
- Catalogue of Special Equipments Dedicated to Conservation of Energy and Water Entitled to Preferential Income Tax Treatment, and
- Catalogue of Special Equipments Dedicated to Work Safety Entitled to Preferential
Clean Development Mechanism incentives
On 23 March 2009 the Ministry of Finance and the State Administration of Taxation jointly issued the a Notice on the Policy of Enterprise Income Tax for China CDM Fund and China CDM Projects (the “CDM Notice”). Under the CDM Notice, enterprises implementing CDM projects in China enjoy the following tax benefits (the changes are effective retrospectively from 1 January 2007):
- CDM tax payments (65% for HFC and PFC projects; 30% for N20 projects; 2% for other projects) may be deducted from the taxable income earned from the sale of CERs;
- Donations from domestic and international institutions are tax exempt, and
- Interest earned from fund deposits and treasury bonds is tax exempt.
I was wondering if you had any information, or any leads to information, on chinese law concerning tax exemptions or benefits for chinese companies that perform corporate philanthropic spending? a general insight into these laws would be helpful, and any greater information on these laws for companies who have philanthropic activity outside of china would be great.
If you can help, please reply to my Wilson Center email account.
Thanks
-James
Hi,
Do you have any information about taxation in Chongming Island?
Thank you,
Kina,
What particular tax issues are you interested in with respect to Chongming Island?
Matthew
Hi Matthew,
I would like to know if there are special tax incentives or any preferential tax treatment in this zone.
Thank you very much,
Kina
Hi Kina,
I do recall that early last year Shanghai issued measures to attract foreign investment in certain districts – I recall that Chongming Island was one of the relevant districts. These incentives, which were not fixed, were basically partial refunds of VAT, Business Tax and Corporate Income Tax that was paid. It is my understanding that these incentives were to be granted on a case by case basis.
I hope this helps.
Cheers,
Matthew
Hi Matthew,
Thank you very much for your answer. By the way, your blog is very interesting and it helps me a lot. I am writing a thesis and it is hard to find good informations about Chinese tax law in English.
Best regards,
Kina
Hi Kina,
Thanks for the positive comments. I am glad the blog has helped. You are correct about the lack of good information on Chinese tax in English. This was one of the reasons I started the blog.
Feel free to comment and ask questions at any time.
Cheers.
Matthew
Hi Matthew,
I would like to ask you if the new preferential tax treatment introduced with the 2008 EITL is very different from the previous one and if it is less attractive for foreign investment.
Sorry, my English is not very good, actually I am French
Thank you very much.
Best regards,
Kina
Kina,
Yes it is quite different and is, generally, less attractive for foreign investment. You might find the following article by Jinyan Li useful http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1030656 as it discusses the changes that were made in 2008.
Your english is fine and there is no need to apologise. My french is limited to “bonjour” so you are much better than me.
Cheers,
Matthew
Bonjour
Thank you for your answer. This article is extremely interesting. I am writing a thesis about the consequences of the 2008 Enterprise Income Tax Law on Foreign Direct Investment so it is completely linked to my subject. I heard that there will be another reform in 2010, I will try to get also some informations about it.
You are nice for my (poor) English.
Thanks again.
Sincerely yours,
Kina