28 Sept 2018
Tax Exemption and Reduction
In a bid to attract foreign investment, China offers a range of tax concessions to FIEs and foreign enterprises. The following are some of the major preferential policies.
Concessions on VAT and Customs Duty
(a) 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.
(b) 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.
(c) 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 VAT in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports.
(d) 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.
(e) 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. Imported equipment of foreign investment projects of which the development is encouraged by the state are exempt from import tariffs and import-related VAT within the scope stipulated.
(f) 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.
(g) Business tax to VAT conversion (B2V): Some of the service industries originally taxable under business tax are now included in the scope of VAT. The transport sector and selected modern service industries in Shanghai carried out the B2V pilot programme from 1 January 2012. B2V was subsequently extended to the whole country for trial operation, involving sectors including transportation services by land, water, air and pipeline, selected modern services (mainly producer services), postal services and telecoms services as of 1 August 2013. Since 1 May 2016, the pilot B2V reform has been fully implemented nationwide and expanded to the construction, real estate, financial and lifestyle services sectors.
(h) At the executive meeting of the State Council on 28 March 2018, it was decided that, with effect from 1 May 2018, businesses in advanced manufacturing such as equipment manufacturing, qualified modern service companies such as those engaged in R&D services and companies operating electrical grids would be entitled to a one-off refund of excess input VAT credit accumulated over a specific period of time.
Concessions on Enterprise Income Tax
Following the abolition of the Enterprise Income Tax Law of the PRC for Foreign-invested Enterprises and Foreign Enterprises and the Provisional Rules on Enterprise Income Tax on 1 January 2008, 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.
- New- and high-technology enterprises given key support by the state are taxed at the reduced rate of 15%.
- High-tech enterprises established in Special Economic Zones and Shanghai Pudong New Area are eligible for transitional preferential tax treatment.
- Income of non-resident enterprises provided for in Article 27 (5) of the Enterprise Income Tax Law is taxed at the reduced rate of 10%.
- According to the Circular on Expanding the Scope of Preferential Income Tax Policies regarding Small Low-Profit Enterprises (Cai Shui No. 43 ), from 1 January 2017 to 31 December 2019, the upper limit of the annual taxable income of small low-profit enterprises  is raised from RMB300,000 to RMB500,000. For such qualified small low-profit enterprises, taxable income will be calculated at the reduced rate of 50% of its income, and they will pay enterprise income tax at the rate of 20%.
- According to the Circular of the Ministry of Finance, the State Administration of Taxation and the Ministry of Science and Technology on Raising the Proportion of Weighted Pre-tax Deduction of the Research and Development Expenses of Small- and Medium-Sized Technology-focused Enterprises (Cai Shui No. 34 ), where the R&D expenses already incurred by a small- or medium-sized technology-focused enterprise in the course of R&D activities have not been included in the current loss and profit as intangible assets, during the period from 1 January 2017 through 31 December 2019, another 75% of the amount of R&D expenses already incurred in the period will be deducted from the amount of taxable income in addition to the prescribed deduction from the amount actually incurred; where any intangible assets are formed, 175% of the costs of the intangible assets will be amortised before taxes during the period.
(b) Income Exempted from Taxation
- Interest income from state bonds.
- Investment income such as dividends and bonuses received among qualified resident enterprises (that is, investment income derived from the direct investment of resident enterprises in other resident enterprises).
- Investment income such as dividends and bonuses received from resident enterprises by non-resident enterprises with establishment or place of business in China, where such income is effectively connected with their establishment or place of business (not including investment income in respect of the shares of publicly-listed and traded resident enterprises held for less than 12 months).
- 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 requirements.
- 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
- R&D expenses in developing new technology, new products and new processes, and wages paid to employees with disabilities and other employees encouraged by the state to be employed may be deducted when computing the 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 the taxable income.
- Enterprises that purchase and utilise special-purpose equipment for the purpose of environmental protection, energy conservation, water conservation or safe production prescribed in the preferential directory may deduct 10% of their investment amount from their taxable income in the current year. The excess amount can be carried forward in the future for deductions in the future five years.
Individual Income Tax Concession for Foreigners
(a) Housing allowance, meal allowance, relocation expenses and laundry fees received in non-cash forms or in the form of cash reimbursement can be exempt from individual income tax.
(b) Travel allowance at reasonable levels within or outside of the country can be exempt from individual income tax.
(c) The portion of home visit allowance, language training fees and children’s education expenses etc verified and approved by the local tax authorities at reasonable levels can be exempt from individual income tax.
(d) Dividends and bonuses received from FIEs can be exempt from individual income tax.
(e) Any foreign individual who has no domicile in China, but 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 the permanent establishment or fixed place of business 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.
(g) Beginning 1 September 2011, the wages and salaries of foreign employees and foreign experts in China will enjoy an extra monthly deduction of RMB1,300 on top of the monthly deduction of RMB3,500 for individual income tax assessment. Overseas Chinese and residents of Hong Kong, Macau and Taiwan will also enjoy this extra monthly deduction.
(h) The wages and salaries of qualified foreign experts can be exempted from individual income tax.
Tax Concessions for Central and Western Regions
From 1 January 2011 to 31 December 2020, enterprises whose main business falls within the “encouraged” category of the western region that generates an income amounting to more than 70% of their total annual income in that year, upon application by the enterprise and verification and confirmation by the supervisory tax department, are eligible for enterprise income tax at the reduced rate of 15%. Self-use equipment imported within the total investment value of domestic enterprises under the encouraged category of the western region, as well as FIEs under the encouraged category and the priority category are exempt from customs duties within the scope stipulated in the policy.
 These refer to enterprises that are engaged in industries not restricted or prohibited by the state and that meet the following conditions: (1) industrial enterprises that have an annual taxable income not exceeding RMB500,000, have no more than 100 employees and have total assets worth no more than RMB30 million; (2) other enterprises that have an annual taxable income not exceeding RMB500,000, have no more than 80 employees and have total assets worth no more than RMB10 million.