China Tax Administration Guide (4) – Tax Treatment of Assets
4.1 Fixed Assets and their Depreciation
4.1.1 Fixed assets of enterprises refer to houses, buildings and structures, machinery, mechanical apparatus, means of transport and other such equipment, appliances and tools related to production and business operations and which have a useful life of one year or more. Items which are used for production and business operations but do not have the nature of major equipment, have a unit value of 2000 yuan or less, or have a useful life of 2 years or less, may be itemized as expenses according to actual consumption.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.2 The valuation of fixed assets shall be based on original cost.
The original cost of purchased fixed assets is the purchase price plus transportation expenses, installation expenses and other related expenses incurred prior to the use of the assets.
The original cost of fixed assets manufactured or constructed by the enterprise itself is the actual expenses incurred in their manufacture or construction.
The original cost of fixed assets treated as investment, after considering the degree of wear and tear of the assets, shall be such a reasonable price as is specified in the contract, or a price appraised with reference to the relevant market price, plus the relevant expenses incurred prior to use of the assets.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.3 An enterprise shall calculate the depreciation of its fixed assets commencing with the month following the month in which they are first put into use. The calculation of depreciation shall cease in the month following the month in which the fixed assets ceased to be used.
Where enterprises are engaged in the exploitation of oil resources, all investments made during the development stage shall be aggregated and treated as capital expenditures, taking the oil (gas) field as a unit; the calculation of depreciation shall begin in the month following the month in which the oil (gas) field commences commercial production.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.4 With respect to the calculation of depreciation of fixed assets, the salvage value shall not be less than 10% of the original value; any request for retaining a lower salvage value must be approved by the local tax authorities.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.5 Depreciation of fixed assets shall be calculated using the straight line method. If it is necessary to use any other method of depreciation, the enterprise must file an application for examination and verification, following which a report shall be made, level-by-level, to the State Administration of Taxation for approval.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.6 The calculation of the useful life of a fixed asset for purposes of depreciation is as follows:
A. for houses and buildings – 20 years;
B. for railway rolling stock, boats, ships, machinery and other production equipment – 10 years;
C. for electronic equipment and means of transport, other than railway rolling stock and boats and ships, as well as such fixtures, tools and furniture related to production and business operations – 5 years.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.7 Houses and buildings refers to houses, buildings and attached structures used for production and business operations, and living quarters and welfare facilities for employees, the scope of which is as follows:
houses, including factory buildings, business premises, office buildings, warehouses, residential buildings, canteens and other such buildings;
buildings, including towers, ponds, troughs, wells, racks, sheds (not including temporary, simply constructed structures such as work sheds and vehicle sheds), fields, roads, bridges, platforms, piers, docks, culverts, gas stations, as well as pipes, smokestacks, and enclosing walls that are detached from buildings, machinery and equipment;
facilities attached to buildings and structures mean auxiliary facilities that are inseparable from buildings and structures and for which no separate value is calculated, including, for example, building and structure ventilation and drainage systems, oil pipelines, communication and power lines, elevators and sanitation equipment.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.8 The scope of railway rolling stock, ships and vessels, machines, machinery and other production equipment is as follows:
railway rolling stock includes various types of locomotives, passenger coaches, freight cars and auxiliary facilities on rolling stock for which no separate value is calculated;
ships and vessels include various types of motor ships and auxiliary facilities on ships and vessels for which no separate value is calculated;
machines, machinery and other production equipment′ includes various types of machines, machinery units, production lines and auxiliary equipment such as various types of power, transport and conduction equipment.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.9 The scope of the means of transport, other than electronic equipment, railway rolling stock, ships and vessels is as follows:
electronic equipment refers to equipment of mainly integrated circuits, transistors, electron tubes and other electronic components whose primary function is to bring into use the application of electronic technology (including software), including computers, computer-controlled robots and digitally controlled or programme controlled systems;
means of transport, other than railway rolling stock and ships and vessels refers to airplanes, automobiles, trains, tractors, motorcycles (motorboats), motorized sailboats, sailboats and other means of transportation.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.10 When it is necessary, for special reasons, to shorten the useful life of fixed assets, an enterprise may submit an application to local taxation authorities who, following their examination and verification, shall report to the State Administration of Taxation for approval.
