China Tax Administration Guide (1) – Regulations Classified According to Use
1. Taxpayers and Tax Levy Objects
1.1 Basic Regulations
1.1.1 Enterprises with foreign investment who earn income from production, business operations and other sources, within the borders of the People¡¦s Republic of China, shall pay Income Tax according to the provisions of this Law.
Foreign enterprises who earn income from production, business operations and other sources, within the borders of the People¡¦s Republic of China, shall pay Income Tax according to the provisions of this Law.
(ZHU XI LING [45] 1991.4.9)
1.1.2 Enterprises with foreign investment in this Law, refers to Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-funded enterprises established within the borders of the People¡¦s Republic of China.
Foreign enterprises; in this Law, refers to foreign companies, enterprises and other economic organizations which have established organizations or sites within the borders of China and engage in production or business, and those which, though not having established organizations or sites in China, have income from sources within the borders of China.
(ZHU XI LING [45] 1991.4.9)
1.1.3 Income from production and business in Paragraphs 1 and 2 of Article 1 of the Tax Law, refers to income from production and business operations in the manufacturing, mining, transport and communications, construction and installation, agriculture, forestry, animal husbandry, fishing, water conservation, commerce, finance, service industry, exploration and exploitation trades and in other trades.
Other income refers to profits (dividends), interest, rental income, income from the transfer of property, income from the supply or transfer of patents, special technology, income from trademark rights and copyright as well as other non-business income.
(GUO WU YUAN LING [85] 1991.6.30)
1.1.4 Established organizations or sites refers to management organizations, business organizations, administrative organizations; sites for factories and the exploitation of natural resources; sites for undertaking construction, installation, assembly and exploration work; and sites for supplying labor services and business agency services.
(GUO WU YUAN LING [85] 1991.6.30)
1.1.5 Business agents refers to companies, enterprises and other economic organizations or individuals entrusted by foreign enterprises to act as agents in any of the following ways:
A. to represent the principals, on a regular basis, in arranging purchases, signing purchase contracts and purchasing commodities on commission;
B. to enter into agency agreements or contracts with the principals to store, on a regular basis, products or commodities of the principals and to deliver such products or commodities, on behalf of the principals, to other parties;
C. and to have authority to represent the principals, on a regular basis, in signing sales contracts or in accepting purchase orders.
(GUO WU YUAN LING [85] 1991.6.30)
1.2 Specific Regulations
1.2.1 Where Chinese-foreign contractual joint-ventures do not have legal person status, each of the partners may separately calculate and pay Income Tax in accordance with relevant State tax laws and regulations; where such an enterprise submits an application which is approved by local tax authorities, income may be calculated and paid on a consolidated basis, according to the provisions of the Tax Law.
(GUO WU YUAN LING [85] 1991.6.30)
1.2.2 Income Tax shall be collected according to the provisions of the “Income Tax Law on Foreign Enterprises” on the operating profits made by the sub-companies or branches established within the borders of China by the equity joint ventures, whose status of legal person belongs to the country where they have registered, set up abroad by Chinese companies or enterprises with foreign companies or enterprises. The above principle also applies to tax collection on the operating profits made by the branches in Mainland China established by joint ventures set up by Chinese companies or enterprises in Hong Kong or Macao.
(CAI SHUI ZI [31] 1984.1.21)
1.2.3 Those joint ventures set up by domestic Chinese enterprises and Chinese-foreign equity joint ventures may be regarded as Chinese-foreign equity joint ventures, after approval of relevant ministries, and if the authorized agencies of the newly set up enterprises are engaged in State-preferred projects, and the proportion of foreign stock ownership is over 25% of the total. Such joint ventures shall pay Income Tax according to the provisions of the “Income Tax Law on Chinese-foreign Equity Joint Ventures” and shall enjoy the relevant tax incentives.
(CAI SHUI ZI [306] 1986.10.20)
1.2.4 The tax collection on the joint ventures set up by Chinese companies, enterprises or other economic organizations with foreign exchange funds from the Bank of China or with foreign exchange funds from the China International Trust and Investment Corporation shall not be carried out in the same way as with Chinese-foreign equity joint ventures.
