Implementing Regulations for the PRC Enterprise Income Tax Law

(Promulgated by the State Council on December 6 2007 and effective as of January 1 2008.) Order of the State Council No.512

PART ONE: GENERAL PROVISIONS

 

Article 1:      These Regulations have been formulated pursuant to the PRC Enterprise Income Tax Law (the Enterprise Income Tax Law).

 

Article 2:      For the purposes of Article 1 of the Enterprise Income Tax Law, the phrase “enterprises wholly owned by individuals or partnerships” means enterprises wholly owned by individuals or partnerships established in accordance with the laws and administrative regulations of China.

 

Article 3:      For the purposes of Article 2 of the Enterprise Income Tax Law, the phrase “an enterprise that is established in China in accordance with the law” includes enterprises, public institutions, social organizations and other revenue earning organizations established in China in accordance with the laws and administrative regulations of China.

 

For the purposes of Article 2 of the Enterprise Income Tax Law, the phrase “an enterprise that is established in accordance with the law of a foreign country (or region)” includes enterprises or other revenue earning organizations established in accordance with the law of a foreign country (or region).

 

Article 4:      For the purposes of Article 2 of the Enterprise Income Tax Law, the term “actual management organization” means an organization that exercises actual comprehensive management and control over an enterprise's production, operations, personnel, accounts, property, etc.

 

Article 5:      For the purposes of the third paragraph of Article 2 of the Enterprise Income Tax Law, the term “establishment” means an establishment that engages in production and business activities in China, and includes:

 

(1)    management organizations, business organizations and offices;

(2)   factories, farms and places where natural resources are extracted;

 

(3)   places that provide labour services;

 

(4)   places that engage in project tasks such as construction, installation, assembly, repair and exploration; and

 

(5)   other establishments that engage in production and business activities.

 

If a non-tax-resident enterprise appoints a business agent to engage in production and business activities in China, including an appointed work unit or individual that normally executes contracts or stores or delivers goods on its behalf, etc., such business agent shall be deemed an establishment set up in China by the non-tax-resident enterprise.

 

Article 6:      For the purposes of Article 3 of the Enterprise Income Tax Law, the term “income” includes income from the sale of goods, income from the provision of labour services, income from the transfer of property, income from equity investments, such as dividends, bonuses, etc., interest income, rental income, franchise royalty income, donation income and other income.

 

Article 7:      For the purposes of Article 3 of the Enterprise Income Tax Law, the term “China-sourced and foreign-sourced income” shall be determined in accordance with the following principles:

 

(1)   based on the place where the transaction took place, for income from the sale of goods;

 

(2)   based on the place where the labour services were provided, for income from the provision of labour services;

 

(3)   income from the transfer of property: based on the place where the immovable property is located, for income from the transfer of immovable property; based on the place where the enterprise or establishment that transferred the property is located, for income from the transfer of movable property; based on the place where the investee enterprise is located, for income from the transfer of equity investment assets;

 

(4)   based on the place where the enterprise that distributed the dividends, bonuses, etc. is located, for income from equity investments, such as dividends, bonuses, etc.;

 

(5)   for interest income, rental income, and franchise royalty income, based on the place where the enterprise or establishment bearing or paying the same is located or the place where the individual bearing or paying the same is resident; and

 

(6)   for other income, shall be determined by the State Council's departments in charge of finance and tax.

 

Article 8:      For the purposes of Article 3 of the Enterprise Income Tax Law, the term “actually connected” means that the establishment in China of a non-tax-resident enterprise that owns the equity or claims on which the income is obtained or owns, manages or controls the property, etc., on which the income is obtained.

 

PART TWO: TAXABLE INCOME

 

Section One: General Provisions

 

Article 9:      When calculating the taxable income of an enterprise, based on accrual basis principles, all revenues and expenses falling in the period in question, regardless of whether the amounts have been received or paid, shall be treated as revenues and expenses of the period in question. All revenues and expenditures not falling in the period in question, notwithstanding the amounts being received or paid in the period in question, shall not be treated as revenues and expenses of the period in question, unless otherwise provided in these Regulations or specified by the State Council's department in charge of finance or tax.

 

Article 10:    For the purposes of Article 5 of the Enterprise Income Tax Law, the term “losses” means a figure of less than zero that an enterprise obtains in accordance with the Enterprise Income Tax Law and these Regulations when it subtracts its non-taxable revenue, tax exempt revenue and various deductions from its gross revenue of the tax year.

 

Article 11:    For the purposes of Article 55 of the Enterprise Income Tax Law, the term “amount of proceeds from liquidation” means the balance remaining after subtracting the net asset value, liquidation expenses and related taxes and levies, etc., from the convertible value or transaction price of all of the enterprise's assets.

 

With respect to the share of the remaining assets obtained by an investor enterprise from a liquidated enterprise, the portion thereof equivalent to the aggregate retained profits and aggregate surplus reserve of the liquidated enterprise distributable to the investor enterprise shall be confirmed as dividend income. The balance remaining after subtracting the aforementioned dividend income from the remaining assets shall be confirmed as income from the transfer of invested assets, if greater than the investment costs, or a loss on the transfer of invested assets, if less than the investment costs.

 

Section Two: Revenue

 

Article 12:    For the purposes of Article 6 of the Enterprise Income Tax Law, the term “enterprise's monetary … revenue” includes cash, deposits, accounts receivable, notes receivable, bond investments to be held until maturity, debt exemptions, etc.

 

For the purposes of Article 6 of the Enterprise Income Tax Law, the term “enterprise's … non-monetary revenue” includes fixed assets, biological assets, intangible assets, equity investments, inventory, bond investments not to be held until maturity, labour services and relevant equity, etc.

Article 13:    The amount of non-monetary revenue obtained by an enterprise as mentioned in Article 6 of the Enterprise Income Tax Law shall be determined based on the fair value thereof.

 

For the purposes of the preceding paragraph, the term “fair value” means the value determined based on the market price.

 

Article 14:    For the purposes of Item (1) of Article 6 of the Enterprise Income Tax Law, the term “revenue from the sale of goods” means the revenue that an enterprise derives from the sale of merchandise, products, raw materials, packaging materials, low value consumables and other inventory.

 

Article 15:    For the purposes of Item (2) of Article 6 of the Enterprise Income Tax Law, the term “revenue from the provision of labour services” means the revenues derived by an enterprise in engaging in construction, installation, repairs, transport, warehousing, leasing, finance, insurance, posts, telecommunications, consulting, brokerage, cultural activities, sports activities, scientific research, technical services, education, training, catering, accommodation, intermediary services, agency services, health services, community services, tourism, entertainment, processing and other labour service activities.

 

Article 16:    For the purposes of Item (3) of Article 6 of the Enterprise Income Tax Law, the term “revenue from the transfer of property” means the revenue derived by an enterprise from the transfer of fixed assets, biological assets, intangible assets, equity, claims and other such property.

 

Article 17:    For the purposes of Item (4) of Article 6 of the Enterprise Income Tax Law, the term “returns on equity investments, such as dividends, bonuses, etc.” means revenue obtained by an enterprise from an investee due to its equity investment therein.

 

The realization of revenue in the form of returns on equity investments, such as dividends, bonuses, etc., shall be confirmed as the date on which the investee rendered its decision on the distribution of profits, unless otherwise specified by the State Council's department in charge of finance or tax.

 

Article 18:    For the purposes of Item (5) of Article 6 of the Enterprise Income Tax Law, the term “interest income” means the revenue derived by an enterprise from its provision to a third party of funds that do not constitute an equity investment or due to a third party holding its funds, and includes deposit interest, loan interest, bond interest, overdue interest, etc.

