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China: New Foreign Investment Law adopted. Page Content. The Foreign Investment Law FIL , adopted at the annual plenary session of the National People's Congress will be a comprehensive legal basis for future investment and business activities of foreign companies in the People's Republic of China. Protection of intellectual property A central point of the FIL is to improve the protection of intellectual property in foreign investment. Transition periods The new law provides for a five-year transitional period during which the existing joint ventures and WFOEs must adapt their organizational form to the FIL and accordingly the Chinese Company Law.
They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement. There is no further tax upon remittance of branch profits. The accrual method of accounting should be used. Gross income refers to monetary and non-monetary income derived by an enterprise from various sources, including, but not limited to, the sales of goods, provision of services, transfer of property, dividends, interest, rentals, royalties, and donations.
Non-taxable income refers to fiscal appropriation, governmental administration charges, governmental funds, and other income specified by the central government. Inventory must be valued according to costs. In computing the cost of inventories, the enterprise may choose one of the following methods: first in first out FIFO , weighted average, or specific identification.
An exemption exists for CIT on dividend derived by a TRE from the direct investment into another TRE except for where the dividend is from stocks publicly traded on the stock exchanges and the holding period is less than 12 months.
The non-TRE shareholder shall report and settle the deferred tax if it later recoups the investment through equity transfer, equity buyback, liquidation of the China TRE, etc. Dividends distributed by a foreign investment enterprise out of its pre profit to its non-TRE shareholder s are exempted from WHT. Partnerships registered in China are not subject to CIT. Unrealised exchange gain loss from the year-end translation of assets liabilities denominated in foreign currency generally is taxable deductible.
The worldwide income of a TRE and its branches both within and outside China is taxable. There are no provisions in the CIT law that allow foreign income directly earned by the TRE to be deferred for tax purposes.
Full Text Translation
The CIT law contains a controlled foreign company CFC rule under which the unremitted earnings of a foreign company controlled by Chinese enterprises may be taxable in China see the Group taxation section for more information. A foreign tax credit is allowed for foreign income taxes paid on foreign-source income. Generally, an enterprise is allowed to deduct reasonable expenditures that actually have been incurred and are related to the generation of income.
Fixed assets with useful lives of more than 12 months must be capitalised and depreciated in accordance with the CIT regulations. Generally, depreciation is calculated by the straight-line method. Shorter tax depreciation life or accelerated depreciation may be allowed due to advancement of technology or suffering from constant vibration or severe corrosion. Production-nature biological assets, such as livestock held for breeding and commercial timber, also have to be capitalised and depreciated using the straight-line method. Under the straight-line method, the cost of an item, less its residual value, is depreciated over the useful life of the asset.
Residual value should be reasonably determined based on the nature and usage of the asset. The CIT law provides minimum useful lives for the following assets:. From 1 January to 31 December , newly acquired fixed assets, other than real estate properties, with unit value not exceeding CNY 5 million are allowed to be expensed-off in one lump sum in the year of acquisition.
Shorter tax depreciation life or accelerated depreciation is allowed for particular types of fixed assets e. A deduction is allowed for amortisation of intangible assets, such as, but not limited to, patents, trademarks, copyrights, and land-use rights. Generally, intangible assets have to be amortised over a period of not less than ten years. For an intangible asset obtained through capital contribution or assignment, it can be amortised according to the useful life prescribed in the laws or agreed in the contracts, if any.
However, acquired goodwill is not deductible until the invested enterprise is entirely transferred or liquidated. Asset loss including bad debt loss may be deductible in the tax year during which such loss is incurred, provided that supporting documents are maintained for inspection by the in-charge tax bureau.
Corporate Income Tax Law and Practice in the People's Republic of China
Interest on loans generally is tax-deductible. For interest expenses on borrowings from non-financial institutions by a non-financial institution, the portion that does not exceed the commercial rate is deductible. The tax deduction of interest paid to related parties is subject to the thin capitalisation rule under the CIT law see the Group taxation section for more information.
Provisions for asset impairment reserves e. Financial institutions and insurance companies may deduct certain provisions and reserves, subject to the caps specified in the relevant tax circulars. The CIT law does not specifically address the deductibility of contingent liabilities.
According to the general principle of the CIT law, contingent liabilities are liabilities that an enterprise has not actually incurred and thus shall not be tax-deductible. Non-charitable donations, as well as sponsorship expenditures that are non-advertising and non-charitable in nature, are not deductible. Reasonable wages and salaries of employees incurred by an enterprise are tax-deductible. Basic social security contributions, including basic pension insurance, basic medical insurance, unemployment insurance, injury insurance, maternity insurance, and housing funds, that are made by an enterprise in accordance with the scope and criteria as prescribed by the state or provincial governments are deductible.
Commercial insurance premiums paid for investors or employees shall not be tax-deductible unless they are paid for safety insurance for workers conducting special types of work. The excess amount must not be carried forward to and deducted in the following tax years. Any excess amount is allowed to be carried forward and deductible in the following tax years.
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Advertising expenses and business promotion expenses incurred by the tobacco industry are entirely not tax-deductible. Fines, penalties, and losses arising from confiscation of property are not deductible for CIT purposes. Generally, tax losses can be carried forward for no longer than five years starting from the year subsequent to the year in which the loss was incurred. Carryback of losses is not permitted. In June , the SAT issued a circular that imposed new transfer pricing compliance requirements in China, including annual reporting forms for related-party transactions RPT forms , country-by-country CbC reporting, and transfer pricing documentation, all of which contain substantial changes to the previous rules.
