China Tax Administration Guide (8) – Tax Incentives
8.1 Basic Regulations
8.1.1 The State shall, in accordance with its industrial policies, guide the orientation of foreign investment and encourage the establishment of enterprises with foreign investment which adopt advanced technology and equipment and export all or the greater part of their production.
(ZHU XI LING [45] 1991.4.9)
8.1.2 Foreign investment enterprises encouraged by the State which request preferential treatments in relation to enterprise Income Tax shall be treated in accordance with the relevant laws and administrative regulations promulgated by the State.
(GUO WU YUAN LING [85] 1991.6.30)
8.2 Lowering Tax Levy Tax Rates
8.2.1 The Income Tax on enterprises with foreign investment established in special economic zones, foreign enterprises which have establishments or sites in special economic zones engaged in production or business operations, and enterprises with foreign investment of a production nature in economic and technological development zones shall be levied at the reduced rate of 15%.
(ZHU XI LING [45] 1991.4.9)
8.2.2 Special Economic Zones refer to the Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen and Hainan Special Economic Zone, specified by the relevant legislation or with the approval of State Council. Economic and Technological Development Zones refers to economic and technological development zones approved by State Council in the coastal Port Cities.
(GUO WU YUAN LING [85] 1991.6.30)
8.2.3 Assessment of Enterprise Income Tax at the reduced rate of 15% is limited to incomes obtained by enterprises from production or business operations in the respective areas as specified in Paragraph 1, Article 7 of the Tax Law.
(GUO WU YUAN LING [85] 1991.6.30)
8.2.4 Income Tax on enterprises with foreign investment of a production nature established in coastal economic open zones, or in the old urban districts of cities where the special economic zones or the economic and technological development zones are located, shall be levied at the reduced rate of 24%.
(ZHU XI LING [45] 1991.4.9)
8.2.5 Coastal Economic Open Zones refers to the cities, counties and districts designated as Coastal Open Economic Zones by State Council.
(GUO WU YUAN LING [85] 1991.6.30)
8.2.6 Assessment of Enterprise Income Tax at the reduces rate of 24% is limited to income obtained by enterprises from production or business operations in the areas specified in Paragraph 2, Article 7 of the Tax Law.
(GUO WU YUAN LING [85] 1991.6.30)
8.2.7 Income Tax on enterprises with foreign investment in coastal economic open zones, old urban districts of cities where the special economic zones or the economic zones or the economic and technological development zones are located, or other regions defined by State Council within the scope of energy, communications, harbour, wharf or other projects encouraged by the State, may be levied at the reduced rate of 15%. The specific rules shall be formulated by State Council.
(ZHU XI LING [45] 1991.4.9)
8.2.8 Assessment of Enterprise Income Tax at the reduced rate of 15% in Paragraph 3, Article 7 of the Tax Law is applicable to the following projects:
A. Enterprises with foreign investment of a production nature established in the Coastal Open Economic Areas, the Special Economic Zones, or in the old urban districts of cities where the Economic and Technological Development Zones are located, and engaged in the following projects:
a. technology intensive or knowledge intensive projects;
b. projects with foreign investment of US$30 million and more, and with a long payback period;
c. energy, transportation and port construction projects.
B. Chinese-foreign equity joint ventures engaged in port and dock construction.
C. Foreign banks, branches of foreign banks, banks with Chinese and foreign joint investment, and other financial institutions established in the Special Economic Zones and other areas approved by State Council, with the capital put up by the foreign investor or operating funds appropriated by the head office totaling US$ 10 million or more; and with the period of operation exceeding ten years
D. Production enterprises with foreign investment established in Shanghai Pudong New Area, and enterprises with foreign investment engaged in energy and transport construction projects such as airports, ports, railways, highways and power stations.
E. Enterprises with foreign investment recognized as new and high-technology enterprises, which are established in the New and High-Technology Industrial Development Zones approved by State Council; and enterprises with foreign investment recognized as new-technology enterprises established in Beijing New-technology Industrial Development Experimental Zones.
F. Enterprises with foreign investment engaged in projects encouraged by the State and established in other areas designated by State Council.
G. Enterprises with foreign investment engaged in industries that fall under Item 1 of this Article shall, after applying to the State Administration of Taxation for approval, pay Enterprise Income Tax at the reduced rate of 15%.
(GUO WU YUAN LING [85] 1991.6.30)
8.2.9 On the matter of taxation incentives for Chinese foreign equity joint ventures building ports or docks
If foreign companies, enterprises or individuals (hereinafter referred to as foreign partners) set up Chinese-foreign joint ventures (hereinafter referred to as joint ventures) with Chinese companies or enterprises in the People¡¦s Republic of China to build ports and docks, besides the preferential policies provided in the laws and regulations regarding joint ventures, the following preferential regulations shall be carried out for such joint ventures since their investment is large, the construction period is long and the capital profit margin is low.
A. The joint venture is permitted to exist for a longer period, which may be longer than 30 years; the period to be determined by all sides of the joint venture through negotiation. The period may still be lengthened upon approval, by the Ministry of Foreign Economics and Trade or government bodies entrusted by the Ministry, of the application presented by the joint venture, if all the sides agree to lengthen the period when the contract comes to an end.
B. Recovery of the investment may be carried out by the enterprise by accelerated depreciation of fixed assets upon approval, by the Ministry of Finance of the People¡¦s Republic of China, of the application examined and verified by the local taxation authorities to which the application is presented by the joint venture.
Customs duty and Industrial and Commercial Consolidated Tax shall be exempt if the joint venture imports materials, loading and unloading equipment, transport vehicles and other production facilities necessary for building docks with the funds covered in the total investment.??