 

The realization of interest income shall be confirmed as the date specified in the contract for the payment of interest by the debtor.

 

Article 19:    For the purposes of Item (6) of Article 6 of the Enterprise Income Tax Law, the term “rental income” means the revenue derived by an enterprise from the provision of the right to use fixed assets, packaging materials or other tangible assets.

 

The realization of rental income shall be confirmed as the date specified in the contract for the payment of rent by the lessee.

 

Article 20:    For the purposes of Item (7) of Article 6 of the Enterprise Income Tax Law, the term “revenue from royalties” means the revenue derived by an enterprise from the provision of the right to use a patent, non-patented technology, trademark, copyright or other licensed right.

 

The realization of revenue in the form of royalties shall be confirmed as the date specified in the contract for the payment of the royalties by the licensee.

 

Article 21:    For the purposes of Item (8) of Article 6 of the Enterprise Income Tax Law, the term “revenue from donations” means the monetary or non-monetary assets accepted from another enterprise, organization or individual without consideration.

 

The realization of revenue in the form of donations shall be confirmed as the date on which the donated assets are actually received.

 

Article 22:    For the purposes of Item (9) of Article 6 of the Enterprise Income Tax Law, the term “other revenue” means the revenue obtained by an enterprise other than the revenue specified in Items (1) to (8) of Article 6 of the Enterprise Income Tax Law, and includes extra income on enterprise assets, deposit income from the late return of packaging materials, payables that genuinely cannot be paid, receivables treated as bad debt losses but thereafter recovered, revenue from debt reorganization, subsidy income, income from liquidated damages, foreign exchange gains, etc.

 

Article 23:    For the following production business and operations of an enterprise, the realization of the revenue may be confirmed over several periods:

 

(1)   if payments for goods sold are received in instalments, the realization of the revenue shall be confirmed based on the payment dates specified in the contract;

 

(2)   if an enterprise is engaged to process or manufacture large machinery, equipment, vessels, aircraft, etc. or engages in construction, installation or assembly business or provides other labour services and does so for a continuous period exceeding 12 months, the realization of the revenue shall be confirmed based on the progress of work completed or the work quantity completed during the tax year.

 

Article 24:    If revenue is derived through production sharing, the realization of the revenue shall be confirmed as the date on which the enterprise obtained the share of the products and the amount of such revenue shall be determined based on the fair value of the products.

 

Article 25:    If an enterprise carries out an exchange of non-monetary assets or it uses goods, property or labour services to make a donation, discharge a debt, for sponsorship, to raise funds, for advertising, as a sample, for employee benefits, for profit distribution or for other such purposes, the same shall be deemed a sale of goods, transfer of property or provision of labour services, unless otherwise specified by the State Council's department in charge of finance or tax.

 

Article 26:    For the purposes of Item (1) of Article 7 of the Enterprise Income Tax Law, the term “fiscal allocations” means the fiscal funds allocated by people's governments at various levels to public institutions, social organizations, etc., that are covered in their budgets, unless otherwise specified by the State Council's department in charge of finance or tax.

 

For the purposes of Item (2) of Article 7 of the Enterprise Income Tax Law, the term “administrative charges” means the charges collected in accordance with relevant provisions, such as laws, regulations, etc., by the procedure approved by the State Council from specific persons in the course of public administration or in the course of providing specific public services to citizens, legal persons and other organizations and which charges are subject to fiscal management.

 

For the purposes of Item (2) of Article 7 of the Enterprise Income Tax Law, the term “government funds” means fiscal funds collected on behalf of the government in accordance with relevant provisions, such as laws, administrative regulations, etc., and that are earmarked for a specific purpose.

 

For the purposes of Item (3) of Article 7 of the Enterprise Income Tax Law, the phrase “other non-taxable revenue specified by the State Council” means fiscal funds obtained by an enterprise as approved by the State Council and that are earmarked for a specific purpose as specified by the State Council's department in charge of finance or tax.

 

Section Three: Deductions

 

Article 27:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “expenditures” means expenditures directly related to obtaining revenue.

 

For the purposes of Article 8 of the Enterprise Income Tax Law, the term “expenditures … reasonably incurred” means necessary and normal expenditures that comply with production and business activity conventions and are required to be recorded as losses or gains, or relevant asset costs for the period in question.

 

Article 28:    The expenditures incurred by an enterprise shall be divided into revenue expenditures and capital expenditures. Revenue expenditures shall be directly deducted in the period when they were incurred. Capital expenditures shall be deducted over several periods or be recorded as relevant capital costs, and may not be directly deducted in the period when they were incurred.

 

If the non-taxable revenue of an enterprise is used to pay the expenses or property arising therefrom, it may not be deducted or the relevant depreciation or amortization thereof calculated and deducted.

Unless otherwise specified in the Enterprise Income Tax Law or in these Regulations, the actual costs, expenses, taxes, losses and other expenditures incurred by an enterprise may not be deducted more than once.

 

Article 29:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “costs” means the sales costs, merchandise sales costs, business expenditures and other expenditures incurred by an enterprise in the course of its production and business activities.

 

Article 30:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “expenses” means the sales expenses, management expenses and financial expenses incurred by an enterprise in the course of its production and business activities, other than relevant expenses recorded as costs.

 

Article 31:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “taxes” means the taxes and surcharges incurred by an enterprise other than enterprise income tax and value added tax that it is permitted to setoff.

 

Article 32:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “losses” means the inventory losses on fixed assets and inventory, damage, decommissioning losses, property transfer losses, non-performing debt losses, bad debt losses, losses due to natural disasters and other events of force majeure and other losses incurred by an enterprise in the course of its production and business activities.

 

The losses incurred by an enterprise shall be deducted in accordance with the provisions of the State Council's competent financial and tax authorities after subtraction of the compensation from the responsible persons and insurance indemnities.

 

If an enterprise has treated an asset as a loss but in a subsequent tax year recovers all or part of such asset, the same shall be recorded as revenue for the period in question.

 

Article 33:    For the purposes of Article 8 of the Enterprise Income Tax Law, the term “other expenditures” means reasonable expenditures other than costs, expenses, taxes and losses incurred by an enterprise in connection with its production and business activities in the course of such production and business activities.

 

Article 34:    An enterprise is permitted to deduct the reasonable wage and salary expenditures incurred by it.

 

For the purposes of the preceding paragraph, the term “wages and salaries” means all of the labour remuneration in monetary or non-monetary form paid to the staff and workers serving in or employed by an enterprise in a tax year, and includes basic wages, bonuses, allowances, subsidies, year-end salary increases, overtime wages and other expenditures relating to the service or employment of staff and workers.

 

Article 35:    An enterprise is permitted to deduct basic social insurance premiums such as basic old-age insurance premiums, basic medical insurance premiums, unemployment insurance premiums, work-related injury insurance premiums, maternity insurance premiums, etc., as well as contributions to the housing reserve paid for its employees falling within the scope and at the rates specified by the State Council's relevant competent departments or the people's government at the provincial level.

 

An enterprise is permitted to deduct supplementary old-age insurance premiums and supplementary medical insurance premiums it pays for investors or employees falling within the scope and at the rates specified by the State Council's departments in charge of finance and tax.

 

Article 36:    An enterprise may not deduct the commercial insurance premiums it pays for investors or employees other than the physical safety insurance premiums it pays for employees in special types of jobs in accordance with relevant state provisions and other commercial insurance premiums that the State Council's competent financial and tax authorities specify may be deducted.

