China law update: Corporate Income Tax Law

UNIFIED TAXATION FOR FOREIGN AND CHINESE COMPANIES HAS BECOME LAW IN CHINA ON JANUARY 1, 2008. FIDUCIA TAKES A CLOSER LOOK AT THE CONTENT.

It is commonly known by now that China passed a new Corporate Income Tax Law (CIT Law) which took effect on January 1, 2008. The law is aimed at creating a level playing field between foreign-invested enterprises and domestic companies by charging both with a tax of 25%. What remained unclear until recently was how exactly the law would be implemented. On December 11, 2007 the Detailed Implementation Rules (DIR) were released, which clarify the main handling and provisions of the law. The following major changes are important:

Effective management is the decisive factor

Although the concept of "(non-) resident enterprises" is new to the Chinese law, it follows international standards. An enterprise is considered to be a resident enterprise if it is established under Chinese law or has its place of effective management in China. As a result, these companies are taxed in China on their worldwide income. The term "effective management" refers to the fact that an organisation exercises management and control over production and business operations, personnel, finance and accounting, and possesses property on Chinese ground. However, the specific factors that determine management and control are not defined yet. The interpretation of these terms are up to local tax authorities and might result in different regulations for each jurisdiction if a clear guideline is not issued.

Small-scale and high-tech enterprises

Other important issues addressed by the DIR were the criteria for "Small-scale enterprises" liable for CIT at a reduced rate of 20%, and "High-/new-technology enterprises" liable for the 15% reduction. In order to qualify for a small-scale enterprise, the law differentiates between manufacturing and non-manufacturing enterprises. A manufacturing enterprise must have a taxable income below RMB 300,000, less than 100 employees and total assets of not more than RMB 30 million. The cappings for non-manufacturing enterprises are RMB 300,000, 80 employees and RMB 10 million.

To enjoy the reduced tax rate of 15%, a high-/new-techno-logy enterprise must own its core intellectual property and have its products and services listed in "The Areas of High and New Technology Encouraged by the State" guidelines. R&D expenditure and revenue from high-technology pro-ducts and services must reach a certain percentage of the company's total revenue. In addition, science and techno-logy personnel must account for a certain percentage of the total number of staff. As these percentages are not fixed yet, implementation of the rules might turn out to be difficult.

The new CIT Law brings fundamental tax changes for foreign investors. But there are still many questions on important matters, which have to be answered before a proper assessment of the law's impact is possible.

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