China’s Current Tax System – Income Tax on Enterprises with Foreign Investment and Foreign Enterprises

(1) Taxpayers

a. Enterprises with foreign investment include Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign owned enterprises.

b. Foreign enterprises include foreign companies, enterprises and other economic organizations which have establishments or places in China engaged in production or business operations or which, though without establishments or places in China, have income from sources within China.

(2) Tax base

The enterprises with foreign investment with head office in China pay income tax on their world-wide income. Foreign enterprises pay income tax only on their income derived from sources within China.

The income tax base for enterprises with foreign investment and foreign enterprises is the taxable income which is the amount remaining from its gross income in a tax year after allowable deduction for costs, expenses and losses.

Any foreign enterprise which has no establishment or place in China but derives income of profits, interest, rental, royalties and other income from sources within China or which, though it has an establishment or place in China, the said income is not effectively connected with such establishment or place, is taxed on the basis of the gross amount of such income.

(3) Tax rates and calculation of the amount of tax payable

The income tax on enterprises with foreign investment and foreign enterprises is 30% of the taxable income plus 3% local income tax, totalling 33% rate. Any foreign enterprise which has no establishment or place in China but derives income of profits, interest, rental, royalties and other income from sources within China or which, though it has an establishment or place in China, the said income is not effectively connected with such establishment or place, pays tax of 20% on such income. The formula for computing the amount of tax payable is:

Amount of tax payable = Taxable income ¡ÑApplicable tax rate

(4) Main tax incentives

a. Tax exemptions or tax reductions may be granted to enterprises with foreign investment of a production nature, export-oriented enterprises with foreign investment, technologically advanced enterprises with foreign investment, and enterprises with foreign investment and foreign enterprises established in the Special Economic Zones, the Economic and Technological Development Zones, the Coastal Open Economic Zones and the New and High-technology Industrial Development Zones specified by the State.

b. The share of profits earned by foreign investors from their invested enterprises may be exempted from tax. The foreign investor who reinvests its share of profits from enterprises with his investment directly into that enterprise by increasing its registered capital or who uses the profit as capital investment to establish another enterprises with foreign investment may receive some tax refund.

c. The exemption from or reduction of local income tax for any enterprise with foreign investment engaged in an encouraged industry or project may, in accordance with the actual situation, be granted by the People’s Government of the relevant Province, Autonomous Region or Municipality directly under the State Council.