 

Article 37:    An enterprise is permitted to deduct reasonable borrowing expenses that do not need to be capitalized that it incurs in the course of its production and business activities.

 

If an enterprise takes out a loan to purchase or fabricate a fixed asset, intangible asset or inventory that requires 12 months or more of fabrication before it reaches the predetermined saleable state, the reasonable borrowing costs incurred during the period when the relevant asset is purchased or fabricated shall be treated as capital expenditures, recorded as the cost of the relevant asset and deducted in accordance herewith.

 

Article 38:    An enterprise is permitted to deduct the following interest expenditures that it incurs in the course of its production and business activities:

 

(1)   interest expenditures on a loan from a financial enterprise incurred by a non-financial enterprise, the deposit interest expenditures and interbank lending interest expenditures of a financial enterprise and interest expenditures on bonds issued, with approval, by an enterprise; and

 

(2)   the portion of the interest expenditures on a loan from a non-financial enterprise incurred by another non-financial enterprise that does not exceed the amount calculated based on the interest rate on a loan of the same type and same period extended by a financial enterprise.

 

Article 39:    An enterprise is permitted to deduct exchange losses incurred in currency transactions and those from converting at the end of the tax year monetary assets and liabilities in a currency other than the renminbi at the median period-end spot renminbi exchange rate into renminbi, unless the same has been recorded as part of the costs of the relevant asset and excluding any portion thereof used in a profit distribution to owners.

 

Article 40:    An enterprise is permitted to deduct the portion of employee benefit expenditures not exceeding 14% of its total payroll.

 

Article 41:    An enterprise is permitted to deduct the portion of labour union funds it allocates and pays that does not exceed 2% of its total payroll.

 

Article 42:    Unless otherwise specified by the State Council's department in charge of finance or tax, an enterprise is permitted to deduct the portion of employee education fund expenditures not exceeding 2.5% of its total payroll. Any portion in excess thereof may be carried forward and deducted in subsequent tax years.

 

Article 43:    An enterprise may deduct 60% of the entertainment expenditures incurred in connection with its production and business activities, which, however, may not exceed 0.5% of its sales (business) revenue for the year.

 

Article 44:    Unless otherwise specified by the State Council's department in charge of finance or tax, an enterprise is permitted to deduct that portion of its qualified advertising and publicity expenditures not exceeding 15% of its sales (business) revenue for the year; any portion in excess thereof may be carried forward and deducted in subsequent tax years.

 

Article 45:    An enterprise is permitted to deduct those funds allocated and earmarked for environmental protection, ecological restoration, etc. in accordance with relevant provisions of laws and administrative regulations. If, after the allocation of the foregoing funds, the purpose thereof is changed, they may not be deducted.

 

Article 46:    An enterprise is permitted to deduct the insurance premiums paid in accordance with provisions for property insurance coverage.

 

Article 47:   The lease charges paid by an enterprise for the lease of fixed assets required for its production and business activities shall be deducted as follows:

 

(1)   the leasing expenditures for fixed assets leased on an operating lease basis shall be deducted evenly over the lease term; or

 

(2)   if a fixed asset is leased on a financial lease basis, the portion of the leasing expenditures that constitute the value of the leased fixed asset according to provisions shall be depreciated and deducted over different periods.

 

Article 48:    An enterprise is permitted to deduct its reasonable labour protection expenditures.

 

Article 49:    Management fees paid between enterprises, rent and royalties paid between business organizations within an enterprise and interest paid between business organizations within a non-bank enterprise may not be deducted.

 

Article 50:    The establishment in China of a non-tax-resident enterprise is permitted to deduct the expenses of its overseas head office incurred in connection with the production and business of the establishment provided that it can provide supporting documents issued by the head office for the scope of expense aggregation, expense quotas, allocation basis and method, etc., and that such expenses are reasonably apportioned.

 

Article 51:    For the purposes of Article 9 of the Enterprise Income Tax Law, the term “charitable donation” means a donation made by an enterprise through a public welfare social organization or a people's government or department thereof at the county level or above and used for a public welfare undertaking as specified in the PRC Law on Donations to Public Welfare Undertakings.

 

Article 52:    For the purposes of Article 51 of these Regulations, the term “public welfare social organization” means a foundation, charitable organization or other such social organization that satisfies the following conditions:

 

(1)   it has been registered in accordance with the law and has legal personality;

 

(2)   its purpose is to develop public welfare undertakings on a non-profit basis;

 

(3)   all of its assets and the increase in value thereof belong to the legal person;

 

(4)   its returns and operational balance are mainly used for undertakings that are consistent with the objective for which the legal person was established;

 

(5)   after its termination, the remaining property will not vest in any individual or for-profit organization;

 

(6)   it does not engage in any business unrelated to the objective for which it was established;

 

(7)   it has sound financial accounting systems;

 

(8)   donors do not in any way participate in the distribution of the social organization's property; and

 

(9)   other conditions as specified by the State Council's departments in charge of finance and tax together with the State Council's civil affairs department and other such registration departments.

 

Article 53:    An enterprise is permitted to deduct the portion of charitable donation expenditures incurred that do not exceed 12% of its total profit for the year.

 

The term “total profit for the year” means the accounting profit for the year calculated by an enterprise in accordance with the state's uniform accounting system.

 

Article 54:    For the purposes of Item (6) of Article 10 of the Enterprise Income Tax Law, the term “sponsorship expenditures” means the various non-advertising type expenditures incurred by an enterprise that are not connected with its production and business activities.

 

Article 55:    For the purposes of Item (7) of Article 10 of the Enterprise Income Tax Law, the term “expenditures on reserves that have not been approved” means the various asset impairment reserve, risk reserve and other such reserve expenditures not complying with the provisions of the State Council's departments in charge of finance and tax.

 

Section Four: Tax Treatment of Assets

 

Article 56:    The historical cost of the various assets of an enterprise, including fixed assets, biological assets, intangible assets, long-term deferred charges, invested assets, inventory, etc., shall serve as the tax computation basis therefor.

 

For the purposes of the preceding paragraph, the term “historical cost” means the actual expenditures incurred by the enterprise at the time it acquired the asset.

 

The increase or reduction in value during the time an asset is held by an enterprise may not be used to adjust the tax computation basis therefor unless the State Council's department in charge of finance or tax has specified that losses or gains thereon may be confirmed.

 

Article 57:    For the purposes of Article 11 of the Enterprise Income Tax Law, the term “fixed assets” means non-monetary assets held by an enterprise to produce products, provide services, lease or for operation and management purposes and that it uses for a period of more than 12 months. Fixed assets include premises, buildings, machines, machinery, means of transport and other equipment, apparatus, tools, etc. that are related to its production and business activities.

 

Article 58:    The tax computation basis for fixed assets shall be determined based on the following methods:

 

(1)   for fixed assets purchased from a third party, the tax computation basis shall be the purchase price, relevant taxes and levies paid and other expenditures incurred directly in connection with making the asset usable for its intended purpose;

 

(2)   for self-fabricated fixed assets, the tax computation basis shall be the expenditures incurred prior to final settlement;

 

(3)   for fixed assets obtained through lease financing, the tax computation basis shall be the total payment amount specified in the lease contract and the related expenses incurred by the lessee in the course of executing the lease contract; if the lease contract does not specify a total payment amount, the tax computation basis shall be the fair value of the asset and the related expenses incurred by the lessee in the course of executing the lease contract;

 

(4)   for fixed asset overage, the tax computation basis shall be the replacement cost for the same type of fixed asset;

 

(5)   for fixed assets obtained through donation, investment, non-monetary asset exchange, debt reorganization, etc., the tax computation basis shall be the fair value of the asset and related taxes and levies paid; and

 

(6)   for altered fixed assets, the tax computation basis shall be the expenditures specified in Items (1) and (2) of Article 13 of the Enterprise Income Tax Law and the additional alteration expenditures incurred in the course of the alteration.