(CAI SHUI WAI ZI [094] 1985.6.1)
1.2.5 Income Tax shall be collected from each of the foreign partners respectively according to his allocated profit if there are two or more foreign partners in the Chinese-foreign contractual joint venture.
(CAI SHUI WAI ZI [252] 1985.11.19)
1.2.6 Those joint ventures set up by domestic Chinese enterprises and Chinese-foreign equity joint ventures may pay Income Tax according to the “Income Tax Law on Chinese-Foreign Equity Joint ventures” and may enjoy the relevant tax exemption and reduction if the new joint ventures are established according to the provisions of the “Chinese-foreign Equity Joint Venture Law”, after approval of the responsible government bodies and the proportion of foreign investment is examined and verified by the local tax authorities to be no less than 25% of the total.
If the joint ventures set up by domestic Chinese enterprises and Chinese-foreign equity joint ventures satisfy the requirements mentioned above, the Chinese-foreign equity joint ventures shall not pay operating profit tax for the dividends and extra dividends derived from the joint ventures. If the joint ventures cannot satisfy the requirements, they shall be regarded as domestic Chinese joint ventures, and each partner shall pay Income Tax respectively for the allocated dividends.
(GUO SHUI HAN [1367] 1990.11.3)
1.2.7 Tax collection from Chinese-foreign contractual joint ventures who have no legal person status
If Chinese-foreign contractual joint ventures do not have legal person status, and each of the partners calculates and pays Income Tax respectively, the domestic Chinese partner shall calculate and pay Enterprise Income Tax according to the tax laws and regulations for domestic enterprises, while the foreign partners shall be regarded as an establishment and site set up in China by foreign companies, enterprises and other economic organizations, and they shall pay Enterprise Income Tax according to the provisions in the ” Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises”, and shall not enjoy the tax incentives for enterprises with foreign investment.
As for the Chinese-foreign contractual joint ventures who do not have legal person status, but whose partners have made company ordinances, carried out joint business operation management, kept unified accounts, shared profits or losses and borne the investment risks together, the joint ventures may apply to the local tax authorities for approval to calculate and pay Enterprise Income Tax as enterprises with foreign investment according to the provisions of the “Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises”, in addition, the joint ventures shall enjoy the tax incentives for enterprises with foreign investment.
(GUO SHUI FA [165] 1991.10.15)
1.2.8 The tax laws applying to the experimental stock system enterprises:
A. If the limited companies are established on the basis of reorganization of the domestic enterprises in China (including State-owned enterprises, collectively-owned enterprises, private enterprises, etc.) under the approval of the relevant government bodies, they shall pay all taxes according to the “Interim Regulations on Tax Collection from Experimental Stock System Enterprises” (hereinafter referred to as ′Interim Regulations′) issued on June 12, 1992 by the State Administration of Taxation and the State Commission for Economic Restructuring, regardless of the kind of issued stocks and the proportion each partner takes.
B. The joint stock limited companies established on the basis of reorganization of enterprises with foreign investment under the approval of the relevant government bodies shall continue to pay all taxes according to the tax laws applying to enterprises with foreign investment.
C. The limited companies newly established with domestic enterprises and enterprises with foreign investment or foreign investors as sponsors under the approval of the relevant government bodies shall pay all taxes according to the Temporary Regulations if the proportion of stock ownership owned by the foreign sponsors is less than 25% of the total; and shall pay all taxes according to the tax laws and regulations applying to enterprises with foreign investment under approval of the applications of the newly established companies by the tax authorities if the proportion of stock ownership owned by the foreign sponsors is no less than 25% of the total.