C. The joint venture shall pay Income Tax at the tax rate of 15%. Any newly established joint venture scheduled to operate for a period of not less than 15 years, from the year in which it begins to make profit, shall be exempted from Income Tax from the first to the fifth years, and allowed 50% reduction from the sixth to the tenth years upon approval of the joint venture¡¦s application by the tax authorities in the relevant provinces, autonomous regions and municipalities directly under State Council.
D. The period for tax exemption and reduction, as stipulated in the previous section, may be lengthened upon approval of the Ministry of Finance of the People¡¦s Republic of China, if the joint venture still has difficulty in tax payments upon expiration of the period for Enterprise Income Tax exemption and reduction.
The exemption from and reduction of local Income Tax for the joint ventures shall be decided by the People’s Governments in the provinces, autonomous regions or municipalities where the joint ventures are located.
E. Income Tax shall not be levied on the profit, allocated to the foreign partners of the joint ventures, to be exempt outside China.
F. The rate standards such as that for loading and unloading at the dock built by the joint venture shall be decided by the joint venture itself, then reported to the responsible government body responsible for the joint ventures and the local responsible price administration for their record.
G. If the foreign partner of the joint venture invests the allocated profit in a new joint venture to build up new berths or docks and the operation period of the new joint venture is not less than 5 years, 40% of the already paid Income Tax on the profit invested in the new joint venture shall be returned upon approval by the taxation authorities of the application presented by the foreign partner.
H. The joint venture is permitted to engage in projects with less investment, short construction period and high capital profit margin as its sideline. The existing regulations shall be adopted to deal with the relevant affairs.
I. The provisions mentioned above apply to companies, enterprises or individuals from Hong Kong or Macao who invest in establishment of joint ventures to build ports and docks.
(GUO FA [118] 1985.9.30)
8.2.10 According to Article 71 of the Detailed Rules, reduction of tax rates stipulated in the Tax Law only applies to income from production and operation carried out by enterprises with foreign investment in corresponding regions. Therefore, the Enterprise Income Tax and local Income Tax shall be calculated and levied at the tax rate stipulated in Article 5 of the Tax Law on any kind of income obtained by enterprises with foreign investment from sources outside China.
(GUO SHUI FA [039] 1993.7.14)
8.2.11 State Council decided that the policies for the coastal open cities shall be implemented for the new open cities consisting of the 5 cities along the Yangtze River: Chongqing, Yueyang, Wuhan, Jiujiang and Wuhu; 4 capital cities in border areas and coastal areas: Harbin, Changchun, Huhehaote and Shijiazhuang; 11 capital cities in inland areas: Taiyuan, Hefei, Nanchang, Zhengzhou, Changsha, Chengdu, Guiyang, Xi¡¦an, Lanzhou, Xining and Yinchuan.
(GUO HAN [93] 1992.7.30)
8.2.12 Other regions approved by State Council in Item 3 of Section 1 in Article 73 and in Item 5 of Section 1 in Articles 75 of the Tax Law refers to the regions, besides the Special Economic Zones, where foreign financial institutions may be established upon approval of State Council. That is to say, all those regions or zones where foreign financial institutions may be established as approved by State Council may enjoy the tax incentives stipulated in Item 3 of Section 1 in Article 73 and Item 5 of section 1 in Article 75 of the Detailed Rules of the Tax Law.
(GUO SHUI HAN [138] 1995.4.3)
8.2.13 The enterprises which may enjoy tax incentives for particular projects shall be enterprises with foreign investment directly investing in building and operating particular projects, excluding the enterprises contracting civil work for the projects.
If the enterprises with foreign investment investing in and operating the particular projects conduct other usual projects as sidelines, the enterprises shall calculate and declare the incomes, costs and the corresponding taxable income from the particular and the usual projects separately, and enterprise Income Tax shall be calculated and paid according to the tax rates and the periods for tax exemption and reduction respectively, applying to the particular projects and the usual projects. For those enterprises who fail to accurately calculate and declare Enterprise Income Tax separately, or for those enterprises whose calculations and declaration the local responsible taxation authorities consider to be not sound, the local responsible taxation authorities shall calculate the Income Tax payable on the basis of the taxable incomes separately, according to the proportions of the business income derived from the particular projects and from the usual projects or according to other appropriate proportions.
(GUO SHUI FA [151] 1995.8.4)
8.3 Regulations on Fixed Term Reductions and Exemptions from Tax
8.3.1 Any enterprise with foreign investment of a production nature scheduled to operate for a period of not less than 10 years shall, from the year in which it begins to make profits, be exempted from Income Tax in the first and second years and allowed a 50% reduction in the third to fifth years. However, the exemption from or reduction of Income Tax for enterprises with foreign investment engaged in the exploitation of resources such as petroleum, natural gas, rare metals and precious metals shall be stipulated separately by State Council. Enterprises with foreign investment which have actually operated for a period of less than 10 years shall repay the amount of Income Tax already exempted or reduced.
(ZHU XI LING [45] 1991.4.9)
8.3.2 The period of operation in Paragraph 1, Article 8 of the Tax Law refers to the period starting from the day when an enterprise actually goes into production and operation (including trial production or operation)to the day the enterprise terminates its production and operation.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.3 An enterprise applying for exemption from and reduction in enterprise Income Tax according to the provisions in Paragraph 1, Article 8 shall file with the local taxation authorities its line of business, the names of its major products and the period of operation, or reduction of Enterprise Income Tax shall not be allowed.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.4 The relevant regulations promulgated by State Council before the entry into force of this Law, which provide preferential treatment in the form of exemption from or reduction of Income Tax for enterprises engaged in energy, communications, harbour, wharf and other major projects of a production nature, for a period longer than that specified in the preceding paragraph, or which provide preferential treatment in the form of exemption from or reduction of Income Tax for enterprises engaged in major projects of a non-production nature, shall remain applicable after this Law enters into force.