 

Article 59:    The depreciation of fixed assets calculated by the straight-line method may be deducted.

 

An enterprise shall commence calculating depreciation from the month following the month in which the fixed asset came into service. Calculation of depreciation shall cease from the month following the month in which use of the fixed asset ceased.

 

An enterprise shall reasonably determine the anticipated net residual value of a fixed asset based on the nature and use of the asset. Once the anticipated net residual value of a fixed asset has been determined, it may not be changed.

 

Article 60:    Unless otherwise specified by the State Council's department in charge of finance or tax, the minimum depreciable life of fixed assets shall be as follows:

 

(1)   premises and buildings, 20 years;

 

(2)   aircraft, trains, ships, machines, machinery and other production equipment, 10 years;

 

(3)   apparatus, tools, furniture, etc. related to production and business activities, 5 years;

 

(4)   means of transport other than aircraft, trains and ships, 4 years; and

 

(5)   electronic equipment, 3 years.

 

Article 61:    The expenses incurred prior to the commencement of commercial production by an enterprise engaging in the exploitation of mine resources such as oil, natural gas, etc., and the method of depletion and depreciation of relevant fixed assets shall be specified separately by the State Council's departments in charge of finance and tax.

 

Article 62:    The tax computation basis for production-type biological assets shall be determined by the following methods:

 

(1)   for production-type biological assets purchased from a third party, the tax computation basis shall be the purchase price and relevant taxes and levies paid; and

 

(2)   for production-type biological assets obtained through donation, investment, non-monetary asset exchange, debt reorganization, etc., the tax computation basis shall be the fair value of the asset and relevant taxes and levies paid.

 

For the purposes of the preceding paragraph, the term “production-type biological assets” means the biological assets held by an enterprise to produce agricultural products, provide labour services or lease, etc., and includes commercial forests, firewood forests, productive livestock and draft animals, etc.

 

Article 63:    The depreciation of production-type biological assets calculated by the straight-line method may be deducted.

 

An enterprise shall commence calculating depreciation from the month following the month in which the production-type biological asset came into service. Calculation of depreciation shall cease from the month following the month in which use of the production-type biological asset ceased.

 

An enterprise shall reasonably determine the anticipated net residual value of a production-type biological asset based on the nature and use of the asset. Once the anticipated net residual value of a production-type biological asset has been determined, it may not be changed.

 

Article 64:    The minimum depreciable life of production-type biological assets shall be as follows:

 

(1)   forest-type production-type biological assets, 10 years; and

 

(2)   livestock-type production-type biological assets, 3 years.

 

Article 65:    For the purposes of Article 12 of the Enterprise Income Tax Law, the term “intangible assets” means non-monetary long-term assets without physical form held by an enterprise to produce products, provide labour services, lease or for operation and management purposes, and includes patent rights, trademark rights, copyrights, leaseholds, non-patented technologies, goodwill, etc.

 

Article 66:    The tax computation basis for intangible assets shall be determined based on the following methods:

 

(1)   for intangible assets purchased from a third party, the tax computation basis shall be the purchase price, relevant taxes and levies paid and other expenditures incurred directly in connection with making the asset usable for its intended purpose;

 

(2)   for self-developed intangible assets, the tax computation basis shall be the expenses incurred during the development period between the time the asset meets capitalization conditions until it becomes usable for its intended purpose; and

 

(3)   for intangible assets obtained through donation, investment, non-monetary asset exchange, debt reorganization, etc., the tax computation basis shall be the fair value of the asset and related taxes and levies paid.

 

Article 67:    The amortized expenses of intangible assets calculated by the straight-line method may be deducted.

 

The amortization period of intangible assets may not be less than 10 years.

 

For an intangible asset used as an investment or acquired, if relevant laws or the contract specifies the use period, it may be amortized over the use period specified in laws or the contract.

 

Expenditures incurred in the purchase of goodwill from a third party may be deducted when the entire enterprise is transferred or liquidated.

 

Article 68:    For the purposes of Items (1) and (2) of Article 13 of the Enterprise Income Tax Law, the term “expenditures on alterations to fixed assets” means the expenses incurred in changing the structure of premises or a building, extending the usable life of such premises or building, etc.

 

The expenditures specified in Item (1) of Article 13 of the Enterprise Income Tax Law shall be amortized over the anticipated remaining depreciable life of the fixed asset; the expenditures specified in Item (2) shall be amortized over the remaining lease term as specified in the contract.

 

If the usable life of an altered fixed asset is extended, in addition to the provisions of Items (1) and (2) of Article 13 of the Enterprise Income Tax Law, its depreciable life shall be extended accordingly.

 

Article 69:    For the purposes of Item (3) of Article 13 of the Enterprise Income Tax Law, the term “expenditures on the overhaul of fixed assets” means expenditures that satisfy both of the following conditions:

 

(1)   the overhaul expenditures are equivalent to at least 50% of the tax computation basis at the time the fixed asset was obtained; and

 

(2)   after the overhaul, the usable life of the fixed asset is extended by at least two years.

 

The expenditures specified in Item (3) of Article 13 of the Enterprise Income Tax Law shall be amortized over the remaining usable life of the fixed asset.

 

Article 70:    The other expenditures that may be treated as long-term deferred charges mentioned in Item (4) of Article 13 of the Enterprise Income Tax Law shall be amortized over a period of not less than three years commencing from the month following the month in which they were incurred.

 

Article 71:    For the purposes of Article 14 of the Enterprise Income Tax Law, the term “invested assets” means the assets arising from an equity or debt investment by an enterprise in a third party.

 

An enterprise is permitted to deduct the cost of invested assets when it transfers or disposes of the same.

 

The cost of invested assets shall be determined by the following methods:

 

(1)   for invested assets acquired through the payment of cash, the cost shall be the purchase price thereof; and

 

(2)   for invested assets acquired other than through the payment of cash, the cost shall be the fair value of the assets and related taxes and levies paid.

 

Article 72:    For the purposes of Article 15 of the Enterprise Income Tax Law, the term “inventory” means the products or merchandise held by an enterprise with a view to selling the same, products in process, materials consumed in the course of production or the provision of labour services, etc.

 

The cost of inventory shall be determined by the following methods:

 

(1)   for inventory acquired through the payment of cash, the cost shall be the purchase price and related taxes and levies paid;

 

(2)   for inventory acquired other than through the payment of cash, the cost shall be the fair value of the inventory and related taxes and levies paid; and

 

(3)   for agricultural products derived from production-type biological assets, the cost shall be necessary expenditures such as materials costs and labour costs incurred in the course of production or harvesting and apportioned indirect expenses.

 

Article 73:    To calculate the cost of inventory used or sold, an enterprise may use the first in first out method, the weighted average method or the identification method. Once a valuation method has been selected, it may not be changed indiscriminately.

 

Article 74:    For the purposes of Article 16 of the Enterprise Income Tax Law, the term “net value of … assets”, and for the purposes of Article 19 of the Enterprise Income Tax Law, the term “net value of … property” means the balance derived from subtracting the depreciation, depletion, amortization, reserves, etc., deducted in accordance with provisions from the tax computation basis of the relevant asset or property.

