Microsoft PowerPoint Enterprise Income Tax Law-enz

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1 Enterprise Income Tax Law (effective January 1, 2008) Wang Jing & Co. Law Firm Zach Wortham / Phenix Zheng / Deng Yong November 10, 2008

2 Topics Reasons for the Enterprise Income Tax Law (EIT) Tax Rates Taxable Income Amount and Deductions Changes in Preferential Tax Treatment Technology Transfer and R & D Advance Pricing Agreements and Investigations

3 I. Reasons for the Enterprise Income Tax Law: Unify the income tax processes of both domestic enterprises and foreign invested enterprises Unify and standardize the procedures and criteria used for pre-tax deductions Implement a preferential tax policy: priority is being given to specific industries for preferential tax treatment and the prior practice of preferential treatment based on the region an enterprise is located is now secondary

4 II. Tax Rate General tax rate 25% - PRC registered enterprises Small/Low-profit enterprises 20% (enterprises must not have more than RMB 300,000 in annual taxes, no more than 100 employees, and assets exceeding RMB 30m) - PRC registered enterprises Specific New and Hi-tech enterprises 15% (enterprises must meet standards regarding investment, employment of skilled workers, and levels of income to qualify as a New or Hi-tech enterprise) - PRC registered enterprises Withholding income tax: 10% - Foreign registered enterprises

5 Tax Rates for Dividends and Bonuses Old law: dividends and bonuses obtained by an overseas parent company from it s subsidiary within the territory of the PRC are not taxable. New law: Article 19 stipulates that dividends and bonuses allocated from PRC based enterprises should be taxed at a rate of 10%. However, income as stipulated in Article 26(3) is still tax-free. (This includes: income from treasury bonds, dividends and bonuses distributed between qualified resident enterprises, and any likewise dividends and bonuses originating and staying in resident enterprises)

6 III. Taxable Income Amount and Deductions Taxable amount of income = total amount of income each tax year - tax-free income - tax-exempt income - all deduction items - any remedies for the losses of the previous year(s) Tax-free income: proceeds not originating from business activities (Article 7 of the EIT ) Example: VAT rebates Tax-exempt income: preferential tax treatment provided for in specific situations (Article 26 of the EIT, Article 83 of the Regulation on the Implementation of the EIT) Example: treasury debts, qualified dividends, profit distribution, and other returns on equity investments between domestic enterprises. Business entertainment expenses may also now be deducted up to a maximum of 0.5% (Article 43 of the EIT)

7 IV. Changes in Preferential Tax Treatment Article 53 stipulates that specific measures for preferential tax treatment and the right to reduce or exempt tax shall be subject to the approval of the State Council. Local authorities have no right to reduce or exempt tax.

8 Examples of Preferential Tax Treatment which have been cancelled Preferential tax rates of 15% and 24% in special economic zones, costal economic and technical development zones, and in the initial development of riverside cities, etc. 2+3 or the system whereby the first two years of taxes were exempted and the following three years received a 50% exemption Tax rebates for foreign invested enterprises from purchases of domestically manufactured equipment Tax rebates from reinvestment into a foreign invested enterprise 50% reduction of tax for foreign invested enterprises whose products are mainly for export General principle: preferential tax treatment which has been stipulated in the new tax law will continue and any that were not included are cancelled.

9 New Preferential Tax Treatment New preferential tax treatment mainly focuses on agriculture, forestry, fishery and animal husbandry industries, also investment in key infrastructure, investment in environmental protection and energy conservation, technology transfer, and investment in notfor-profit organizations (the first three years are exempted and the following three years receive a 50% exemption) The new preferential period begins the first revenue is produced from production or operation whereas the old law stipulated that preferential treatment began the first revenue producing year of the enterprise