(ZHU XI LING [45] 1991.4.9)
8.3.5 The relevant regulations promulgated by State Council before the entry into force of this Law in Paragraph 2, Article 8 of the Tax Law refers to the following regulations concerning the exemption and reduction of enterprise Income Tax promulgated by State Council:
A. Chinese foreign equity joint ventures engaged in port and dock construction and with the operation period exceeding 15 years may, upon the approval of their applications by the taxation authorities at the level of province, autonomous region or municipality directly under State Council, in which the enterprises are located, enjoy exemption from Enterprise Income Tax from the first profit-making year to the fifth year, and reduction in Enterprise Income Tax by 50% from the sixth to the tenth year.
B. Enterprises with foreign investment established in Hainan Special Economic Zone and engaged in the construction of such infrastructure projects as airports, ports, docks, railways, highways, power stations, coal mines, water conservancy, etc., or in the development and operation of agriculture, and with the operation period exceeding 15 years may, upon approval of their applications by Hainan Provincial Taxation authorities, enjoy exemption from Enterprise Income Tax starting from the first profit-making year to the fifth year, and reduction in enterprise income tax by 50% from the sixth to the tenth year.
C. Enterprises with foreign investment established in Shanghai Pudong New Area and engaged in the construction of such energy and transportation projects as airports, ports, railways, highways and power stations, etc. and with the operation period exceeding 15 years may, upon approval of their applications by the Shanghai Municipal Taxation authorities enjoy exemption from Enterprise Income Tax from the first profit-making year to the fifth year, and reduction in Enterprise Income Tax by 50% from the sixth to the tenth year.
D. Enterprises with foreign investment established in the Special Economic Zones and engaged in service industries, and with the foreign investment exceeding US$5 million and the operation period exceeding 10 years may, upon approval of their applications by the relevant Special Economic Zone taxation authorities, enjoy exemption from Enterprise Income Tax for the first profit-making year, and reduction in Enterprise Income Tax by 50% for the second and third years.
E. Foreign banks, branches of foreign banks, banks with Chinese and foreign joint investment, and other financial institutions established in the Special Economic Zones and other areas approved by State Council with the capital put in by foreign investors, or the operating funds appropriated by the head offices of foreign banks to their branches, exceeding US$10 million, and with the operation period lasting 10 year and more may, upon approval of their applications by the relevant taxation authorities, enjoy exemption from Enterprise Income Tax for the first profit-making year and reduction in Enterprise Income Tax by 50% for the second and third years.
F. Chinese-foreign equity joint ventures recognized as new and high-technology enterprises and established in new and high-technology industrial development zones approved by State Council, with the operation period exceeding 10 years may, upon approval of their applications by the local taxation authorities, enjoy exemption from Enterprise Income Tax for the first and second profit-making years. For enterprises with foreign investment established in the Special Economic Zones, the preferential tax provisions of the Special Economic Zones and the Economic and Technological Development Zones shall remain applicable. For enterprises with foreign investment established in Beijing New-technology Industrial Development Experimental Zones, the preferential tax provisions of Beijing New-technology Industrial Development Experimental Zone shall be applicable.
G. Export-oriented enterprises with foreign investment may, upon the expiration of the tax exemption and reduction period as provided for in the Tax Law, enjoy a further 50% reduction in Enterprise Income Tax based on the rate stipulated by the Tax Law, if the value of their exported products of the year exceeds 70% of the total value of their products of the year. But for the Special Economic Zones and the Economic and Technological Development Zones and other export-oriented enterprises where Enterprise Income Tax has already been reduced to 15% and the above requirements are met, the Enterprise Income Tax shall be levied at 10%.
H. Technologically advanced enterprises with foreign investment may, upon the expiration of the Enterprise Income Tax exemption and reduction period as stipulated by the Tax Law, enjoy a further 50% reduction in Enterprise Income Tax for three years based on the rate stipulated by the Tax Law, if they remain technologically advanced enterprises.
I. Other regulations relating to the exemption and reduction of enterprise income tax will be promulgated, or have been approved for promulgation, by State Council.
In applying for Enterprise Income Tax exemption or reduction pursuant to the provisions of Item 6, Item 7 and Item 8 of this Article, enterprises with foreign investment shall submit the relevant certifying documents issued by the department responsible for examination and confirmation by the local taxation authorities.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.6 The first profit-making year mentioned in Paragraph 1, Article 8 of the Tax Law and in Article 75 of these Rules refers to the first profit-making tax year after an enterprise goes into production and operation. An enterprise sustaining loss in the initial stage of its operation may carry them over and make them up in subsequent years in accordance with the provisions of Article 11 of the Tax Law. Its first profit-making year may be the year in which the enterprise begins to make profit after the losses are made up.
The period of Enterprise Income Tax exemption and reduction, as stipulated in Paragraph 1, Article 8 of the Tax Law and Article 75 of these Rules, shall be counted consecutively from the first profit making year and shall not be deferred due to losses incurred during the period.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.7 For an enterprise which goes into operation in the middle of the year, if it makes profit in the same year while the actual period of operation is less than six months, it may choose to take the following year as the year to start enjoying exemption from or reduction in Enterprise Income Tax. However, income tax shall be levied in accordance with the Tax Law on the taxable income earned by the enterprise in that year.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.8 Unless otherwise provided by State Council, the tax incentives of Paragraph 1, Article 8 of the Tax Law are not applicable to enterprises engaged in the exploitation of such natural resources as petroleum, natural gas, rare metals and precious metals.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.9 Enterprises that have enjoyed Income Tax exemption and reduction pursuant to the provision in Paragraph 1, Article 8 of the Tax Law and Article 75 of these Rules, but whose actual operation falls short of the prescribed period, shall repay the exempted and reduced Enterprise Income Tax, except for those having sustained huge losses caused by natural disasters or accidents.