 

Article 75:    Unless otherwise specified by the State Council's department in charge of finance or tax, an enterprise undergoing restructuring shall confirm the income or loss derived from the transfer of relevant assets at the time of the occurrence of the transaction and the tax computation basis of the relevant assets shall be determined anew based on the transaction price.

 

PART THREE: TAX PAYABLE

 

Article 76:    The formula for calculating the tax payable as specified in Article 22 of the Enterprise Income Tax Law is as follows:

 

tax payable = taxable income x applicable tax rate – tax reduction or exemption – tax set off

 

The “tax reduction or exemption” and “tax set off” in the formula means the tax payable reduced, exempted or set off in accordance with the Enterprise Income Tax Law and the preferential tax provisions of the State Council.

 

Article 77:    For the purposes of Article 23 of the Enterprise Income Tax Law, the term “income tax paid abroad” means the tax of an enterprise income tax nature payable by an enterprise and actually paid by it on income sourced from outside China in accordance with the foreign tax laws and relevant provisions.

 

Article 78:    For the purposes of Article 23 of the Enterprise Income Tax Law, the term “set-off limit” means the tax payable on income of an enterprise sourced from abroad and calculated in accordance with the Enterprise Income Tax Law and these Regulations. Unless otherwise specified by the State Council's department in charge of finance or tax, the set-off limit shall be calculated by country (or region) but not by item. The formula therefor is as follows:

 

set-off limit = total tax payable on China and foreign income calculated in accordance with the Enterprise Income Tax Law and these Regulations x taxable income sourced from a certain country (or region) ÷ total taxable China and foreign income

 

Article 79:    For the purposes of Article 23 of the Enterprise Income Tax Law, the term “five years” means five consecutive tax years commencing from the year following the year the enterprise obtained the income sourced from abroad and exceeded the set-off limit for the tax of an enterprise income tax nature paid abroad.

 

Article 80:    For the purposes of Article 24 of the Enterprise Income Tax Law, the term “directly control” means that a tax-resident enterprise directly holds at least 20% of the shares of a foreign enterprise.

 

For the purposes of Article 24 of the Enterprise Income Tax Law, the term “indirectly control” means that a tax-resident enterprise holds at least 20% of the shares in a foreign enterprise in an indirect manner. The specific measures for the determination thereof shall be formulated separately by the State Council's departments in charge of finance and tax.

 

Article 81:    When an enterprise sets off enterprise income tax in accordance with Article 23 or 24 of the Enterprise Income Tax Law, it shall submit the relevant tax receipts for the pertinent year issued by the foreign tax authorities.

PART FOUR: PREFERENTIAL TAX TREATMENT

 

Article 82:    For the purposes of Item (1) of Article 26 of the Enterprise Income Tax Law, the term “revenue from sovereign bond coupons” means the interest income derived by an enterprise on the bonds issued by the State Council's finance department and held by the enterprise.

 

Article 83:    For the purposes of Item (2) of Article 26 of the Enterprise Income Tax Law, the phrase “returns paid between tax-resident enterprises on equity investments, such as dividends, bonuses, etc., that satisfy the criteria” means the investment returns derived by a tax-resident enterprise on its direct investment in another tax-resident enterprise. The returns on equity investments, such as dividends, bonuses, etc., mentioned in Items (2) and (3) of Article 26 of the Enterprise Income Tax Law do not include investment returns derived from publicly offered, listed and traded shares of a tax-resident enterprise that have been held for less than 12 months in succession.

 

Article 84:    For the purposes of Item (4) of Article 26 of the Enterprise Income Tax Law, the term “non-profit organization that satisfies the criteria” means an organization that satisfies all of the following criteria:

 

(1)   it has carried out the procedures for registration as a non-profit organization in accordance with the law;

 

(2)   it engages in charitable or non-profit activities;

 

(3)   other than the reasonable expenditures related to the organization, it uses all of the revenues that it obtains for the public welfare or non-profit undertakings that it registered or are specified in its charter;

 

(4)   its property and the fruits therefrom are not used for distributions;

 

(5)   as specified in its registration or charter, after its cancellation, its remaining property will be used for public welfare or non-profit objectives, or will be transferred by the registration authority to an organization of the same nature and with the same purpose, and the same will be announced to the public;

 

(6)   the person(s) who injected property into the organization do not retain or enjoy any rights in the property; and

 

(7)   the expenditures on the wages and benefits of the working personnel are held to a certain percentage and do not constitute a disguised distribution of the organization's property.

 

The measures for the determination and administration of non-profit organizations as specified in the preceding paragraph shall be formulated by the State Council's departments in charge of finance and tax together with relevant departments of the State Council.

Article 85:    For the purposes of Item (4) of Article 26 of the Enterprise Income Tax Law, the term “revenue of a non-profit organization that satisfies the criteria” does not include revenue derived from profit-making activities engaged in by a non-profit organization, unless otherwise specified by the State Council's department in charge of finance or tax.

 

Article 86:    The income derived by an enterprise from engaging in agricultural, forestry, animal husbandry and fisheries projects that is eligible for exemption of, or a reduction in, enterprise income tax as mentioned in Item (1) of Article 27 of the Enterprise Income Tax Law refers to the following:

 

(1)   enterprise income tax shall be exempted on the income derived by an enterprise engaging in the following projects:

 

(i)          cultivation of vegetables, grains, tubers, oil-bearing crops, beans, cotton, hemp, sugar crops, fruits or nuts;

 

(ii)         breeding of new varieties of crops;

 

(iii)        cultivation of traditional Chinese medicinal materials;

 

(iv)        fostering and cultivation of forests;

 

(v)         raising of livestock and poultry;

 

(vi)        gathering of forest products;

 

(vii)       agricultural, forestry, animal husbandry and fisheries service projects, such as irrigation, primary processing of agricultural products, veterinary medicine, agricultural technology promotion, agricultural machinery operation and repair, etc.; and

 

(viii)      offshore fishing;

 

(2)   enterprise income tax shall be reduced by half on the income derived by an enterprise engaging in the following projects:

 

(i)          the cultivation of flowers, tea and other beverage crops and spice crops; and

 

(ii)         marine aquaculture and inland aquaculture.

 

An enterprise engaging in projects the development of which is restricted or prohibited by the state shall not be eligible for the preferential enterprise income tax treatment specified in this Article.

 

Article 87:    For the purposes of Item (2) of Article 27 of the Enterprise Income Tax Law, the term “basic infrastructure projects strongly supported by the state” means projects such as ports, airports, railways, highways, urban public transport, electricity, water conservation, etc., as specified in the Catalogue of Basic Infrastructure Projects Eligible for Preferential Enterprise Income Tax Treatment.

Enterprise income tax shall be exempted on investment and operating income derived by an enterprise engaging in a basic infrastructure project strongly supported by the state as specified in the preceding paragraph from the first to the third years commencing from the tax year in which the project first obtains production and operating revenues, and assessed at 50% for the fourth to the sixth years.

 

An enterprise that contracts for the operation or construction of a project specified in this Article or constructs such project for its own use shall not be eligible for the preferential enterprise income tax treatment specified in this Article.

 

Article 88:    The environmental protection, energy conservation and water conservation projects that meet the criteria as specified in Item (3) of Article 27 of the Enterprise Income Tax Law include projects for public sewage treatment, public waste disposal, comprehensive development and utilization of methane, improvement of energy conservation and emissions-reducing technologies, desalination of sea water, etc. The specific criteria and scope of such projects shall be formulated by the State Council's departments in charge of finance and tax in consultation with the relevant departments of the State Council, and announced and implemented after approval by the State Council.