Fixed assets which for special reasons require the useful life to be shortened include:
A. machinery and equipment subject to strong corrosion by acid or alkali and factory buildings and structures subject to constant shaking and vibration;
B. machinery and equipment operated continually year-round for the purpose of raising the utilization rate or increasing the intensity of use;
C. fixed assets of a Chinese-foreign contractual joint venture having a period of contract shorter than the useful life specified in Article 35 of these Rules and which will be left with the Chinese party after expiration of the contract.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.11 Enterprises which acquire used fixed assets having a remaining useful life shorter than the useful life specified in Article 35 of these Rules, following agreement by the local taxation authorities after their examination and verification of the certifying documents submitted, may calculate depreciation according to the remaining useful life.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.12 Where the value of fixed assets increases during the course of use of the fixed assets, due to expenditure on expansion, reconstruction and technical innovation, the value of the fixed assets shall be increased; where the period of use of the fixed assets can be extended, the useful life shall be appropriately extended and the calculation of depreciation shall be adjusted accordingly.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.13 Fixed assets which continue to be used after being fully depreciated may not be further depreciated.
The balance of proceeds received by an enterprise on the disposal or transfer of fixed assets shall be entered into the profit and loss account for the year, after deduction of the undepreciated amount, or the salvage value, and handling fees.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.14 The depreciation of fixed assets received as gifts by an enterprise shall be calculate on the basis of a reasonable valuation.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.15 During the development stage and subsequent stages of an enterprise engaged in the exploitation of oil resources, depreciation of fixed assets with the nature of investment may be calculated on a consolidated basis, without retaining salvage value; the period of depreciation shall not be less than 6 years.
(GUO WU YUAN LING [85] 1991.6.30)
4.1.16 The technical innovation of the fixed assets refers to the technical innovation carried out for the original fixed assets to improve the performance and quality of the products, increase the variety of the products, as well as reduce the energy and raw material consumption, and add new functions to, increase the value of and lengthen the life span of the fixed assets. The technical innovations may consist of modifying the original machines and equipment; expanding, reconstructing or building up in another place the houses or structures. The expenses for such technical innovations mentioned above shall be regarded as capital expense and shall be treated according to the relevant regulations on fixed assets.
(CAI SHUI WAI ZI [331] 1986.12.31)
4.1.17 Treatment and tax calculation of the rented assets by financial lessees
When enterprises with foreign investment rent fixed assets in the form of a financial lease, the calculation and collection of Income Tax shall be carried out as follows according to the different situations of the lessees:
A. If the lease term of the fixed assets is longer than the depreciable life of the fixed assets, the lease rentals paid each period, which are not higher than the depreciable cost calculated on the basis of the depreciable life according to provisions of the Tax Law, may be completely calculated into the costs and expenses for the period of the enterprise.
B. If the lease term of the fixed assets is shorter than the depreciable life of the fixed assets, and the lease rentals paid each period are higher than the depreciable costs calculated on the basis of the depreciable life according to the provisions of the Tax Law, the excess part shall not be taken as costs and expenses for the period but shall be taken as expenses which shall be amortized within the remaining period, obtained by deduction of the lease term from the depreciable life stipulated by the Tax Law when the ownership of the fixed assets is transferred to the lessees at the end of the lease term. When the ownership of the fixed assets is transferred to others or the fixed assets are sold at the end of the lease term, the difference between the obtained income and the expenses to be amortized may be taken as the profit or loss for the period.