(GUO SHUI FA [087] 1993.9.24)
1.2.9 Tax payment registration for maintenance and service stations established in China by foreign companies for their own products
Maintenance and service stations established in China by foreign companies or enterprises shall not be regarded as Chinese-foreign contractual joint ventures and the tax shall be levied on the relevant domestic companies in whose income the income of the maintenance and service stations is calculated, on condition that the maintenance and service stations mainly provide maintenance and service for the products of the foreign companies or enterprises, that the foreign companies or enterprises pay site rents, worker wages and commission charges regularly in addition to providing maintenance equipment, components and parts, and that they do not become involved in profit allocation, nor become involved in income allocation for maintenance and service.
(CAI SHUI WAI ZI [066] 1982.6.15)
1.2.10 Tax calculation and collection on the service charges for management conducted by foreign companies, enterprises or other economic organizations employed by Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises.
Foreign companies, enterprises or other economic organizations employed by Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures or wholly foreign-owned enterprises to conduct management service belong to the category of enterprises who have an establishment and site in China, therefore on their income from the service charges for management, the Industrial and Commercial Consolidated Tax and Enterprise Income Tax shall be collected according to the “Regulations on Industrial and Commercial Consolidated Tax (Draft)”(1), the Income Tax Law on Foreign Enterprises (2) and other relevant regulations.
Note:
Since July 1, 1991, the tax (1), (2) is collected according to the provisions of the “Income Tax Law on Enterprises with Foreign Investment and Foreign Enterprises” (as the same in the whole book).
(CAI SHUI WAI ZI [102] 1986.4.21)
1.2.11 Enterprise Income Tax shall be calculated and paid according to the provisions of the Tax Law and the Detailed Rules by enterprises with foreign investment in medical treatment and education on the income from business operations and from other sources.
(GUO SHUI FA [152] 1994.7.4)
1.2.12 The question of Resource Tax on the exploitation of crude oil on the Chinese mainland by foreign enterprises
Foreign enterprises shall pay Income Tax according to the provisions of the “Income Tax Law of the People¡¦s Republic of China on Foreign Enterprises” and in the Detailed Rules on their income from business operations and from other sources derived from exploiting land petroleum resources in China.
The provisions in the “Detailed Rules and Regulations for the Implementation of the Income Tax Law of the People¡¦s Republic of China on Foreign Enterprises” regarding ′enterprises engaged in exploiting offshore petroleum resources′ also apply to foreign enterprises engaged in exploiting land petroleum resources.
The regulations on the Income Tax collection regarding the foreign enterprises exploiting offshore petroleum resources made by the Ministry of Finance, the State Administration of Taxation and the Offshore Oil Taxation Administration Bureau all apply to foreign enterprises engaged in exploiting land petroleum resources, except where there are other specific regulations.
(GUO SHUI FA [20] 1990.2.13)
1.2.13 Where enterprises exploit coal bed gas resources on the Chinese mainland, the operating and other income they receive shall pay Income Tax according to the provisions of the ” Income Tax Law of the People¡¦s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises” and the Detailed Rules for their implementation.
(CAI SHUI ZI [62] 1996.7.5)
1.2.14 Provisions in “Detailed Rules for Implementation of The Income Tax Law of the People¡¦s Republic of China on Enterprises with Foreign Investment and Foreign Enterprises” relevant to ′enterprises engaged in exploitation of coal bed gas resources′, are applicable to enterprises engaged in exploitation of coal bed gas resources on the mainland.
(CAI SHUI ZI [62] 1996.7.5)
1.2.15 Unless otherwise stipulated, the regulations formulated by the Ministry of Finance, the State Administration of Taxation and the Offshore Oil Taxation Administration Office on questions related to Enterprise Income Tax on cooperative exploitation of coal bed gas resources, are all applicable to enterprises engaged in exploitation of coal bed gas resources on the mainland.
(CAI SHUI ZI [62] 1996.7.5)
1.2.16 Tax collection in stock ownership reorganization
Stock ownership reorganization refers to: changes in the shareholders (investors) of an enterprise, in the share values or the share proportions held by the shareholders, consisting of, (1) stock ownership transfer, i.e., the shareholders of enterprises transfer part of or all of their stock ownership or shares to others; (2) increase of capital and expansion of shares, i.e., increase in the capital of the enterprise in the following ways: enterprises seek new investors
and issue stock; new investors join or existing shareholders increase their investment, thus expanding total stock ownership of the enterprise. The stock ownership reorganization of an enterprise is the shareholders¡¦ activity regarding investment and transaction, the reorganization of the stock ownership structure, shall not affect the essence of the enterprise, the enterprise shall not go through liquidation procedures, and the debt and credit of the enterprise shall be effective after the reorganization of stock ownership.
