Circular on Issues Relevant to the Revision of the Rates of Pre-tax Deductions from Individual Income Tax of Family Proprietorships, Wholly Individually-owned Enterprises and Partnerships

(Issued by the Ministry of Finance and the State Administration of Taxation on June 3 2008.)

Cai Shui [2008] No.65

Finance departments (bureaux) and local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, the Tibet, Ningxia and Qinghai Provincial (Autonomous Region) Offices of the State Administration of Taxation and the Finance Bureau of the Xingjiang Production and Construction Corp:

Pursuant to the current Individual Income Tax Law, its Implementing Regulations and relevant policies, we hereby inform you as follows on issues relevant to the revision of the rates of pre-tax deductions from individual income tax of family proprietorships, wholly individually-owned enterprises and partnerships:

1. When levying in accordance with the law individual income tax on the production and operating income of owners of family proprietorships and of investors in wholly individually-owned enterprises and partnerships, the rate for the deduction of the expenses of the owners and investors themselves is uniformly set at Rmb24,000 per year (Rmb2,000 per month).

2. The expenditures on the actual reasonable wages and salaries paid by a sole industrial or commercial proprietorship, wholly individually-owned enterprise or partnership to its employees may be deducted in full before tax.

3. The expenditures on labour union funds allocated and employee benefits and employee education funds incurred by a sole industrial or commercial proprietorship, wholly individually-owned enterprise or partnership falling within 2%, 14% and 2.5% respectively of its total payroll may be deducted in full.

4. The portion of the advertising expenses and business publicity expenses incurred in a tax year by a sole industrial or commercial proprietorship, wholly individually-owned enterprise or partnership not exceeding 15% of its sales (operating) revenue for the year may be deducted in full; any amount above 15% may be carried forward and deducted in subsequent tax years.

5. The business entertainment expenditures incurred in a tax year by a sole industrial or commercial proprietorship, wholly individually-owned enterprise or partnership and directly related to its production and operations may be deducted at the rate of 60% of the amount incurred, but may not exceed 0.5% of its sales (operating) revenue for the year.

6. Article 1 above shall be effective as of March 1 2008 and Articles 2, 3, 4, and 5 above shall be effective as of January 1 2008.

7. The first paragraph of Article 13 and Article 29 of the State Administration of Taxation, Circular on the Issuance of the «Measures for the Calculation of the Individual Income Tax of Family Proprietorships (Trial Implementation))»(Guo Shui Fa [1997] No.43) are revised in line with the foregoing provisions; and an Article 30 reading as follows, “The expenditures on labour union funds allocated and on employee benefits and employee education funds incurred by a sole industrial or commercial proprietorship falling within 2%, 14% and 2.5% respectively of its total payroll may be deducted in full.” shall be added and the sequence of the Articles shall be revised accordingly.

Items (1), (2), (5), (6) and (7) of Article 6 of Annex 1 to the Ministry of Finance and State Administration of Taxation, Circular on the Issuance of the «Provisions for the Levy of Individual Income Tax on the Investors in Wholly Individually-owned Enterprises and Partnerships)»(Cai Shui [2000] No.91) are revised in line with the foregoing provisions.

Implementation of the Ministry of Finance and State Administration of Taxation, Circular on Revising the Rates of the Expenses of Owners of Family Proprietorships and of Investors in Wholly Individually-owned Enterprises and Partnerships that are Deductible from Individual Income Tax (Cai Shui [2006] No.44) shall cease.