Specifically, the transfer pricing documentation requirement has adopted a three-tiered approach, including a master file, local file, and special issue file i.
The SAT also issued a revised circular on advance pricing arrangements APAs in October , which provides process and requirements for an enterprise to apply for an APA as well as the situations where an APA application will be prioritised or declined. The SAT issued a circular in March to renew the Chinese rules on the procedures of transfer pricing investigation and mutual agreement procedures MAPs.
This circular empowers the Chinese tax authorities to collect financial information of overseas related parties under the transfer pricing audit for value chain purpose. The CIT law has a thin capitalisation rule disallowing interest expense arising from excessive related-party loans. However, if there is sufficient evidence e. Under the CFC rule, the undistributed profits of CFCs located in low-tax jurisdictions with an effective income tax rate of less than The Chinese tax authorities have published a list of countries i. The tax incentive policies mainly include the following and are applicable to both domestic and foreign investments.
A CIT exemption applies to the dividend derived by a TRE from the direct investment into another TRE, except where the dividend is from stocks publicly traded on the stock exchanges and the holding period is less than 12 months. A CIT exemption also applies to the income derived by recognised non-profit-making organisations engaging in non-profit-making activities. The CIT rate may be reduced under certain conditions for different industries see the Taxes on corporate income section for more information.
Any portion that is not utilised in that year can be carried forward and deducted in the following years. A Chinese corporate partner of a venture capital in the form of a limited partnership is also eligible for such incentive. Any unutilised amount can be carried forward and creditable in the following five years. There are also tax incentives in relation to the deduction of expenses and cost e. See the Deductions section for more information. A TRE is allowed to claim foreign tax credit in relation to foreign income tax already paid overseas in respect of income derived from sources outside China on a country-basket basis or under the comprehensive method.
The creditable foreign tax also includes foreign income tax paid by qualified CFCs. However, the creditable amount may not exceed the amount of income tax otherwise payable in China in respect of the foreign-sourced income. In addition, there is a five-year carryforward period for any unutilised foreign tax. Dividends distributed by a foreign investment enterprise out of its pre profit to non-TRE shareholders are still exempted from WHT.
In addition to the above tax treaties, China has also entered into tax information exchange agreements TIEAs with a few countries.
Foreign Investment Law of the People's Republic of China | Dezan Shira & Associates
For example:. Enterprises are required to file their annual income tax return within five months after the end of the tax year, together with an audit certificate of a registered public accountant in China. Information on related-party transactions must be filed with the annual income tax return. Settlement of tax payment is due, in conjunction with the annual income tax return, within five months after the end of the tax year. There is no fixed audit cycle in China. Tax audit targets are selected pursuant to certain criteria. For unintentional errors e.
For transfer pricing adjustments, the statute of limitation is ten years. There is no statute of limitation for tax evasion, refusal to pay tax, or defrauding of tax payment. Since , the Chinese tax authorities have strengthened their tax administration on transfer pricing and income derived by non-TREs. The SAT has released a number of tax circulars addressing the tax administration of transfer pricing, foreign contractors and service providers, WHT on passive income, etc.
In addition, the transfer has to be effected at fair value so that any gain shall be recognised for tax purpose at the time when the transaction takes places unless the transaction qualifies for deferral tax treatment provided under the tax regulations. The Chinese tax authorities have, in recent years, challenged and clawed back CIT on several equity transfer cases whereby non-TREs disposed of their equity investment in China to related parties at cost or below 'fair value'.
In addition, they have become more knowledgeable on valuation theories and methodologies and are applying them in reviewing valuation reports in order to ascertain the fair value of equity transfer transactions for tax purposes. In addition, the Chinese tax authorities have geared up their efforts in recent years to scrutinise investment structures involving intermediate holding companies incorporated in low-tax jurisdictions. One of their focuses is on the indirect equity transfer of Chinese companies by non-TREs.
However, if the Chinese tax authorities are of the view that the non-TRE transferor has used an abusive arrangement to indirectly transfer the equity of the Chinese company i. In early , the SAT issued a circular that sets out new guidance on the assessment of indirect transfer of China taxable properties by non-TREs. The SAT has also released circulars relating to the claiming of treaty benefits by non-TREs and interpretation of certain articles and terms in the tax treaties, such as dividends, royalties, beneficial ownership, etc.
Aggressive tax planning including, but not limited to, tax-avoidance and treaty-abusive arrangements not supported by reasonable commercial purposes and substance will be subject to scrutiny by the Chinese tax authorities. Non-residents and their withholding agents are required to file certain prescribed forms and other supporting documents when performing tax filing to justify their claims for the tax treaty benefits.
The tax position taken by the non-residents or withholding agents are subject to examination by the Chinese tax authorities after the tax filing. It is the first time the SAT has introduced a set of technical views, interpretation, and practice guidelines for the implementation of a tax treaty in such a comprehensive manner.
For transfer pricing investigation, increasing scrutiny has been imposed on outbound related-party remittance, such as service fees and royalty payments. The Chinese tax authorities are also stringent on activities for the decision-making, monitoring, control, and compliance purposes of the group, and may challenge the service remittance for group finance, tax, human resources, and legal activities, which is different from common positions taken by Organisation for Economic Co-operation and Development OECD countries.
Another focus of the Chinese tax authorities in transfer pricing investigation is location-specific advantages e. As such, the Chinese tax authorities often expect a different transfer pricing policy in China, which will pose difficulties on multinational groups who implement a consistent transfer pricing policy around the world.
Related Corporate Income Tax Law and Practice in the Peoples Republic of China
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