10 Preferential Policy Transition Period From January 1, 2008, the tax rate of enterprises which enjoy a preferential treatment will gradually move to the statutory tax rate over a period of 5 years as of the implementation of the new tax law. Enterprises which enjoy a tax rate of 15% will be levied 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011, and 25% in 2012; enterprises which are levied 24% of the enterprise s income will be levied 25% beginning in From January 1, 2008, enterprises which enjoy a preferential treatment of regular income tax deductions such as being exempt during the first two years and receiving a 50% exemption the following three years, being exempt the first five years and receiving a 50% exemption the following five years, etc, will enjoy the preferential treatment until the preferential term expires according to the original tax law, the administrative regulations, and the preferential regulations and term in the relevant document; for enterprises which fail to enjoy a preferential policy because they have not yet begun to make a profit, the preferential term will commence from the year 2008.

11 Preferential Treatment in Special Economic Zones and the Pudong New Area For New and Hi-tech enterprises registered in the special economic zone and Shanghai Pudong new area after January 1, 2008, their income from the special economic zone and Pudong new area shall be exempted from tax for the first two years and shall receive a 50% exemption the following 3 years, using the statutory tax rate of 25% as of the tax year the enterprises obtained business and operational income. In Guangdong Province Special Economic Zones include: Shenzhen, Zhuhai, and Shantou

12 V. Technology Transfer and R&D Expenses Technology Transfer: the portion of income from technology transfer in a tax year which does not exceed RMB 5million is exempted from tax; the portion which exceeds RMB 5million will receive a 50% tax exemption. The exemption may be delayed until a late time (Article 90 of the Regulation on Implementation of the EIT) An additional amount may be deducted from R&D expenses and the intangible assets formed as a consequence: additional 50% deduction (Article 95 of the Regulation on the Implementation of EIT Law) Example: Company A earned RMB 6 million from the transfer of technology in In order to avoid paying the maximum tax liability Company A could divide it s investment into segments less than 5 million RMB and pay over a period of a couple of years.

13 VI. Advance Pricing and Investigations The tax authority shall be entitled to make tax readjustments within 10 years of the tax year when the related transaction was conducted. (PRC law states that accounting books, accounting documents, statements and certificates of tax payment must be kept for 10 years) An enterprise may file with the tax authority the pricing principles and computation approaches for the transactions between it and its affiliates, the tax authority and the enterprise shall enter into an advance pricing arrangement upon negotiations and confirmation. When the tax authority investigates the transactions of an enterprise with its affiliates and when it find the materials provided by the enterprise are false or incomplete, it may decide the rate of tax of transfer pricing based on the results of it s investigation. Transfer pricing refers to the manipulation of product pricing between two connected enterprises in order to maximize their own profit or avoid tax and completely ignores market demands.

14 eg1: Comparing investment through HK and abroad, in regards to changes in the EIT Investor Company A (Sweden) Investor Company A (HK) investment Profit, tax rate10% investment Profit, tax rate 5% Within the territory of the PRC Subsidiary B Interest, royalties 10% Within the territory of the PRC Subsidiary B Interest, royalties 7%

15 eg2: Aspects not yet clear - Income tax in regards to Equity Interest Transfer Company A in HK Company B in HK investment within the territory of the PRC equity interest transfer Company C within the territory of the PRC (target company) Questions still not clear: 1. the application of law (if in China then tax should be paid) 2. How to control the transaction and therefore implement tax rules

16 Aspects not yet clear - Technical eg3: Consultancy Contracts in regards to Enterprise Income Tax and Business Tax Company A (Sweden) Technical consultancy Consultancy fee Within the territory of the PRC Company B (PRC) Enterprise income tax and business tax should be paid however, the consultancy contract may be divided into on-the-spot consulting services (for which taxes must be paid) and remote consulting services (for which no taxes are paid) (Article 15 of the Regulation on Implementation of the EIT Law ). It should be further noted that certain ratios may apply in regards to how much work is specified as on-the-spot services.

Conclusion Thank You for your time Zach Wortham: zwortham@wjnco.

17 Conclusion Thank You for your time Zach Wortham: Phenix Zheng: Deng Yong:

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