Tax basics for FIEs
October 12, 2011 | BY
clpstaff &clp articles &Tax specialists offer their insights for potential inbound investors on fundamental tax rules they need to be aware of
As the owner of a European business, I'm thinking about establishing a more permanent presence in China. I'm not familiar with what tax incentives there are, as this may really assist in my decision to open up on the Mainland.
What are the basic tax privileges for foreign-invested enterprises?
The domestic perspective
Generally speaking, foreign-invested enterprises (FIEs) established after January 1 2008 are no longer granted super-national tax privileges, which reduce or exempt their income tax in China. Moreover, except in certain industries, FIEs established after January 1 2009 could no longer have their self-use imported equipment exempted from the import Value-added Tax (Vat). As a result, most super-national tax privileges that FIEs used to enjoy have either been excluded or cancelled by now.
As such, currently in mainland China, foreign investors may find that besides certain tax privileges for foreign individuals, they are subject to the same tax incentive policies and treatments for their FIEs as domestic enterprises. Governing both domestic and foreign invested enterprises, the current tax laws and regulations, especially the new PRC Enterprise Income Tax Law (中华人民共和国企业所得税) and its implementation rules, grant mostly industry-oriented privileges on top of geographic-oriented incentives, focus on both direct and indirect tax incentives instead of providing direct tax reduction or exemption, and provide project-base tax preferential treatments to replace most company-base tax preferential treatments. For example, newly-established high and new technology enterprises in the Special Economic Zones and Pudong New Area are exempted from corporate income tax during the first two years from the year of collecting their first operating revenues, followed by a 50% annual reduction during the subsequent 3 years. Enterprises of encouraged industries set up in western China may enjoy a reduced corporate income tax rate of 15%, and software and integrated circuit companies are granted prolonged tax incentives, etc. In practice, FIEs that are engaged in various locally-encouraged industries may also seek certain financial support from local governments upon negotiation.
It should also be noted that every foreign investor is liable for an additional withholding tax in mainland China on dividends distributed by FIEs, for example, a 10% withholding tax if the dividend is paid to a foreign company. Such withholding tax, however, can be relieved under treaties or tax agreements between China and other countries or regions. For example, qualified Hong Kong companies are only responsible for a 5% withholding tax on their dividends from FIEs instead of 10%, courtesy of the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (内地和香港特别行政区关于对所得避免双重征税和防止偷漏税的安排).
David Yu and Clare Lu
Founding Partner and Partner
Llinks Law Offices
The international perspective
Prior to 2008, China had two separate enterprise income tax (EIT) laws for foreign and domestic enterprises in China. Foreign and foreign-invested enterprises (FIEs) enjoyed a number of favourable tax incentives such as reduced tax rates, tax holidays, and tax refunds to the dismay of domestic enterprises that saw little of the same incentives. That is, until 2008 when the EIT laws were unified and many of the tax incentives were repealed and replaced with new (but, unfortunately, fewer) incentives that foreign and domestic enterprises alike could enjoy. As an owner of a European business, the type of basic tax incentives that your FIE in China would enjoy depends on the type of business it is in, as well as its location.
All enterprises are generally subject to EIT at a standard rate of 25% of taxable profits. However tax exemptions or reduction, among other incentives, may be available to enterprises that meet certain criteria, are engaged in certain activities, or are located in certain regions in China, etc. Since the Chinese government still uses tax incentives to drive investment in areas encouraged under national development plans, enterprises that tend to benefit most from tax incentives include those in industries related to high-technology, environmental protection, energy conservation, and infrastructure development. For example, such beneficiaries include enterprises that:
- engage in key infrastructure projects supported by the government or eligible environmental protection; energy or water conservation projects (a three-year EIT exemption followed by a three-year 50% deduction on the EIT rate);
- qualify as High- and New Technology Enterprises or Advanced Technology Service Enterprises (15% EIT rate);
- qualify as Software Enterprises (a two-year EIT exemption followed by a three-year 50% deduction on the EIT rate);
- are venture capital enterprises investing in small and medium-sized high technology enterprises (extra deduction of 70% of the investment amount after holding the investment for two years)
Additionally, “super” deductions (an extra expense deduction for PRC tax purposes) and other credits are available to enterprises engaged in certain activities that are encouraged by the government, mainly the development of new technology, new products or environmental protection.
In addition to EIT, companies are generally subject to either Value-added Tax (Vat) or Business Tax (BT), as well as other taxes and local levies. Vat is imposed on enterprises that sell goods, provide processing or repair and replacement services or import goods in China. BT is levied on enterprises that provide certain labour services, transfer intangible assets or sell immovable property in China. Depending on the type of activities the enterprise is engaged in there may be reduced Vat or BT rates. For example, BT on income earned from off-shore outsourcing services by certain enterprises and income from technology transfer, technology development and related technology consultation or supporting services may be exempted.
Before deciding where you want to set up your FIE, you may want to check with local tax authorities as to whether certain incentives and financial subsidies are available locally (for example, financial subsidies are available to certain industries in Waigaoqiao, Shanghai). As the national government is trying to encourage the economic development of China's western regions, special tax incentives are also available to enterprises setting up in those regions.
Last but not the least, tax incentives are subject to change at any time. It is advisable to check the tax incentives that may be available to the industry/business you are engaged in and the related requirements prior to your investment in China.
Daniel Chan and Doris Ho
Partner and Senior Associate
DLA Piper
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