Implementing Regulations for the PRC Enterprise Income Tax Law

Specific Provisions for Revenue

The Implementing Regulations stipulate specific provisions for revenue: the gross revenue of the enterprises comprises the income the enterprise receives in monetary terms or non-monetary terms. Monetary income includes the receipt of cash, deposits, accounts receivable, bills receivable, securities held to maturity and waivers of debt obligations; non-monetary income includes the receipt of fixed assets, biological assets, intangible assets, equity interest, inventory, securities not held to maturity, services and related interest. The fair value principle should be adopted as a measurement for non-monetary income. In addition, the accrual principle should be followed in the recognition of sales revenue.

Specific Provisions for the Principle, Scope and Criteria of Deductions

The scope and criteria of deductible expenses will have a direct impact on the computation of taxable income and thus the amount of tax payable. Article 8 of the EIT Law provides that the payments that are reasonable and related to the earning of income including costs, expenses, taxes, losses and other payments are deductible in the computation of taxable income. The Implementing Regulations give the detailed scope of deduction and criteria as below:

(i) Deduction of wages and salaries before tax

The Implementing Regulations give a unified treatment for both domestically-funded enterprises and foreign-invested enterprises regarding the deductions of wages and salaries from income. Where the wages and salaries incurred are reasonable, they are deductible.

(ii) Deduction of staff welfare expenses, trade union operating fees, staff education expenses before tax

(iii) Deduction of entertainment expenses before tax

Since it is difficult to distinguish corporate entertainment from personal entertainment, the Implementing Regulations make a compromise on the deduction of entertainment expenses. The deductible amount thereof should be limited to 60% of the actual expended amount, but the maximum amount cannot exceed 0.5% of the sales revenue for the current year.

(iv) Unifying the deduction of advertising and marketing expenses before tax

The Implementing Regulations unify such tax treatment and set a limit on the deduction of advertising expenses to 15% of the sales revenue. However, any portion in excess of the 15% can be carried over for deduction in future tax years.

(v) Provisions on condition and scope for the deduction of charitable donations

The Implementing Regulations set the limit for deductible charitable donations at 12% on the profits for the current year. Charitable donations are donations to prescribed charitable activities, as approved by the PRC Law for Donation to Charities, through charitable organizations or governments.

Detailed Provisions on Preferential Tax Treatment

The Implementing Regulations elaborate on the scope and procedures of preferential tax treatment including:

(i) Preferential tax treatment to support the development of agriculture, forestry, animal husbandry and fishery industries

The EIT Law provides in principle that the income derived from projects of agriculture, forestry, animal husbandry and fishery industries are qualified for tax exemption or reduction. The Implementing Regulations specify that income derived from the following business are exempted from tax: (1) the growing of vegetables, grains, edible tuberous roots, vegetable oil seeds, beans, cotton, jute (flax), sugar, fruit and nuts; (2) the cultivation of new species for agricultural produce; (3) the growing of Chinese herbs; (4) cultivation and plantation of forestry; (5) animal husbandry and bird breeding; (6) the collection of wooden products; (7) irrigation, processing of primary agricultural produce, veterinarian, promotion of agricultural technology, repair of machinery for use in farming, forestry, animal and fishery sectors; and (8) ocean fish catching. The Implementing Regulations also specify that income derived from (1) the growing of flowers, tea, plants of consumption as soft drinks, spicy drinks, and (2) sea and fresh water fish harvesting, are taxed at 50% of the full rate.

(ii) Preferential tax treatment to encourage the construction of infrastructure facilities and projects

The Implementing Regulations provide that enterprises engaging in projects for ports, airports, railways, highways, public transportation, electricity supply, and water supply can receive a tax concession of three years exemption plus three years taxation at 50% of the full tax rate.

(iii) Preferential tax treatment to support environmental protection, conservation of energy and water, integrated utilization of resources, and work safety

The Implementing Regulations provide that enterprises that carry out the following projects can receive tax concession of three years exemption from tax and three years taxation at 50% of the normal rate: sewage treatment, refuse treatment, methane gas usage and development, energy conservation technology, emission levels reduction, and sea water desalination treatment. In addition, the Ministry of Finance, the State Administration of Taxation, and other relevant ministries will formulate the detailed scope and conditions for preferential tax policy.

The EIT Law provides that for enterprises which integrally utilize energy and resources to make products that meet the requirements under the national policies, taxable income can be reduced. While the Implementing Regulations stipulate the specific proportion of reduction in taxable income is 10%, the detailed conditions thereof shall based on the main materials for the products, and should come from the prescribed resources under the Catalogue for the Preferential Tax Treatment on the Integrated Utilization of Resources. The products should meet the industry standards and must not fall under the restricted and prohibited categories.

The EIT Law provides that enterprises that incur expenditure on special equipment that protects the environment, conserves energy and water, or enhances work safety can get tax exemption up to a certain percentage. The Implementing Regulations provide specific proportions and detailed conditions: where the enterprise incurs actual expenditure on special equipment that is on the list of Catalogue of Equipment for the Exclusive Use in Environmental Protection that Receives Tax Preferences, Catalogue of Equipment for the Exclusive Use in Energy and Water Conservation, and Catalogue of Equipment for the Exclusive Use in Work Safety that Receives Tax Preferences, 10% of the actual expenditure can be credited against the tax payable for the current year. If the tax payable is not enough, the credits can be carried over for use within the next five tax years.

(iv) Tax concessions to promote technological innovation and technical advancement

To promote technological innovation and technical advancement, the EIT Law lays down four areas where tax preferences are available. The Implementing Regulations give the following specific provisions:

The EIT Law provides that enterprises that derived income from the transfer of technology are either exempted from tax or may receive tax reductions. The Implementing Regulations specifically provide that where the enterprise derives income the transfer of technology, the first Rmb5 million of the taxable income is exempted from income tax. The amount over the Rmb5 million is subject to income tax at 50% of the full rate.

The EIT Law provides that enterprises that incur research and development expenses on new technology, new products, and new workmanship can claim additional deductions in the computation of taxable income. The Implementing Regulations specifically provide that where the enterprise derives the above-mentioned income, the enterprises can claim additional deductions equal to 50% of the actual expenses incurred.

The EIT Law provides that venture capital enterprises that invest in projects that receive prime support from and that are encouraged by the State, can claim deductions from the taxable income with references to a percentage on the investment amount. The Implementing Regulations expressly provide for tax concessions for VC enterprises that make equity investments in unlisted small and medium size high-tech enterprises for a period of over two years, such that 70% of the investment amount can be credited against the taxable income of the invested enterprises in the year in which the investment holding has lasted for two years. If the taxable income is not enough for the investment credit, the credits can be carried over for use in future years.

The EIT Law provides that enterprises can receive accelerated depreciation allowance where the fixed assets become obsolete due to technological advancement. The Implementing Regulations specifically provide that fixed assets qualified for accelerated depreciation allowance include: (1) fixed assets fast becoming obsolete; and (2) fixed assets in a state of vibration and being exposed to high degree of erosion.

(v) Tax concessions to income earned by eligible not-for-profit organizations

The EIT Law provides that the income derived by eligible not-for-profit organizations is exempted. The Implementing Regulations set out the conditions for being met to be "non-profit making organizations" in the areas of registration procedures, the scope of its activities, and the use and distribution of properties. In addition, the Implementing Regulations provide that the non-for-profit organization cannot carry out profit-making activities. Where the not-for-profit organization earns any income from profit-making activities, the income is taxable.

*About the authors:

Gary Gao is a Partner and Jason Ju is a Senior Lawyer at Duan & Duan Law Firm.