(GUO WU YUAN LING [85] 1991.6.30)
8.3.10 To encourage the trade and projects of enterprises with foreign investment, the People’s Governments of provinces, autonomous regions and municipalities directly under the Central Government, in accordance with their actual conditions, may decide to exempt or reduce local Income Tax.
(ZHU XI LING [45] 1991.4.9)
8.3.11 The Income Tax laws and regulations regarding enterprises with foreign investment shall not apply to enterprises whose stock ownership proportions owned by a foreign side or Chinese side cannot meet the requirement of those stipulated in the laws for enterprises with foreign investment after they are merged, divided or stock ownership of the enterprises are reorganized. Therefore, tax collection shall be carried out for such enterprises according to the Income Tax laws and regulations applying to domestic Chinese enterprises except where there are other particular provisions in tax laws and regulations. The fixed term tax exemption and reduction already enjoyed by the enterprises before reorganization according to Article 8 of the Tax Law shall be dealt with differently in the following cases:
A. The provisions regarding repaying the exempt and reduced tax stipulated in Article 8 of the Tax Law shall not apply to enterprises from which the stock ownership held by foreign investors in their original enterprises was not withdrawn but put into merged enterprises, divided enterprises or kept in the enterprises in which the stock ownership reorganization has been carried out, whether the operation period of the enterprise before the stock ownership reorganization was long or short.
B. The foreign investors of the enterprise before the reorganization shall repay the exempt and reduced Enterprise Income Tax according to the provisions in Article 8 of the Tax Law if the foreign investors withdraw or transfer their stock ownership to the local investors during the reorganization of the enterprise and the actual operation of the enterprise before the reorganization falls short of the prescribed period for tax exemption and reduction.
(GUO SHUI FA [071] 1997.4.28)
8.3.12 Determination of the profit-making years of the equity joint ventures, contractual joint ventures and wholly foreign-owned enterprises whose construction and operation are carried out in phases.
For equity joint ventures, contractual joint ventures and wholly foreign-owned enterprises who enjoy tax exemption and reduction from the first profit-making year according to Article 5 of the “Income Tax Law on Chinese-foreign Equity Joint Venture” and Article 5 of the “Income Tax Law on Foreign Enterprises”, the profit-making year shall be the year when the enterprises start production, operation (including trial operation and partial operation ) and make profits. Therefore, in principle, the equity joint ventures, the contractual joint ventures and wholly foreign-owned enterprises whose construction and operation are carried out in phases shall only enjoy tax exemption and reduction once, and there shall be no other tax exemption and reduction period for the part of the project constructed later. However, if the equity joint ventures, the contractual joint ventures and wholly foreign-owned enterprises make investments according to the amount stipulated in the approved contract (not including additional investments), and it is shown in the contract that the project needs to be constructed, put into production and operation in phases, and there are account books established respectively for the investments and expenses for the earlier finished phase and later finished phase and the revenue and income from production and operation made in the earlier phase and later phase, can be clearly calculated and separated; in this case the tax exemption and reduction period may be calculated separately upon approval of the enterprise¡¦s application by the taxation authorities in the provinces, autonomous regions and municipalities directly under State Council.
(CAI SHUI WAI ZI [102] 1986.4.21)
Editor’s note
There are similar provisions in Article 76 of the “Detailed Rules for Implementation of the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprise”.
There are similar provisions in Article 76 of the “Detailed Rules for Implementation of the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprise”.
8.3.13 Tax incentives for new and high-technology enterprises
A. Enterprises with foreign investment recognized as new and high-technology enterprises, engaged in technology-intensive and knowledge-intensive projects, and established in the New and High-technology Industrial Development Zones determined by State Council in Coastal Open Economic Areas (including the old urban districts of the cities where the Special Economic Zones and Economic and Technological Development Zones are located) or the enterprises engaged in projects with foreign investment of US (30 million or more and with a long payback period, shall enjoy tax incentives applying to the enterprises in Coastal Open Economic Areas upon approval of the State Administration of Taxation.
B. The tax incentives shall be granted to enterprises with foreign investment recognized both as new and high-technology enterprises and as export-oriented enterprises according to Item 7 of Section 1 in Article 35 of the Detailed Rules of the Tax Law. However, an enterprise is permitted to make a choice to enjoy one kind of tax incentive but not both kinds of tax incentives, according to the provisions in Article 5 of “Implementation of the Tax Incentives Regarding ′Provisions for Encouraging Investment of Foreign Enterprise′ by State Council” issued on January 23, 1987 by the Ministry of Finance, if the enterprise is recognized both as an export-oriented enterprise and a technologically advanced enterprise.
(GUO SHUI FA [165] 1991.10.15)
8.3.14 Explanations of tax incentives applying to new and high-technology enterprises
A. The enterprises with foreign investment recognized as new and high-technology enterprises established in the New and High-technology Industrial Development Zones determined by State Council or recognized as new-technology enterprises established in Beijing New-technology Industrial Development Experimental Zones shall pay Enterprise Income Tax at the reduced rate of 15% from the tax year in which the enterprise is recognized as the new and high-technology enterprise or new-technology enterprises.