 

Enterprise income tax shall be exempted on investment and operating income derived by an enterprise engaging in an environmental protection, energy conservation or water conservation project that meets the criteria as specified in the preceding paragraph from the first to the third years commencing from the tax year in which the project first obtains production and operating revenues, and assessed at 50% for the fourth to the sixth years.

 

Article 89:    If a project eligible for the tax exemption/reduction specified in Article 87 or 88 hereof is transferred during the tax exemption or reduction period, the transferee shall be eligible for the tax exemption and/or reduction for the remaining period commencing from the transfer date. If such project is transferred after the expiration of the tax exemption/reduction period, the transferee shall not be eligible for further tax exemptions/reductions in respect of such project.

 

Article 90:    The income derived from technology transfers that meet the criteria and that are eligible for exemption of, or a reduction in, enterprise income tax as specified in Item (4) of Article 27 of the Enterprise Income Tax Law means that that part of such technology transfer income derived by a tax-resident enterprise in one tax year and not exceeding Rmb5 million shall be exempt from enterprise income tax. Enterprise income tax on the portion above Rmb5 million shall be assessed at 50%.

 

Article 91:    Enterprise income tax on the income specified in Item (5) of Article 27 of the Enterprise Income Tax Law obtained by a non-tax-resident enterprise shall be assessed at the reduced rate of 10%.

 

The following income may be exempted from enterprise income tax:

(1)   income from interest on a loan extended to the Chinese government by a foreign government;

 

(2)   income from interest on a preferential loan extended to the Chinese government or a tax-resident enterprise by an international financial organization; and

 

(3)   other income as approved by the State Council.

 

Article 92:    For the purposes of the first paragraph of Article 28 of the Enterprise Income Tax Law, the term “small, low-profit enterprise that meets the criteria” means an enterprise in an industry not restricted or prohibited by the state and satisfying the following criteria:

 

(1)   an industrial enterprise whose annual taxable income does not exceed Rmb300,000, whose workforce does not exceed 100 persons and whose total asset value does not exceed Rmb30 million; or

 

(2)   another enterprise whose annual taxable income does not exceed Rmb300,000, whose workforce does not exceed 80 persons and whose total asset value does not exceed Rmb10 million;

 

Article 93:    For the purposes of the second paragraph of Article 28 of the Enterprise Income Tax Law, the term “high and new technology enterprise that the state strongly needs to support” means an enterprise that owns its core intellectual property and satisfies all of the following criteria:

 

(1)   its products (services) fall within the scope of the High and New Technology Fields Strongly Supported by the State;

 

(2)   the percentage of its sales revenue accounted for by research and development expenses is not lower than the prescribed percentage;

 

(3)   the percentage of the enterprise's total revenue accounted for by its revenue from high and new technology products (services) is not lower than the prescribed percentage;

 

(4)   the percentage of the enterprise's total workforce accounted for by scientific and technical personnel is not lower than the prescribed percentage; and

 

(5)   other criteria as specified in the measures for the determination and administration of high and new technology enterprises.

 

The High and New Technology Fields Strongly Supported by the State and the measures for the determination and administration of high and new technology enterprises shall be formulated by the State Council's departments in charge of science and technology, finance and tax in consultation with relevant departments of the State Council, and published and implemented after approval by the State Council.

 

Article 94:    For the purposes of Article 29 of the Enterprise Income Tax Law, the term “ethnic autonomous areas” means autonomous regions, autonomous prefectures and autonomous counties in which ethnic automony is implemented in accordance with the PRC Law on Autonomy in Ethnic Areas.

 

Enterprises in industries restricted or prohibited by the state and located in ethnic autonomous areas shall not be eligible for reductions in, or exemption of, enterprise income tax.

 

Article 95:    For the purposes of Item (1) of Article 30 of the Enterprise Income Tax Law, the super-deduction of research and development expenses means that research and development expenses incurred by an enterprise in developing a new technology, new product or new process and that have not given rise to an intangible asset and been recorded as losses or gains for the period, are super-deducted at the rate of 50% of the research and development expenses after deduction of the actual amount incurred in accordance with provisions. If such expenses have given rise to an intangible asset, they shall be amortized at 150% of the intangible asset costs.

 

Article 96:    For the purposes of Item (2) of Article 30 of the Enterprise Income Tax Law, the super-deduction of wages paid by an enterprise to employ disabled persons means that if an enterprise employs disabled persons, the wages paid to such employees are super-deducted at the rate of 100% after deduction of the actual wages paid to the disabled employees. For the scope of disabled persons, the relevant provisions of the PRC Law on the Protection of Disabled Persons shall apply.

 

The method of super-deduction of wages paid by an enterprise for the employment of other job seekers whose employment the state encourages as mentioned in Item (2) of Article 30 of the Enterprise Income Tax Law shall be specified separately by the State Council.

 

Article 97:    For the purposes of Article 31 of the Enterprise Income Tax Law, the phrase “deduct … from … taxable income” means that a venture investment enterprise that makes an equity investment in an unlisted small or medium-sized high and new technology enterprise for at least two years may deduct from its taxable income 70% of its investment amount in the year that it has held the equity for two full years. If the amount is insufficient to deduct in the year in question, it may carry the same forward to, and deduct the same in, subsequent tax years.

 

Article 98:    For the purposes of Article 32 of the Enterprise Income Tax Law, fixed assets for which the depreciable life may be shortened or the accelerated depreciation method adopted include the following:

 

(1)   fixed assets the product upgrading and replacement of which are relatively rapid due to technical progress; or

 

(2)   fixed assets that are exposed to strong vibrations or high corrosion over an extended period of time.

 

If shortening of the depreciable life is adopted, the minimum depreciable life may not be less than 60% of the depreciable life specified in Article 60 hereof. If the accelerated depreciation method is adopted, either the double declining balance method or the sum-of-the-years-digit method may be used.

 

Article 99:    For the purposes of Article 33 of the Enterprise Income Tax Law, the phrase “revenue calculated at a reduced rate” means that the revenue derived by an enterprise from products whose production is not restricted or prohibited by the state, that comply with relevant state and industry standards and in which the main raw materials are resources specified in the Catalogue of Preferential Enterprise Income Tax Treatment for the Comprehensive Utilization of Resources is recorded in the total revenues at the reduced rate of 90%.

 

The percentage of the product production materials accounted for by the raw materials mentioned in the preceding paragraph may not be less than the rate specified in the Catalogue of Preferential Enterprise Income Tax Treatment for the Comprehensive Utilization of Resources.

 

Article 100:  For the purposes of Article 34 of the Enterprise Income Tax Law, the phrase “set off against … tax” means that 10% of the investment in special purpose equipment, such as environmental protection equipment, energy saving equipment, water saving equipment and work safety equipment specified in the Catalogue of Preferential Enterprise Income Tax Treatment for Environmental Protection Equipment, the Catalogue of Preferential Enterprise Income Tax Treatment for Energy Saving and Water Saving Equipment and the Catalogue of Preferential Enterprise Income Tax Treatment for Work Safety Equipment purchased and actually used by an enterprise may be set off against the enterprise's tax payable for the year. If the amount is insufficient to set off in the year in question, it may be carried forward to, and set off in, the subsequent five tax years.

