Circular on Income Tax Issues of Partners of Partnerships

(Issued by the Ministry of Finance and the State Administration of Taxation on December 23 2008 and effective as of January 1 2008.)

Cai Shui [2008] No.159

Finance departments (bureaux), offices of the State Administration of Taxation and local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, and the Finance Bureau of the Xinjiang Production and Construction Corp:

Pursuant to relevant provisions of the PRC Enterprise Income Tax Law, its Implementing Regulations and the PRC Individual Income Tax Law, we hereby notify you on income tax issues of partners of partnerships as follows:

1. For the purposes of this Circular, the term “partnership” means a partnership established in accordance with laws and administrative regulations of China.

2. Each of the partners in a partnership is a taxpayer. If the partners in a partnership are natural persons, they shall pay individual income tax; if the partners are legal persons or other organisations, they shall pay enterprise income tax.

3. The production and other business income and other income of a partnership shall be subject to the principle of “apportion first, then tax”. The calculation of the specific taxable income shall be conducted in accordance with relevant provisions of the Provisions for the Levy of Individual Income Tax on Investors in Wholly Individually-owned Enterprises and Partnerships (Cai Shui [2000] No.91) and the Ministry of Finance and State Administration of Taxation, 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 (Cai Shui [2008] No.65).

The “production and other business income and other income” mentioned in the preceding paragraph includes the income distributed to all of the partners by the partnership and the income (profit) retained by the partnership during the year in question.

4. The partners of a partnership shall determine their taxable income in accordance with the following principles:

(1) the partners of the partnership shall determine their taxable income in proportion to their respective shares of the production and other business income and other income of the partnership as specified in the partnership agreement;

(2) if the partnership agreement is silent or unclear on such proportion, their taxable income shall be determined based on the proportions of all of the production and other business income and other income distributed to them as decided by the partners through consultations;

(3) if the consultations are unsuccessful, their taxable income shall be determined based on all of the production and other business income and other income, and in proportion to their respective capital contributions;

(4) if their capital contributions cannot be determined, the taxable income of each partner shall be the average of all of the production and other business income and other income calculated based on the number of partners.

The partnership agreement may not specify that all of the profit will be distributed to only some of the partners.

5. If the partners of a partnership are legal persons or other organisations, they may not, when calculating the enterprise income tax payable by them, use the losses of the partnership to reduce their profits.

6. The foregoing provisions shall be effective as of January 1 2008. In the event of a conflict between this Circular and previous provisions, this Circular shall prevail.