B. The production enterprises with foreign investment recognized as new and high-technology enterprises scheduled to operate for a period of not less than 10 years (not including new-technology enterprises established in Beijing New-technology Industrial Development Experimental Zones) may, from the year in which it begins to make profits, enjoy exemption from Income Tax for the first and second years and a 50% reduction from the third to fifth years.
C. Enterprises with foreign investment shall enjoy tax incentives for the remaining years in the tax exemption and reduction period if the tax year in which the enterprises with foreign investment are recognized as new and high-technology enterprises, is after the year when the enterprises begin to make profits, or the tax year, in which the enterprises with foreign investment in Beijing New-technology Industrial Development Experimental Zone are recognized as new-technology enterprises, is after the year when the enterprises begin production. If the enterprises with foreign investment are recognized as new and high-technology enterprises or new-technology enterprises after the tax exemption and reduction periods for enterprises with foreign investment come to an end, the enterprises with foreign investment shall no longer enjoy the fixed term tax exemptions and reductions applying to new and high-technology enterprises or new-technology enterprises.
(GUO SHUI FA [151] 1994.6.29)
8.3.15 Clarification is given as follows on the exemption from or reduction of Enterprise Income Tax on income from liquidation carried out by enterprises with foreign investment during the fixed term tax exemption and reduction period stipulated in Article 8 of the “Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises”:
Any production enterprise with foreign investment, scheduled to operate for a period of not less than 10 years, shall, from the year in which it begins to make profits, be exempt from Income Tax in the first and second years and allowed a 50% reduction from the third to fifth years in Article 8 of the Tax Law applies only to income derived from the production period, therefore, the exemption from and reduction of Income Tax stipulated in Article 8 of the Tax Law shall not apply to income from the liquidation carried out during the fixed term tax exemption and reduction period.
(GUO SHUI FA [008] 1993.6.15)
8.3.16 Determination of the actual date an enterprise goes into operation
The actual date an enterprise starts production or operations stipulated in Article 74 of the Detailed Rules of the Tax Law shall be the date when the enterprise with foreign investment particularly engaged in real estate development and operation obtains the first project for real estate development and operation. If the date for the enterprise to obtain the first project for real estate development and operation is before the date when the business license of the enterprise is signed and issued, then the latter date shall be the actual date when production or operations start as stipulated in Article 74 of the Detailed Rules of the Tax Law.
(GUO SHUI FA [153] 1995.8.3)
8.3.17 Enterprises with foreign investment established in the Shanghai Pudong New Area and engaged in the construction of such energy and transportation projects as airports, ports, railways, highways and power stations, etc. refers to those who directly invest in the above projects, not including those who contract the construction and installation of the above projects. Therefore, Shanghai Feilong International Engineering and Technology Company Limited contracting the construction projects for power, electronics and information communication, etc. shall not enjoy the relevant tax incentives according to Item 3 of Section 1 in Article 75 of the “Detailed Rules and Regulations for the Implementation of the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises”.
(GUO SHUI HAN [713] 1993.5.14)
8.3.18 If an enterprise with foreign investment begins to make profit in the same year as the enterprise goes into operation, then the year shall be regarded as the first profit-making year of the enterprise according to Section 1 of Article 8 in the Tax Law and according to Article 75 of the Detailed Rules of the Tax Law whether the actual operation period is long or short that year. In this case, the period of Enterprise Income Tax exemption and reduction shall be counted consecutively from this first profit making year and shall not be deferred due to losses incurred during the period, except for the cases described in Article 77 of the Detailed Rules in the Tax Law.
If an enterprise with foreign investment is the same as the case described in Article 77 of the Detailed Rules of the Tax Law, i.e., the enterprise goes into operation in the middle of the year, the actual period of operation is less than six months in that year and the enterprise chooses to pay Income Tax on the profit obtained in the year according to the provisions in the Tax Law, the period for Income Tax exemption and reduction shall be counted from the following year (not from the following profit-making year). Therefore, if the enterprise suffers a loss in the year following the first profit making year, it is not permitted to redetermine the first year for profit making or to recount the period for tax exemption and reduction.
(GUO SHUI FA [121] 1995.6.28)
8.3.19 Any enterprise with foreign investment which is engaged in agriculture, forestry or animal husbandry and any other enterprise with foreign investment which is established in remote underdeveloped areas may, upon approval, by the responsible department for tax affairs under State Council, of an application filed by the enterprise, be allowed a 15% to 30% reduction of the amount of income tax payable for a period of 10 years following the expiration of the period for tax exemption or reduction provided for in the preceding two paragraphs.
(ZHU XI LING [45] 1991.4.9)
8.4 Tax Refunds for Reinvestment
8.4.1 Any foreign investor in an enterprise with foreign investment which reinvests his share of profit from the enterprise directly into that enterprise by increasing its registered capital, or which uses the profit as capital investment to establish other enterprises with foreign investment to operate for a period of not less than 5 years shall, upon approval by the taxation authorities of an application filed by the investor, be refunded 40% of the Income Tax already paid on the reinvested amount. Where regulations of State Council provide otherwise in respect of preferential treatment, such regulations shall apply; if the investor withdraws his reinvestment before the expiration of a period of 5 years, he shall repay the refunded tax.
(ZHU XI LING [45] 1991.4.9)
8.4.2 Reinvest its share of profit directly in Article 10 of the Tax Law means that the profits earned by a foreign investor before being drawn from an enterprise with foreign investment shall be used directly to increase his registered capital, or to make direct capital investment in another Chinese-foreign joint venture after such profits are appropriated. In assessing the refundable tax amount in accordance with the provisions of Article 10 of the Tax Law, the said foreign investor shall provide a supporting document certifying the attributable year in which the profit was reinvested; where no supporting document can be provided, the local taxation authorities shall determine the year by appropriate methods.
