Income Tax For Resident and Non-resident Enterprises

1. Legal authority
2. Resident and non-resident
3. Taxation on foreign investment enterprises
4. Taxation on foreign enterprises
5. Tax incentive

 

Legal authority

• The PRC Corporate Income Tax Law and its Detailed Implementation Regulations
• The PRC Tax Levy and Administration Law and its Detailed Implementation Regulations

 

Tax residents and non-tax residents

FIE's are tax residents under the PRC Tax Law and therefore they are subject to tax on world-wide income. FE's are non-tax residents and therefore subject to income derived from sources inside China only. Non-residents are not entitled to the benefit of tax credits, as provided under the tax treaties entered into between the PRC and other countries.

 

Taxation on Foreign Investment Enterprises (FIE)

 

Tax rates applying to FIE's and FE's

_{Since 2008, the tax systems for domestically funded enterprises and foreign funded enterprises have been unififed under the PRC Corporate Income Tax Law. The corporate income tax rate for resident enterprises (FIE) is 25%.}

_{The corporate income tax rate for non-resident enterprises (FE) is 20%, but it is reduced to 10% under the Detailed Implementation Regulations.}

Tax year

The tax year starts from the first day in the calendar year and ends with the last day in the calendar year.

Taxable amount

Ascertainment of taxable amount is based on the accrual principle.

1. Taxable amount = Profit from sale of goods + other profits + non-business receipts minus non-business expenses, 
2. Profit from sale of goods = net amount on sale of goods - costs of goods sold - sales tax - (selling expenses + administrative expenses + finance expenses),
3. Net amount on sale of goods = gross amount on sales of goods - sales discount - sales returns,
4. Costs of goods sold = current period costs of goods + opening stock - closing stock,
5. Current period costs of goods = current period production costs + opening semi-finished goods + opening finished goods - closing semi-finished goods - closing finished goods,
6. Current period production costs = current period direct materials consumed + direct wages + direct expenses.

Taxation on fixed assets

Definition

Assets with costs exceeding RMB2,000 that have a useful life of more than one year are classified as fixed assets.

Depreciation

Depreciation of assets is calculated by the straight-line method. The total depreciation amount for a fixed asset is the historical cost after a deduction of 10% residual value. Annual depreciable amount charged to production costs is arrived at by dividing the costs net of residual value by the prescribed minimum number of years in use.

 

Taxation on foreign enterprise (FE) 

Foreign enterprises are classified into two types: Foreign enterprises with a taxable presence in the PRC, and Foreign enterprises without a taxable presence in the PRC.

A taxable presence means that a particular foreign enterprise has set up or deemed to have set up a permanent establishment in the PRC. Foreign enterprises that have permanent establishment in the PRC shall be subject to tax on all PRC-source income. A permanent establishment may include a representative office, a construction site, a mineral extraction site, a factory or a fixed place of business.

 

(a) Foreign enterprises with a permanent establishment in the PRC

According to the PRC Income Tax Law and its Implementation Regulations, Representative offices are considered to be permanent establishments set up inside China by non-resident foreign corporations1. RO's are subject to tax on all income derived from within the PRC irrespective of whether they are paid inside China.

Exemptions

The assignment of employees to work in China constitutes a taxable presence. If there is a bilateral tax treaty between the PRC and other countries, the activities of the employee does not constitute a permanent establishment. Therefore it is not taxable in the host country if the duration of the employees' presence in the PRC is less than 6 months in any 12-month period. A tax planning opportunity may exist by taking advantage of the 6-month (183-day) rules.

• the Implementing Regulations of the PRC Income Tax Law provides that the term "establishment or sites" shall refer to management establishments, business offices, operating offices and places, factories, places of extraction of natural resources, sites for contracted projects such as construction, installation, assembly or exploration projects, sites for the delivering services and business agents.

• Mauritius has a tax treaty with the PRC, under which the period of granting the income tax exemption extends to 12 months for a permanent establishment set up by Mauritius corporations inside the PRC.

 

(b) Foreign enterprises that do not have a permanent establishment in the PRC

Foreign enterprises that do not have a permanent establishment in the PRC are subject to withholding tax on following category of income:

• (a) Rent, 
• (b) Interest,
• (c) Royalty, and 
• (d) Dividend. 

Before the commencement date of the "PRC Corporate Income Tax Law" on 1st January 2008, dividend income is specifically exempted from income tax under the "PRC Tax Law for Foreign Investment Enterprises and Foreign Enterprises". The income tax exemption continues to apply if the dividend is paid out of the profits earned before 1st January 2008.

A foreign enterprise that is resident of a country with which the PRC has a tax treaty is subject to withholding tax at a reduced tax rate ranging from 5% to 10%. If the foreign enterprise is not a resident of a country with which the PRC has a tax treaty, the foreign enterprise will be subject to a withholding tax at 10% on the above-mentioned category of income, as provided unilaterally under the Implementation Regulations of the PRC Corporate Income Tax Law.

 

Withholding tax on China-source income

For detailed information on the withholding tax regime, in which a Foreign Enterprise is required to pay tax on China-source income, please refer to the public notice [2015] 60 as issued by the State Administration of Taxation. [Read]

 

TAX INCENTIVES

Tax Treatment Benefits

With effect from 1st November 2015, non-resident individuals and enterprises who want to claim treatment benefits shall not be required to obtain administrative approval from the PRC tax authorities. Instead, the non-resident individual should exercise its own judgment whether it is eligible for the treatment benefit. If so, he can submit the reporting form to claim the tax benefit either on his own or through the witholding tax agent. The same procedural change also applies to non-resident enterprises.

For details, please refer to the public notice [2015] 60 issued by the State Administration of Taxation. [Read] 

Reduction in tax rate

An FIE set up in the free trade zone (Shanghai, Shenzhen and Tianjin) is entitled to tax rate reduction.

Carry-forward of tax losses

Foreign investment enterprises can use its tax loss to offset future profits. The carry-forward of tax loss is valid for a period of 5 years commencing at the year when the loss is incurred.