C. The lessee¡¦s calculation of the depreciation charge of the rented fixed assets:
a. Calculation of the original price of the rented fixed assets: The original price of the rented fixed assets consists of the following expenses which shall be paid by the lessees, e.g. payment for the purchase of the fixed assets, the expenses for transportation, insurance, installation and set up, as well as the purchase expenses paid by the lessee for the transfer of ownership of the fixed assets to the lessee, according to the contract, when the lease term ends
b. Depreciable life and depreciation method:
In principle, the depreciable life and depreciation method shall be selected according to the relevant provisions in the Tax Law, but if a change in the depreciable life and the depreciation method are approved by the Ministry of Finance or authorized government bodies, the calculation may be carried out according to the approved depreciable life and depreciation method.
D. The interest and service charges to be paid by the lessee may be categorized into the expenses for the period when payment is made.
(CAI SHUI WAI ZI [033] 1987.2.22)
4.1.18 Tax payment on the transfer of assets by Chinese-foreign equity joint ventures and foreign enterprises
Enterprise Income Tax shall be calculated and paid on income obtained by Chinese-foreign equity joint ventures and foreign enterprises from transfer of the fixed assets and intangible assets, and such income shall be calculated into the business income of the enterprise for the year.
Income from transfer of the assets shall be calculated according to the following formula:
income from transfer of assets =gross income from transfer of the assets-(remaining value of the assets + transfer expenses)
remaining value of the assets=the original price of the assets-the depreciable cost or the amortized amount
the transfer expenses consist of: service charges, carriage, charges for dismantling and clearing, as well as other expenses related to the transfer of assets.
(CAI SHUI WAI ZI [033] 1987.2.22)
4.1.19 The provision on the foreign cooperative party shall recover the investment before paying Income Tax according to the agreement in the contract of the contractual joint venture′ in Section 2 of Article 22 in the Law on Chinese-Foreign Contractual Joint Ventures¡¦ refers to the recovery of the investment by the foreign cooperative party by taking its share of the income from depreciation of the fixed assets. If the cooperation period of the contractual joint venture is shorter than the depreciation life of the fixed assets stipulated in the tax laws and regulations, and it is written in the cooperation contract that ownership of the total assets of the joint venture shall be transferred to the Chinese party when the cooperation term comes to an end, the foreign party shall recover its investment by accelerated depreciation of the fixed assets upon the State Administration of Taxation¡¦s approval of the joint venture¡¦s application.
(GUO SHUI HAN [502] 1991.4.9)
4.1.20 Depreciation shall be calculated from the second month after commercial production starts in the oil field if all the development investment of the oil field is taken as capital expenses. The depreciable life shall not be shorter than 6 years.
The development investment not depreciated or not fully recovered from the depreciation in the oil field, may be recovered from the depreciation (according to the undepreciated life) in the income of other oil (gas) fields where commercial production has already started.
(GUO SHUI YOU HAN [052] 1991.9.18)
4.1.21 Depreciation of development investment and amortization of exploration expenses
A. Depreciation shall be calculated by the enterprise engaged in development of oil resources according to provisions of the Detailed Rules
with the oil (gas) field as the unit in calculation and with all the investment in the development phase as the capital expense, whether the investment is tangible or intangible assets. As for development investment occurring after the commercial production starts in the oil field, depreciation shall be calculated annually from the following year on the basis that the investment in each year is accumulated respectively year by year. The undepreciated part of the development investment in an oil (gas) field abandoned in the development phase, may be recovered from the depreciation (according to the undepreciated life) in the income of the enterprise¡¦s other oil (gas) field where commercial production has already started.
B. The amortization of reasonable exploration expenses occurring in the enterprise engaged in the exploitation of oil resources shall be carried out from the first month when the commercial production starts in the enterprise’s oil (gas) field. The amortization period shall not be shorter than one year. For the exploration expenses occurring after commercial production starts, the amortization shall be carried out from the following year on the basis that the annual exploration expenses are accumulated respectively year by year, and the amortization period is not shorter than one year.