Foreign investors shall, within one year from the date the funds are actually invested, apply to the original tax collecting authorities for a tax refund and submit a document certifying the amount and duration of the added or new capital investment.
(GUO WU YUAN LING [85] 1991.6.30)
8.4.3 Where regulations of State Council provide otherwise in respect of preferential treatment, such provisions shall apply in Article 10 of the Tax Law refers to the case in which a foreign investor, who makes direct re-investment in establishing or expanding an export-oriented enterprise or a technologically advanced enterprise in China or who reinvests profit from an enterprise in Hainan Special Economic Zone directly into enterprises engaged in infrastructure and agricultural development in Hainan Special Economic Zone, may get a full refund of Enterprise Income Tax paid on the re-invested amount, according to the relevant regulations of State Council.
In applying for a tax refund on reinvestment pursuant to the preceding paragraph, the said foreign investor shall, besides going through the procedures provided in Paragraph 2 and 3, Article 80 of these rules, submit a document issued by the relevant examination and confirmation department, certifying the relevant newly established or expanded enterprise as being an export-oriented or technologically advanced enterprise.
(GUO WU YUAN LING [85] 1991.6.30)
8.4.4 Where a newly established or expanded enterprise, in which a foreign investor makes reinvestment, fails to meet the standards of an export-oriented enterprise, or is no longer recognized as a technologically advanced enterprise within three years after it goes into production or operation, the foreign investor shall pay back 60% of the tax refunded.
(GUO WU YUAN LING [85] 1991.6.30)
8.4.5 Refund of the Income Tax paid on the reinvested amount′ shall be calculated according to the following formula:
tax refundable = reinvested amount¡Ò{1 – [the original investment enterprise income tax rate + local Income Tax rate applicable to the enterprise]} x original Enterprise Income Tax rate applicable to the enterprise x refund rate.
(GUO WU YUAN LING [85] 1991.6.30)
8.4.6 An investment company whose total shares are held by foreign investors, may be regarded as a foreign investor if the investment company reinvests in China with the profit (dividends) allocated from the enterprise with foreign investment. Such an investment company shall enjoy a tax refund on the reinvestment according to the provisions in the Tax Law, the Detailed Rules and other relevant regulations.
(CAI SHUI ZI [083] 1995.1.13)
8.4.7 If foreign investors purchase shares of their own enterprise (including shares by stock rights) or of other enterprises with the profit (dividends) allocated from the enterprises with foreign investment or from joint stock enterprises, the tax incentives regarding tax refunds on the reinvestment stipulated in the Tax Law shall not apply.
(GUO SHUI FA [139] 1993.12.3)
8.4.8 If the foreign partner of a Chinese-foreign equity joint venture first remits the allocated profit outside China, saves it in foreign banks or applies it as working capital for trade, and then invests it in the Chinese-foreign equity joint venture, the provisions for the tax refund on reinvestment shall not apply.
(CAI SHUI WAI ZI [82] 1981.9.16)
8.4.9 On the matter of tax refunds for the investors in enterprises with foreign investment who reinvest
A. The period of operation in Article 10 of the Tax Law shall be counted according to the following principles: the period of operation shall be counted from the date when the reinvestment fund is actually invested, if foreign investors in enterprises with foreign investment directly reinvest the profit allocated from the enterprise into the same enterprise or into other enterprises with foreign investment who have already started production or operations (including trial production, trial operation); however, the period of operation shall be counted from the date when the new enterprise starts production or operation ( including trial production or trial operation), if the foreign investors reinvest in establishing new enterprises with foreign investment.
B. Foreign investors shall present documentary evidence to certify the tax year in which the profit for reinvestment occurs when foreign investors apply for a tax refund on reinvestment. If the foreign investors fail to provide documentary evidence, the taxation authorities shall determine the tax year in which the profit from the reinvestment occurs, by reckoning from the earliest tax year when the dividends payable or the part of the unallocated profit belonging to the foreign investors, occurs in the account before the annual reinvestment in the following years, and on that result they shall calculate Enterprise Income Tax.
C. Foreign investors shall not enjoy a tax refund on reinvestment with the income from liquidation in enterprises with foreign investment.
D. The foreign investors shall repay 60% of the tax refunded in the following cases:
a. the foreign investors reinvest to establish or expand an export-oriented enterprise and the enterprise does not meet the requirements for export-oriented enterprises within three years from the day when it begins production or operations or within the three years from the day when the reinvestment is made;
b. foreign investors reinvest to establish or expand a technologically advanced enterprise and the enterprise¡¦s qualifications as a technologically advanced enterprise are cancelled within three years from the day when the enterprise starts production or operation, or when the reinvestment is made.
E. If the foreign investors make reinvestment in another place, the tax authorities, to which the foreign investors used to pay tax, shall grant a tax refund according to the provisions in Section 3 of Article 80 in the Detailed Rules, and also send the Tax Refund for Reinvestment of Foreign Investors in Another Place Certificate to the taxation authorities, to which the enterprise receiving the reinvestment pays tax (see the attached sample form). If the foreign investors are identified, upon examination and verification, by the tax authorities, to which the enterprise receiving the reinvestment pays tax, as those who withdrew the fund within the operation period, which is shorter than 5 years, counted from the year when the reinvestment was made as mentioned in Article 10 of the Tax Law, or as those who are in the same case as mentioned in Section 3 of Article 81 in the Detailed Rules, the foreign investors shall repay all or part of the tax refunded to the taxation authorities to which the enterprise receiving the reinvestment pays tax.