 

Enterprises eligible for the preferential enterprise income tax treatment specified in the preceding paragraph shall have actually purchased and themselves actually brought into service the special purpose equipment specified in the preceding paragraph. If an enterprise purchases special purpose equipment as specified above but transfers or leases out the same within five years, it shall cease to be eligible for the preferential enterprise income tax treatment and shall make good the enterprise income tax that it has set off.

 

Article 101:  The catalogues of preferential enterprise income tax treatment specified in Articles 87, 99 and 100 of this Part shall be formulated by State Council's departments in charge of finance and tax in consultation with relevant departments of the State Council, and published and implemented after the approval of the State Council.

 

Article 102:  If an enterprise simultaneously engages in projects to which different preferential enterprise income tax treatment is applicable, income shall be calculated separately for its preferential treatment eligible projects and its period expenses reasonably allocated among them. If the income is not calculated separately, the enterprise shall not be eligible for the preferential enterprise income tax treatment.

 

PART FIVE: WITHHOLDING AT SOURCE

 

Article 103:  For the enterprise income tax payable by non-tax-resident enterprises and subject to withholding at source in accordance with the Enterprise Income Tax Law, taxable income shall be calculated in accordance with Article 19 of the Enterprise Income Tax Law.

 

For the purposes of Article 19 of the Enterprise Income Tax Law,
the term “entirety of revenue” means all of the price and the non-price expenses charged by a non-tax-resident enterprise to payers.

 

Article 104:  For the purposes of Article 37 of the Enterprise Income Tax Law, the term “payer” means a work unit or individual that directly bears an obligation of paying relevant amounts to a non-tax-resident enterprise in accordance with relevant laws or a contract.

 

Article 105:  For the purposes of Article 37 of the Enterprise Income Tax Law, the term “paid” or “payable” refers to both monetary and non-monetary payments, such as cash payments, remittance payments, payments by bank transfer, payments through the realization of equity, etc.

 

For the purposes of Article 37 of the Enterprise Income Tax Law, the term “amount … due payable” means the payables that a payer is required to record as relevant costs or expenses in accordance with accrual basis principles.

 

Article 106:  For the purposes of Article 38 of the Enterprise Income Tax Law, the circumstances under which a withholding agent may be designated include the following:

 

(1)   it is anticipated that the term of project operations or the provision of labour services will be less than one tax year and there is evidence indicating that the tax payment obligation will not be performed;

 

(2)   tax registration or temporary tax registration has not been carried out and no agent in China has been appointed to perform tax payment obligations; or

 

(3)   enterprise income tax filing or prepayment filing has not been carried out by the prescribed deadline.

 

The withholding agent specified in the preceding paragraph shall be designated by the tax authority at the county level or above. Additionally, the withholding agent shall be informed of the calculation basis and calculation method for the tax he/she is to withhold, the withholding term and the withholding method.

 

Article 107:  For the purposes of Article 39 of the Enterprise Income Tax Law, the phrase “place from which the income arose” means the place where the enterprise's income was derived as determined based on the principles specified in Article 7 hereof. If there is more than one place in China from where income is derived, the taxpayer shall select one for the purpose of filing and paying enterprise income tax.

 

Article 108:  For the purposes of Article 39 of the Enterprise Income Tax Law, other revenue in China of the taxpayer means revenue derived from various other sources in China by the taxpayer.

 

The tax authority, when seeking recovery of the tax payable by the taxpayer, shall inform the taxpayer of the grounds for such payment, the amount to be paid, the payment deadline and payment method, etc.

 

PART SIX: SPECIAL TAX ADJUSTMENTS

 

Article 109:  For the purposes of Article 41 of the Enterprise Income Tax Law, the term “affiliated party” means an enterprise, other organization or individual that has one of the following affiliated relationships with the enterprise:

 

(1)   a direct or indirect control relationship in terms of funds, operations, sale and purchase, etc.;

 

(2)   directly or indirectly under common control by a third party; or

 

(3)   another interest-based relationship.

 

Article 110:  For the purposes of Article 41 of the Enterprise Income Tax Law, the phrase “at arm's length” means the principles observed by non-affiliated transaction counterparties in conducting business transactions on the basis of a fair transaction price and common business practice.

 

Article 111:  For the purposes of Article 41 of the Enterprise Income Tax Law, the term “reasonable means” includes the following:

 

(1)   comparable uncontrolled price method, which is a method whereby pricing is determined based on the price of identical or similar business transactions between non-affiliated transaction counterparties;

 

(2)   resale price method, which is a method whereby pricing is determined by subtracting the price margin of identical or similar business from the price of merchandise purchased from an affiliated party and resold to a non-affiliated transaction counterparty;

 

(3)   cost-plus method, which is a method whereby pricing is determined by adding reasonable expenses and profit to the cost;

(4)   transactional net margin method, which is a method whereby the margin is determined based on the level of the net margin derived from identical or similar business transactions between non-affiliated transaction counterparties;

 

(5)   profit split method, which is a method whereby the consolidated profit or loss of the enterprise and its affiliated parties is allocated at a reasonable rate among all parties; or

 

(6)   another method compatible with the arm's length principle.

 

Article 112:  An enterprise may, in accordance with the second paragraph of Article 41 of the Enterprise Income Tax Law, share with affiliated parties jointly incurred costs and reach a cost sharing agreement based on the arm's length principle.

 

When an enterprise and its affiliated parties allocate costs, they shall do so based on the principle of matching of costs and forecast returns, and submit relevant information requested by the tax authority by the deadline set by the tax authority.

 

If in allocating their costs an enterprise and its affiliated parties violate the first or second paragraph of this Article, the costs that they themselves allocated may not be deducted when calculating their taxable income.

 

Article 113:  For the purposes of Article 42 of the Enterprise Income Tax Law, the term “pre-agreed pricing arrangement” means the agreement on an enterprise's pricing principles and calculation method for affiliated transactions in future years reached, after submitting an application to the tax authority, by the enterprise with the tax authority based on the arm's length principle after consultations and confirmation.

 

Article 114:  The relevant information mentioned in Article 43 of the Enterprise Income Tax Law includes the following:

 

(1)   period information, such as the standards for determining, the method of calculating and a description of the prices and expenses for affiliated business transactions;

 

(2)   information on the resale (transfer) price or final sale (transfer) price for the property, property use rights, labour services, etc., involved in affiliated business transactions;

 

(3)   information such as the product prices, pricing method
and profit level that other enterprises connected to the affiliated investigation are required to provide and that are comparable to those of the enterprise under investigation; and

 

(4)   other information relating to the affiliated business transactions.

 

For the purposes of Article 43 of the Enterprise Income Tax Law, the term “other enterprises connected to the affiliated transaction investigation” means enterprises that are similar to the enterprise under investigation in terms of the substance and method of their production and operations.

 

An enterprise shall submit information such as the standards for determining, the method of calculating and a description of the prices and expenses for its affiliated business transactions by the deadline specified by the tax authority. Affiliated parties and other enterprises connected to the affiliated transaction investigation shall provide relevant information by the deadline agreed to by them with the tax authority.

 

Article 115:  When determining the taxable income of an enterprise in accordance with Article 44 of the Enterprise Income Tax Law, the tax authority may use the following methods:

 

(1)   referring to the profit margin level of identical or similar enterprises;

 

(2)   adding reasonable expenses and profit to the enterprise's costs;

 

(3)   taking a reasonable percentage of the overall profit of the group of affiliated enterprises; or

 

(4)   another reasonable method.

 

If an enterprise objects to the taxable income determined by the tax authority in accordance with a method specified in the preceding paragraph, it shall provide relevant evidence, and, subject to recognition thereof by the tax authority, the previously determined taxable income shall be adjusted.