C. The enterprise engaged in exploitation of oil resources may independently decide the depreciation life and amortization period for the development investment and exploration expenses respectively, according to the financial position of the enterprise, if the depreciation life and amortization period are no shorter than those mentioned above. The enterprise shall present the time plan for amortization and depreciation to the responsible taxation authorities for their records. During the fulfillment of the plan, if there is a need to change or modify the amortization period and depreciation life, the enterprise shall present an application to the responsible taxation authorities for approval.
D. The straight-line method shall be adopted for depreciation and amortization on the basis of the average annual amount for the above-mentioned development investment and exploration expenses.
(GUO SHUI FA [191] 1991.11.27)
4.2 Tax Treatment of Intangible Assets
4.2.1 Patents, technical know-how, trademarks, copyrights, land use rights and other intangible assets of enterprises shall be appraised on the basis of their original value.
For received intangible assets, the original value is the actual amount paid based on a reasonable price.
For a self-developed intangible asset, the original value is the total amount of actual expenses incurred in the process of development.
For intangible assets used as investment, the original value is a reasonable price as stipulated in the agreement or contract.
(GUO WU YUAN LING [85] 1991.6.30)
4.2.2 The amortization of intangible assets shall be calculated using the straight line method.
Intangible assets which are transferred, assigned or used as investment, where the useful life is stipulated in the agreement or contract, may be amortized over the period of that useful life; the amortization period of intangible assets for which no useful life has been stipulated or which have been self-developed, shall be not less than 10 years.
(GUO WU YUAN LING [85] 1991.6.30)
4.2.3 Where enterprises are engaged in the exploitation of petroleum resources, reasonable exploration expenses incurred may be amortized against income from oil (gas) fields that have already commenced commercial production. The period of amortization shall be not less than one year.
Where operation of a contract field owned by a foreign oil company is terminated due to failure to find commercially viable oil (gas), and where ownership of the contract for the exploitation of petroleum (gas) resources is not continued and management organizations or offices for carrying out operations for the exploitation of petroleum (gas) resources are no longer maintained in China, reasonable exploration expenses already incurred for the terminated contract field, after examination and verification and issuance of certification by the tax authorities, may be amortized against production income of a newly owned contract field when the new contract for cooperative exploitation of oil (gas) resources is signed within 10 years from the date of the termination of the old contract.
(GUO WU YUAN LING [85] 1991.6.30)
4.3 Tax Treatment of Other Intangible Assets
4.3.1 Expenses incurred by enterprises during the preparation period shall be amortized beginning with the month following the month in which production and business operations commence; the period of amortization shall be not less than 5 years.
The period of amortization refers to the period from the date of approval of the organization of the enterprise to the date of commencement of production and business operations (including trial production and trial business operations).
(GUO WU YUAN LING [85] 1991.6.30)
4.3.2 An enterprise¡¦s inventory of merchandise, finished products, goods in process, semi-finished products, raw materials and other such materials shall be valued at cost.
(GUO WU YUAN LING [85] 1991.6.30)
4.3.3 When inventory goods are delivered or used, enterprises may choose one of the following methods for valuing actual costs: first-in, first-out; moving averages; weighted average; or last-in, first-out.
Once a valuation method has been adopted for use, no change may be made thereto. Where a change in the method of valuation is really necessary, the situation shall be reported to the local taxation authorities for approval before the commencement of the subsequent tax year.
(GUO WU YUAN LING [85] 1991.6.30)
4.3.4 Definitions of the preparation period and the preliminary expenses, and calculation of amortization for the expenses occurring in the preparation period (hereinafter referred to as preliminary expenses) paid by Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises.