The tax collection in stock ownership reorganization shall be dealt with according to the following provisions:
A. Tax collection on income from stock ownership transfer
Income Tax shall be calculated and paid or shall be reduced according to the relevant provisions of the Tax Law and the Detailed Rules for enterprises with foreign investment and foreign enterprises on their income made by transferring their stock ownership or shares of the enterprises. The loss of the enterprises in China from transferring their stock ownership or shares may be deducted from the taxable income for the period.
The profit or loss from transferring stock ownership refers to the difference between the transfer price and the cost of stock ownership.
The transfer price of stock ownership refers to the monetary value in the form of cash, non-monetary assets or royalty collected by the stock ownership transferor, from the transfer of stock ownership; if the enterprise has retained profits for the shareholders such as profits which have not been allocated or funds retained after tax payment, the stock ownership transferor shall transfer the monetary value of the retained profit for the shareholders along with the transfer of the stock ownership (the monetary value shall not be greater than the book value of the enterprise belonging to the stock ownership transferor). The investment income belonging to the stock ownership transferor shall not be reckoned in the transfer price of the stock ownership.
The cost of stock ownership refers to the actual amount of capital paid to the enterprise by a shareholder (or an investor) for the investment, or the real transfer price of stock ownership paid to the former transferor by the shareholder when purchasing the stock ownership.
B. Premium on stock issuing
The premium on stock issuing, belonging to the royalty of the shareholders of the enterprise, shall not be regarded as operating profit, therefore Income Tax shall not be collected; at the liquidation of the enterprise, the premium shall not be calculated into the taxable liquidation income.
C. Limitation on the preferential policies regarding tax refund on reinvestment derived from purchasing shares with profit (dividends)
The preferential policies of tax refund on reinvestment in the Tax Law shall not apply to foreign investors who purchase the shares of the enterprise they belong to (including the shares by stock rights) or purchase the shares of other enterprises with the profit (dividends) allocated from the enterprise.
D. Tax collection from the enterprise where stock ownership reorganization is conducted
In terms of tax collection, the business operations of the enterprise during stock ownership reorganization shall be regarded as continuous business operation. After the stock ownership reorganization, tax collection shall be carried out as follows for the enterprises still regarded as enterprises with foreign investment or the enterprises to which the tax laws and regulations regarding enterprises with foreign investment still apply according to the relevant laws and regulations:
a. Enterprises shall not be permitted to modify the book values of their assets, debts and shareholders¡¦ equity according to the appraised values of the relevant assets made specifically for the realization of the stock ownership transfer. If enterprises have modified the relevant book values of assets by the appraised values in profit and loss accounting, on the basis of which, they have calculated and drawn the depreciation or amortization, the taxable income of the enterprises for the year shall be modified at calculation and declaration of the yearly taxable income according to the requirements in the section “Treatment of Asset Pricing” regarding the merger of enterprises in Article 1 of the Interim Regulations.
b. The preferential policies enjoyed by enterprises according to the Tax Law, the Detailed Rules and relevant regulations shall not be changed because of stock ownership reorganization. After stock ownership reorganization, the enterprises shall continue to enjoy the preferential policies until the period for enjoyment of the preferential policies comes to the end. When the period for enjoyment of the preferential policies ends, the enterprise shall cease to enjoy the relevant preferential tax policies.
c. The losses of an enterprise in business operations which are not offset before stock ownership reorganization may be made up for year by year within the remaining period of years stipulated for making up for the loss in Article 11 of the Tax Law. (Article 11 of the Tax Law is 3.2 in this chapter).
(GUO SHUI FA [71] 1997.4.28)