 

Article 116:  For the purposes of Article 45 of the Enterprise Income Tax Law, the term “Chinese citizen” means an individual who pays in accordance with the PRC Individual Income Tax Law individual income tax in China on income derived in China and from abroad.

 

Article 117:  For the purposes of Article 45 of the Enterprise Income Tax Law, the term “control” includes the following:

 

(1)   a tax-resident enterprise or Chinese citizen by itself/himself/herself directly or indirectly holding at least 10% of the voting shares of a foreign enterprise and their jointly holding at least 50% of the shares of the foreign enterprise; or

 

(2)   although the shareholding percentage of a tax-resident enterprise, or of a tax-resident enterprise and a Chinese citizen not reaching the figures specified in Item (1), their exercising actual control of the foreign enterprise in terms of shares, funds, operations, sale and purchase, etc.

 

Article 118:  For the purposes of Article 45 of the Enterprise Income Tax Law, the phrase “actual tax burden markedly lower than the tax rate specified in the first paragraph of Article 4 hereof” means less than 50% of the tax rate specified in the first paragraph of Article 4 of the Enterprise Income Tax Law.

Article 119:  For the purposes of Article 46 of the Enterprise Income Tax Law, the term “debt investment” means financing obtained directly or indirectly by an enterprise from an affiliated party and on which it is required to repay the principal and pay interest or is required to pay compensation by another method that is similar in nature to paying interest.

 

Indirect debt investments obtained from an affiliated party by an enterprise include the following:

 

(1)   a debt investment provided by an affiliated party through a non-affiliated third party;

 

(2)   a debt investment provided by a non-affiliated third party and for which an affiliated party provides security and bears joint and several liability; and

 

(3)   other debt investments of a liability nature indirectly obtained from an affiliated party.

 

For the purposes of Article 46 of the Enterprise Income Tax Law, the term “equity investment” means an investment accepted by an enterprise for which it is not required to repay the principle and pay interest and which investment gives the investor ownership over net assets of the enterprise.

 

The standard mentioned in Article 46 of the Enterprise Income Tax Law shall be formulated separately by the State Council's departments in charge of finance and tax.

 

Article 120:  For the purposes of Article 47 of the Enterprise Income Tax Law, the phrase “does not have a reasonable commercial objective” means that the main objective is to reduce, be exempted from or delay payment of tax.

 

Article 121:  If the tax authority makes a special tax adjustment in respect of an enterprise in accordance with tax laws and administrative regulations, it shall charge daily interest on the additional tax levied for the period from June 1 of the year following the pertinent tax year until the date the tax amount is paid.

 

The interest charged as specified in the preceding paragraph may not be deducted when calculating taxable income.

 

Article 122:  The interest mentioned in Article 48 of the Enterprise Income Tax Law shall be calculated at the reference rate posted by the People's Bank of China for renminbi loans extended during the same period for paying the additional tax in the pertinent tax year plus five percentage points.

 

If an enterprise submits relevant information in accordance with Article 43 of the Enterprise Income Tax Law and these Regulations, interest may be imposed only at the reference rate for renminbi loans specified in the preceding paragraph.

 

Article 123:  If a business transaction between an enterprise and an affiliated party is not consistent with the arm's length principle, or if the enterprise implements another arrangement that does not have a reasonable commercial objective, the tax authority shall have the right to make a tax adjustment within the 10 years from the tax year in which the transaction occurred.

 

PART SEVEN: ADMINISTRATION OF LEVY AND COLLECTION

 

Article 124:  For the purposes of Article 50 of the Enterprise Income Tax Law, the term “place where an enterprise is registered” means the domicile where an enterprise is registered in accordance with relevant state laws.

 

Article 125:  If an enterprise consolidates and pays enterprise income tax, it shall centrally calculate its taxable income. The specific measures therefor shall be separately formulated by the State Council's departments in charge of finance and tax.

 

Article 126:  A primary establishment as mentioned in Article 51 of the Enterprise Income Tax Law shall satisfy both of the following criteria:

 

(1)   it is responsible for monitoring and managing the production and business activities of the other establishments; and

 

(2)   it keeps complete account books and vouchers that accurately reflect the revenues, costs, expenses, losses and gains of all the establishments.

 

Article 127:  For the purposes of Article 51 of the Enterprise Income Tax Law, the term “approval of the tax authority” means the approval of the higher level tax authority common to the tax authority of each place where an establishment is located.

 

If a non-tax-resident enterprise, after receiving approval to consolidate payment of enterprise income tax, needs to establish further, merge, relocate or close down establishments or halt the operations of an establishment or establishments, a report shall be submitted in advance to the tax authority of the place where the primary establishment responsible for consolidating the filing and payment of enterprise income tax is located. If the primary establishment responsible for consolidating the filing and payment of enterprise income tax needs to be changed, matters shall be handled in accordance with the preceding paragraph.

 

Article 128:  The advance payment of enterprise income tax on a monthly or quarterly basis shall be specifically determined by the tax authority.

 

When an enterprise pays enterprise income tax in advance on a monthly or quarterly basis in accordance with Article 54 of the
Enterprise Income Tax Law, it shall pay the same based on the actual profit for the month or quarter. If payment based on the actual profit of the month or quarter presents difficulties, payment may be made based on the monthly or quarterly average of the taxable income for the previous tax year, or in accordance with another method approved by the tax authority. Once a payment method has been determined, it may not be indiscriminately changed during that tax year.

Article 129:  An enterprise shall file in the tax year to the tax authority by the deadlines specified in Article 54 of the Enterprise Income Tax Law its returns for the advance payment of enterprise income tax, annual enterprise income tax returns, financial accounting reports and other relevant information specified by the tax authority, regardless of whether it has made a profit or a loss.

 

Article 130:  If an enterprise's income is calculated in a currency other than the renminbi, when paying enterprise income tax in advance, its taxable income shall be converted into renminbi at the median of the renminbi exchange rates on the last day of the month or quarter. At year end, when effecting final settlement, no conversion shall be carried out for the tax paid in advance on a monthly or quarterly basis, and only the taxable income for the unpaid portion of enterprise income tax for that tax year shall be converted into renminbi at the median of the renminbi exchange rates on the last day of the tax year.

 

If, following examination and confirmation by the tax authority, an enterprise has under-calculated or over-calculated the income specified in the preceding paragraph, the taxable income for the under-calculated or over-calculated income shall be converted into renminbi at the median of the renminbi exchange rates on the last day of the month preceding the time of examination and confirmation of the back tax or tax refund, and the back tax to be paid or tax to be refunded shall be recalculated.

 

PART EIGHT: SUPPLEMENTARY PROVISIONS

 

Article 131:  For the purposes of the first paragraph of Article 57 of the Enterprise Income Tax Law, the phrase “enterprises whose establishment was approved prior to the promulgation hereof” means enterprises that completed registration prior to the promulgation of the Enterprise Income Tax Law.

 

Article 132:  The relevant provisions of the second and third paragraphs of Article 2 of the Enterprise Income Tax Law shall apply mutatis mutandis to enterprises established in the Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan.

 

Article 133:          These Regulations shall be effective as of January 1 2008. The Implementing Rules for PRC Law on Foreign-invested Enterprise and Foreign Enterprise Income Tax issued by the State Council on June 30 1991 and the Implementing Rules for PRC Tentative Regulations on Enterprise Income Tax issued by the Ministry of Finance on February 4 1994 shall be repealed simultaneously.