10 May 2012
Tax Exemption and Reduction
In a bid to attract foreign investment, the Chinese government has introduced a range of tax concessions to FIEs and foreign enterprises. The following are some of the major preferential policies.
Concessions on Business Tax, VAT and Customs Duty
(a) Incomes derived by research and development centres established by FIEs and foreign investors, as well as incomes derived by foreign enterprises and foreign individuals from technology transfer, technology development and related consultancy and technology services are exempt from business tax.
(b) The raw materials, auxiliary materials, parts, components, accessories and packaging materials imported by FIEs for the outward processing or assembly of products and for the production of goods for export are exempt from import tariffs based on the quantity of finished products actually processed and exported. Alternatively, import tariffs are levied on the imported materials and parts first and rebates are made later based on the quantity of finished products actually processed and exported.
(c) FIEs under “encouraged category” are entitled to full VAT rebate on the purchase of domestically-produced equipment within their investment amount if such equipment is listed in the catalogue of duty-free imports.
(d) Imports of equipment and supporting technologies, accessories and parts for own use by existing FIEs under the “encouraged category”, foreign-invested R&D centres, FIEs with advanced technologies and export-oriented FIEs, are exempt from import tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports.
(e) Imports of equipment for own use by FIEs for producing products in the Catalogue of State New and High Technology Products and imports of supporting technology, accessories and parts as set out in the contract are exempt from import tariffs and import-related VAT, with the exception of commodities listed in the Catalogue of Non-Duty-Free Commodities to be Imported for Domestic-Funded Projects.
(f) Imports by FIEs of advanced technology in the Catalogue of State New and High Technology Products and software fees paid overseas as stipulated in the contract are exempt from import tariffs and import-related VAT.
(g) For R&D centres set up by FIEs, imports of equipment or related technologies, accessories and parts for own use that are not produced domestically or the performance of those produced domestically fails to meet the needs of the enterprises are exempt from import tariffs and import-related VAT in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports (Guo Fa  No.37), provided that the imports are within the enterprises’ total investment amount.
Concessions on Enterprise Income Tax
Since 1 January 2008, both the Enterprise Income Tax Law of the PRC for Foreign-invested Enterprises and Foreign Enterprises and the Provisional Rules on Enterprise Income Tax have been abolished. The original concession policy has been replaced by the relevant provisions in the new Enterprise Income Tax Law. The new Enterprise Income Tax Law has unified and standardised all the tax reductions and exemptions for domestic and foreign enterprises, and has introduced the new system of “offering primary tax concessions by industry and secondary tax concessions by region,” which is applicable to all domestic and foreign enterprises. The main concession policies are as follows:
(a) Concessionary Tax Rates
Industries and projects given key support and encouragement in development by the state are entitled to concessions on enterprise income tax.
Qualified small and medium-sized enterprises making a small profit are taxed at the reduced rate of 20%.
New- and high-technology enterprises given key support by the state are taxed at the reduced rate of 15%.
(b) Income Exempted from Taxation
Interest income from state bonds.
Investment income such as dividends and bonuses received among qualified resident enterprises.
Investment income such as dividends and bonuses received from resident enterprises by non-resident enterprises with establishments or venues in China, where such income is effectively connected with their establishments or venues.
Income of qualified non-profit organisations.
(c) Reduction and Exemption of Enterprise Income Tax
Income from agriculture, forestry, animal husbandry or fishery projects.
Income from investment in and operation of public infrastructure projects given key support by the state.
Income from environmental protection, energy saving and water conservation projects meeting requirements.
Income from technology transfer meeting requirement.
The autonomous authorities of minority autonomous regions may decide on granting tax reduction or exemption to enterprises in their respective autonomous regions in respect of the share of enterprise income tax receivable by the autonomous region.
Other enterprises under the encouraged category specified by the state may enjoy tax reduction or exemption according to the rules of the State Council.
(d) Deductible and Exempted Items
Research and development costs in developing new technology, new products and new processes, and wages paid to disabled employees and other employees encouraged by the state to be employed may be deducted when computing taxable income.
Venture capital enterprises engaged in venture capital investments given key support and encouragement by the state may deduct a fixed proportion of their investment amount from their taxable income.
Where accelerated depreciation is required of the fixed assets of an enterprise for the purpose of technology advancement, the enterprise may shorten the period of depreciation or adopt the accelerated depreciation method.
Income received by an enterprise engaged in comprehensive utilisation of resources to produce products meeting the requirements of state industrial policies may be deducted when computing taxable income.
Enterprises that purchase special-purpose equipment for the purpose of environmental protection, energy conservation, water conservation or safe production may deduct a fixed proportion of their investment amount from their taxable income.
In order to maintain the continuity of policy, the new Enterprise Income Tax Law provides for a transition period for enterprises enjoying concession policies before the promulgation of the new law. Under State Council rules, for enterprises granted approval to be set up before the promulgation of the new law which could enjoy tax concessions according to the tax laws and administrative rules at that time, a five-year transition period as from the effective date of the new law is given to them to pass gradually to the new tax rates. Enterprises entitled to tax reduction and exemption for a fixed period may continue to enjoy the concessions after the new law comes into effect up to the expiry of the period. But for enterprises not enjoying tax concessions due to failure to make a profit, the concession period will be calculated from the year the new law comes into effect. In the special zones designated by law for promoting foreign economic cooperation and technological exchange and in zones designated by the State Council for implementing the above special policies, newly established new- and high-technology enterprises given key support by the state may enjoy transitional tax concessions. Other enterprises under the encouraged category recognised by the state may enjoy tax reduction and exemption according to State Council rules.
Individual Income Tax Concession for Foreigners
The following income of foreigners is eligible for individual income tax concession:
(a) Housing allowance, meal allowance, relocation expenses and laundry fees received in non-cash forms or in the form of cash reimbursement can be deducted from the taxable income.
(b) Travel allowance at reasonable levels can be exempt from individual income tax.
(c) The portion of home visit allowance, language training fees and children’s education expenses at reasonable level can be deducted from the taxable income.
(d) Dividends and bonuses received from FIEs can be exempt from individual income tax.
(e) Any foreign individual who resides in China consecutively or accumulatively for not more than 90 days (or 183 days for those from countries that have signed tax treaties with China) in a tax year is exempt from individual income tax if his wage or salary is not paid or borne by his employer in China and is not borne by a resident establishment or permanent venue of his employer in China.
(f) With the approval of the competent tax authorities, any foreign individual who resides in China for more than a year but less than five years, his wage or salary during his duration of work outside China and paid by the non-China employer, may be exempt from individual income tax.
Tax Concessions for Central and Western Regions
FIEs under the “encouraged” category in the western region that enjoy the “two-year exemption and three-year reduction by half” tax concession are eligible for enterprise income tax at the reduced rate of 15% for three more years following the expiration of the said concession. FIEs recognised as high-tech or export-oriented enterprises with an export value amounting to over 70% of their annual output value in the current year are eligible for a 50% reduction of enterprise income tax during this three-year period, however the reduced tax rate cannot be below 10%.