(GUO SHUI FA [009] 1993.6.15)
Appendix
Tax Refund for Reinvestment of Foreign Investors in Another Place Certificate
________Tax Office:
Foreign investor, ________, of the enterprise, ________ in our place reinvests the profit of ________ an enterprise (technologically advanced enterprise, export-oriented enterprise) ________ in your place on ________ (month) ________ (date) ________ (year). According to the relevant provisions in the Tax Law, our taxation authorities already carried out the tax refund at the refund rate of ________, totaling ________ yuan on ________ (month) ________ (date) ________ (year).
Seal
_____ (month) ______ (date) ______ (year)
(GUO SHUI FA [009] 1993.6.15)
8.4.10 The preferential regulations regarding a tax refund on the reinvestment stipulated in the “Income Tax Law of the People¡¦s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises” (hereinafter referred to as ′the Tax Law′) and in the Detailed Rules only apply to foreign investors. Enterprises with foreign investment in China who invest in other places as investors are not foreign investors. The preferential regulations regarding a tax refund on the reinvestment stipulated in the Tax Law and the Detailed Rules for foreign investors only apply to enterprises with foreign investment whose total shares are held by foreign investors and who are particularly engaged in investment business, since such enterprises with foreign investment may be regarded as foreign investors according to provisions of Section 2 in Article 1 of CAI SHUI ZI [083] 1994, “Notice on the Few Taxation Problems Regarding the Enterprises with Foreign Investment Engaged in Investment Business” issued by the Ministry of Finance and the State Administration of Taxation. No other enterprises with foreign investment shall enjoy relevant preferential regulations on tax refunds on the reinvestment stipulated in the Tax Law and the Detailed Rules.
(GUO SHUI HAN [154] 1995.4.12)
8.5 Other Tax Incentives
8.5.1 A tax exemption shall be granted for the property of the International Finance Corporation and for the following income or revenue obtained by the corporation in China:
A. profit allocated from the funded joint ventures and exempt abroad; income from stock transfer;
B. property (including real estate) in China and income from lease or transfer of the property;
C. interest from loans to Chinese companies and enterprises.
(CAI SHUI ZI [35] 1984.1.31)
8.6 The Scope of Enterprises of a Production Nature
8.6.1 Enterprises of a production nature in Paragraphs 1 and 2 of Article 7 and Paragraph 1 or Article 1 of the Tax Law refers to enterprises engaged in the following industries:
A. machine building and electronics industries;
B. energy industries (not including oil and natural gas exploitation);
C. metallurgical, chemical and building material industries;
D. light, textile and packaging industries;
E. medical apparatus and pharmaceutical industries;
F. agriculture, forestry, animal husbandry, fishery and water conservancy;
G. construction industry;
H. communications and transportation industries (not including passenger transportation);
I. development of science and technology, geological survey and industrial information consultancy that are directly at the service of production and maintenance and repair service for production equipment and precision instruments;
J. other industries that are recognized by the responsible department for taxation affairs under State Council.
(GUO WU YUAN LING [85] 1991.6.30)
8.6.2 An investment company engaged in the investment business and other businesses related to investment (including services such as management, training, agency, etc. for the enterprise receiving the investment), according to the relevant laws and regulations, is not a production enterprise as stipulated in Article 7 and Article 8 of the “Income Tax Law of the People¡¦s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises” and in Article 72 of the Detailed Rules, and shall not enjoy the tax incentives regarding production enterprises with foreign investment.
(CAI SHUI ZI [083] 1995.1.13)
8.6.3 Regulations on Determining Production Enterprises with Foreign Investment
The development of science and technology, geological surveys and industrial consultations directly serving production refer to: such development whose result may directly constitute technology for manufacturing products, or directly constitute technology for management of the flow of production; such surveys whose data may be directly used for development and utilization of all kinds of natural resources; and consultations and software development which are carried out specifically for the utilization of technology or for the development and utilization of natural resources. However, the development, surveys and consultations mentioned above do not include such services provided to various enterprises as accounting, auditing, legal services, asset appraisals, market information collecting and brokerage etc. as well as computer software development not serving technology or development and utilization of resources as mentioned above.
All enterprises with foreign investment, particularly engaged in sales of goods made from purchased goods in a simple way, e.g. the purchased goods are assembled, packaged, cleaned, selected or organized, etc, belong to those engaged in sales, if the goods on sale remain the same in shape, function and composition as when they were purchased. Therefore enterprises such as the following shall not be recognized as production enterprises with foreign investment: enterprises which sell goods simply repaired with the imported or purchased sets of appliances or equipment and parts; enterprises engaged in the sales of various purchased beverages and foods, which they simply bottle and package; and the trade providing such specific services as bottling and packaging.
If enterprises with foreign investment, previously recognized as production enterprises with foreign investment, do not conform to the principle of this notice, correction shall be made according to the principles in this notice. If taxation authorities find it difficult to make decisions in the future, they shall report the case to the State Administration of Taxation, who shall give an official written reply, after examination and verification of the case.
(CAI SHUI ZI [051] 1994.7.29)
8.6.4 Enterprises with foreign investment particularly engaged in the development and management of real estate, do not belong to production enterprises with foreign investment as defined in Article 7 and Article 8 of the Tax Law, and they shall not enjoy the tax incentives for production enterprises with foreign investment.
