Essentials of Enterprise Income Tax in China

By Miss Hua Lin, Attorney-at-Law, Partner BRIGHT & RIGHT
       Dr. Michael Liu, Attorney-at-Law, Partner BRIGHT & RIGHT

The new Enterprise Tax Law of PRC has come into effect since January 1, 2008. The essentials related to enterprises with foreign investments are illustrated by the following questions and answers.

1.  What is the enterprise income tax rate for a foreign enterprise in China?
When a foreign enterprise has established its institution and premises in China, 25% of the income earned within and outside China by the foreign enterprise, which is related to the said institution and premises in China, should be paid as enterprise income tax. When a foreign enterprise has not established its institution and premises in China, or the income earned is not actually related to the said institution and premises, generally 20% of the income earned in China should be paid as enterprise income tax.

2. What is the transitional policy for those foreign enterprises paying tax according to the old tax laws?
Those foreign enterprises that have been incorporated before the promulgation of the new Enterprise Income Tax Law and have been enjoying the lower tax rate should continue paying the enterprise income tax according to the original tax rate for five years.

3. Which industrial sectors can enjoy preferential tax treatments?
The following industrial sectors are entitled to enjoy the preferential treatment in Enterprise Income Tax:
a. the enterprises with high and new technologies that need key assistance from the state;
b. small-sized enterprises with little margin of profits;
c. enterprises in agriculture, forestry, animal husbandry and fishery;
d. enterprises in industries of environmental protection, energy conservation and water conservation;
e. enterprises engaged in construction of public infrastructures and the like.

4. What are the tax preferential treatments for technique innovation and technology advance?
The enterprise income tax for the technology transfer that is consistent with the relevant conditions can be exempted or reduced. The costs by enterprises for research and development of new techniques, new products and new processes can be deducted in the calculation of enterprise income tax. And when the accelerated depreciation of the enterprise’s fixed assets becomes necessary due to the technology innovation, the years of depreciation can be reduced or the accelerated depreciation can be applied.

5.  Which kinds of income are taxable?
The income from the following sources is taxable: sales, labor, property transfer, stock interests, dividends, interests, rent, franchise fees, donations, etc.

6. What are the specific minimum years of depreciation for enterprise’s properties?
They are respectively as follows:                                                                                    a. houses, buildings, twenty years;
b. production equipment such as airplanes, trains, ships, machines, ten years;
c. utensils, tools and furniture that related to production and management, five years;
d. transportation tools other than airplanes, trains and ships, four years;
e. electronic equipment, three years.

7. Which kinds of fixed assets are not allowed to be depreciated?
The following kinds of fixed assets are not allowed to be depreciated:
a. the fixed assets that have not been put into use;
b. the fixed assets that have been acquired by way of management leasing;
c. the fixed assets that have been leased out by way of lease financing;
d. the fixed assets that continue being used whose depreciation is fully calculated;
e. the fixed assets that are not related to the management and operation;
f. the land as fixed assets with separate estimated price, etc.