The preparation period refers to the period between the signing of the contract by all sides of the equity or contractual joint ventures and the date when production or operation starts; for wholly foreign-owned enterprises, the preparation period refers to that between the establishment of the enterprise and approval by China¡¦s relevant government bodies and the date when production or operation starts. The production or operation starting period covers both trial operation and partial operation. The expenses occurring in the preparation period for the establishment of Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises refer to expenses related to the preparation of the establishment of the enterprise, including: wages, traveling expenses and training expenses for employees engaged in the preparation, the expenses for consultation and survey, for business entertainment, for document printing, for telecommunications and for the operation starting ceremony, etc., but does not include expenses for the purchase and construction of fixed assets such as machine equipment and buildings, or expenses for purchase of all kinds of intangible assets as well as expenses which shall be paid by the investors on their own according to provisions in the contract, agreement and regulations. As for the Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-owned enterprises whose operation period is shorter than 5 years, the preliminary expenses may be totally amortized on the straight-line method within the operation period after examination and approval by the local taxation authorities.
(CAI SHUI WAI ZI [102] 1986.4.21)
4.3.5 The definition of the date when the approval of preparation for the establishment of the enterprise is made
The date when the approval of preparation for the establishment of the enterprise is made refers to the date when signed agreements or contracts for the establishment of the Chinese-foreign equity or contractual joint ventures are approved; such a date for wholly foreign-owned enterprises refers to the date when the request for establishment of the enterprise is approved.
The expenses occurring before the approval of the agreements and contracts signed for the establishment of Chinese-foreign equity or contractual joint ventures on the feasibility study carried out by all sides together, may be calculated into the preliminary expenses after examination and approval by the local taxation authorities.
(GUO SHUI FA [165] 1991.10.15)
4.3.6 Tax Treatment for Transfer of Assets
Transfer of assets refers to the enterprise¡¦s transfer-in or transfer-out of a part of or all of the assets from or to another enterprise or within the enterprise itself (including the goodwill, business operations and liquidation assets). The essence of the enterprises engaged in transfer-in or transfer-out shall not be affected by the transfer-in and transfer-out of assets.
The tax payment regarding the transfer of assets shall be dealt with as follows:
A. Treatment of the gains from transfer of assets
The calculation and payment of taxes shall be carried out with the enterprise¡¦s gains or losses from the transfer of assets calculated into the taxable income for the period according to relevant provisions of the Tax Law and the Detailed Rules.
B. Entering the transfer-in of assets into the accounts
Various assets transferred to the transfer-in side may be entered into the accounts of relevant assets at the actual transfer-in prices. If it is difficult to calculate the transfer-in prices since there are too many items of transfer-in assets or the transfer-in assets are transferred in with goodwill or business operations, the transfer-in price may be entered into the accounts of relevant assets of the transfer-in side according to the transfer-out side¡¦s net book value on the transfer-out assets. The difference between the actual transfer-in price and the net book value of the assets may be taken as the transfer-in price for the goodwill or business operations, which shall be listed independently as intangible assets and shall be amortized within 10 years¡¦ time starting from the date when transfer of assets was carried out, or shall be amortized within the remaining operating period of the enterprise, if that remaining operating period from the date when the transfer of assets was carried out is shorter than 10 years.
C. Treatment of Tax Incentives
The original tax treatment shall be continued if the transfer-in and transfer-out sides do not change their production and business operations after the transfer of the assets; for transfer-in and transfer-out sides who enjoy fixed term exemptions from, or reduction of tax payments, the period for tax exemptions or reduction may not be lengthened on the basis of the transfer of assets.
The tax incentives shall cease if the transfer-in enterprise or the transfer-out enterprise changes their production or business operations after the transfer of assets, and if the business originally enjoying relevant tax incentives changes into that which may not enjoy the tax incentives according to relevant regulations. If the business originally did not enjoy the relevant tax incentives changes into that which may enjoy the tax incentives, the enterprise shall enjoy the tax incentives for the remaining part of the tax incentive years calculated from the first profit-making year.
D. Treatment of losses on transfer of assets
The operating losses occurring at transfer of assets in the transfer-in side and the transfer-out side shall be made up for within the years stipulated for making up for losses in Article 11 of the Tax Law. The enterprise¡¦s operating loss shall not be transferred between the transfer-in side and the transfer-out side, whether the enterprise transfers all or part of its total assets and business.
(GUO SHUI FA [71] 1997.4.28)