(GUO SHUI FA [153] 1995.8.3)
8.6.5 Confirmation of production enterprises with foreign investment
A. Enterprises with foreign investment professionally engaged in the following businesses may be recognized as production enterprises with foreign investment:
a. those engaged in engineering design and in providing labor services ( including consultation for such projects as construction, installation and assembling); consultation includes technological assistance or guidance for the improvement of existing productive technology used for projects or used in enterprises, for improvement of business administration, for selection of technologies and for improvement of the function, efficiency and quality etc. of the existing manufacturing equipment or products of the enterprise;
b. those engaged in feeding, aquaculture (including aquatic farming), farming (including flowers raising), raising poultry, livestock, dogs and cats etc.;
c. those engaged in scientific research and development of manufacturing technology;
d. those engaged in directly providing users with warehousing and transport services with their own transport vehicles and storage facilities.
B. The enterprises with foreign investment professionally engaged in the following business shall not be regarded as production enterprises with foreign investment:
a. those engaged in indoor or outdoor preparation and decoration, or installation and setup of indoor appliances;
b. those engaged in advertisements, card and picture making as well as book and magazine issuing;
c. those engaged in food processing, mainly for sale at their own canteen or at their store front;
d. those engaged in the maintenance and repair of domestic appliances and repair of articles for daily use.
C. Maintenance and repair of production equipment and precision instruments mentioned in Item 9 of Section I in Article 72 of the Detailed Rules does not include the maintenance and repair of vehicles, electrical appliances, computer monitoring systems, ordinary instruments and ordinary meters.
(GUO SHUI FA [109] 1992.4.29)
8.6.6 The enterprises with foreign investment engaged in ′transport′ mentioned in Item 8 of Section 1 in Article 72 of the “Detailed Rules and Regulation for the Implementation of the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises” include those engaged in the house moving and transport business, but does not include those engaged in the letter delivery (express) business.
(GUO SHUI HAN [383] 1994.7.4)
8.6.7 The enterprise with foreign investment engaged specifically in land leveling business for land development and house construction may be regarded as building enterprises defined in Item 7 of Article 1 in Article 72 of the “Detailed Rules and Regulation for the Implementation of the Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises” who may enjoy tax incentives applying to production enterprises with foreign investment.
(GUO SHUI HAN [388] 1994.7.6)
8.6.8 The enterprises with foreign investment particularly engaged in indoor or outdoor preparation and decoration, or installation and setting up of indoor appliances who shall not be regarded as production enterprises with foreign investment include:
A. enterprises engaged in installation of lifts and escalators;
B. enterprises engaged in rough preparation and installation of doors and windows etc. for buildings and structures.
(GUO SHUI HAN [389] 1994.7.6)
8.6.9 On the matter of how enterprises with foreign investment concomitantly engaged in production and in non-production types business, shall enjoy tax incentives
A. Enterprises with foreign investment, whose business scope as defined in the business license does not cover production, shall not be taken as production enterprises to enjoy relevant tax incentives, whatever proportion the enterprise¡¦s production business takes in its actual operation.
B. The following tax incentives shall be granted to enterprises with foreign investment whose business scope as defined in the business license covers both production business and non-production business, or whose business scope as defined in the business license only covers the production business, but, who actually also conducts non-production business:
a. In the tax exemption and reduction period counted from the first profit making year of the enterprise according to the provisions in Article 8 of the Tax Law, the enterprise with foreign investment engaged in both production and non-production businesses may apply to the responsible taxation authorities in the year when the enterprise¡¦s income from production business is over 50% of the total business income, to enjoy the corresponding tax exemption and reduction for the year, after examination and verification by the responsible taxation authorities; the enterprise shall not enjoy the corresponding tax exemption and reduction if income from production is not over 50% of the total business income for the year.
b. The enterprise with foreign investment, engaged in both production and non-production businesses and established in the areas where tax is levied at the reduced rate according to Article 7 of the Tax Law and the relevant regulations by State Council, shall enjoy the relevant tax reductions starting with the first year when income from production exceeds 50% of total income.
(GUO SHUI FA [209] 1994.9.19)
8.7 Comprehensive tax incentives for particular areas
8.7.1 (5 Special Economic Zones (covering 23 cities and counties)) and (32) Economic and Technological Development Zones
Shenzhen City, Zhuhai City, Shantou City, Xiamen City and Hainan Province (Haikou City, Sanya City, Tongshi City, Qionghai City, and Qiongshan, Wenchang, Anding, Wanning, Tunchang, Chengmai, Danxian, Lingao, Baoting, Ledong, Dongfang, Changjiang, Baisha, Qiongzhong, Lingshui Counties)
Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Minhang of Shanghai, Hongqiao of Shanghai, Caohejing of Shanghai, Ningbo, Wenzhou, Xiaoshan, Fuzhou, Guangzhou, Nansha, Dayawan, Zhanjiang, Kunshan, Yingkou, Weihai, Rongqiao, Dongshan, Shenyang, Harbin, Changchun, Hangzhou, Wuhan, Chongqing, Wuhu, Beijing, Urumqi.
Appendix 1
Temporary Regulations for Exemption from and Reduction of Enterprise Income Tax and Industrial and Commercial Consolidated Tax in the Special Economic Zones and 14 Coastal Cities With Ports Issued by the State Council of the People’s Republic of China
GUO FA [161] 1984.11.15
In order to promote foreign economic cooperation, technological communication, introduction of foreign investment and advanced technology to speed up the modernization of socialist construction in four special economic zones, i.e., Shenzhen, Zhuhai, Xiamen and Shantou, and 14 coastal cities with ports, i.e., Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai Cities, China shall offer tax exemption from and reduction of Enterprise Income Tax and Industrial and Commercial Consolidated Tax for companies, enterprises and individuals from abroad and from Hong Kong and Macao (hereinafter referred to as foreign investors) who inve