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13 types of taxes applicable to foreign-funded enterprises, foreign enterprises and foreign individuals are introduced.
At present, there are 13 types of taxes applicable to foreign-funded enterprises, foreign enterprises and foreign individuals (apart from the agricultural tax, tariffs and ship tonnage tax).They are the value-added tax, the consumption tax, the business tax, the income tax on foreign-funded enterprises and foreign enterprises, the personal income tax, the resource tax, the land value-added tax, the stamp tax, the tax on urban real estate, the tax on the use of automobile and ship plates, the slaughter tax, the contract tax and construction fees for cultural undertakings. Laws and regulations related to these tax types and the "Law of the People's Republic of China on Managing the Levy and Collection of Taxes" have constituted China's tax legal system involving foreign interests.
I. Income Tax on Foreign-Funded Enterprises and Foreign Enterprises
"The Income Tax Law for Foreign-Funded Enterprises and Foreign Enterprises" is China's only tax law involving foreign interests which is applicable to foreign-funded enterprises and y foreign enterprises.
1. Taxpayers
In accordance with the stipulations of the Tax Law, taxpayers of foreign-funded enterprises and foreign enterprises can be divided into two categories: one refers to foreign-funded enterprises, which mean Sino-foreign joint ventures, Sino-foreign cooperative businesses and wholly foreign-funded enterprises which were established according to Chinese laws and registered in China; and the other refers to foreign enterprises, which mean foreign companies, enterprises and other economic organizations, including those foreign companies, enterprises and other economic organizations which have set up agencies or sites within the territories of China to engage in production and operations, and those which have not set up agencies or sites but have incomes derived from within the territories of China, as well as the foreign investors in Sino-foreign cooperative businesses who do not constitute legal persons of enterprises.
2. Tax rates
In view of different forms of incomes, the Income Tax Law for Foreign-Funded Enterprises and Foreign Enterprises adopts different proportionate tax rates.
(1) For taxable incomes derived by enterprises engaged in production and operations, a 30% proportionate tax rate is adopted. In addition, a 3% local income tax is levied and collected according to the taxable income amount. The two tax rates combined equal 33%.
(2) As regards foreign companies, enterprises and other economic organizations which have not set up agencies or sites within the territories of China but have stock dividends, interests, rents and royalties and other incomes derived from within the territories of China, the income tax with a 20% proportionate rate is levied and collected through deduction in advance.
3. Provisions on tax preferential terms
(1) Preferential terms for aiding new enterprises
For productive foreign-financed enterprises with an operational duration of more than ten years, the enterprise income tax shall not be levied and collected from the first year to the second year beginning from their first profit-making year and shall be levied and collected at a reduced rate of 50% from the third year to the fifth year. The productive foreign-funded enterprises referred to here mean foreign-funded enterprises engaged in the following industries:
a. Machine-building and electronic
industries;
b. Energy industry (excluding pumping petroleum and natural gas);
c. Metallurgy, chemical and building industries;
d. Light, textile and packaging industries;
e. Medical equipment and pharmaceutical industries;
f. Agriculture, forestry, livestock breeding, fisheries and water conservancy;
g. Building industry;
h. Transport industry (excluding passenger transport);
i. Scientific and technological development, geological prospecting and industrial
information consultancy industries, as well as the production equipment and
precision meter maintenance and service industries that serve production directly;
and
j. Other industries designated by the competent taxation department of the State
Council.
(2) Preferential terms to investors in special economic sectors and special areas
a. For foreign-financed enterprises engaged in agriculture, forestry and livestock breeding and for foreign-financed enterprises established in underdeveloped remote areas, in addition to enjoying the same preferential term of tax reductions and exemption in the first five profit-making years beginning from the first profit-making year as newly-established enterprises, they can also continue to enjoy the preferential term of a 15-30% cut in the income tax over the next ten years to come.
b. For foreign-funded enterprises established in the Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones, for foreign-funded enterprises that have set up agencies or sites in the special economic zones to engage in production and operations, for productive foreign-funded enterprises established in economic and technological development zones, and for foreign-funded enterprises established in state high and new technology and industrial development zones designated by the State Council which are designated as high- and new-tech enterprises, the enterprise income tax shall be levied and collected at the reduced tax rate of 15%.
c. For productive foreign-financed enterprises established in coastal open economic areas and in the old urban areas where special economic zones and economic and technological development zones are situated, the enterprise income tax shall be levied and collected at the reduced tax rate of 24%.
d. With regard to productive foreign-financed enterprises established in open coastal economic areas and in the old urban areas where special economic zones and economic and technological development zones are situated or foreign-financed enterprises established in other areas designated by the State Council, those falling under the category of energy, transport, port and wharf projects or other projects encouraged by the state, the enterprise income tax can be levied and collected at the reduced tax rate of 15%.
e. As regards Sino-foreign joint ventures with an operational duration of more than 15 years which are engaged in port and wharf construction, after applications are filed by such ventures and upon approval by the local taxation department, starting from their first profit-making year, the enterprise income tax shall not be levied and collected from the first year to the 5th year, and shall be collected at the reduced tax rate by 50% from the 6th to the 10th year.
f. With respect to foreign-financed enterprises established in the Hainan Special Economic Zone which are engaged in such infrastructure projects as airports, ports, wharves, railways, highways, power stations, coal mines and water control facilities and with respect to foreign-financed enterprises engaged in agricultural development and operations, if they have an operational duration of more than 15 years, after applications are filed by such enterprises and upon approval by the Hainan provincial taxation department, beginning from their first profit-making year, the enterprise income tax shall not be levied and collected from the first year to the 5th year, and shall be levied and collected at the reduced tax rate by 50% from the 6th year to the 10th year.
g. As for foreign-funded enterprises established in the Shanghai Pudong New Area which are engaged in energy and transport construction projects such as airports, ports, railways, highways and power stations, and which have an operational duration of more than 15 years, after applications are filed by such enterprises and upon approval by the Shanghai municipal taxation department, beginning from their first profit-making year, the enterprise income tax shall not be levied and collected from the first year to the 5th year and shall be levied and collected at the reduced tax rate by 50% from the 6th year to the 10th year.
h. For foreign-financed banks, Sino-foreign joint banks, branches of foreign banks and financial companies and other financial institutions, established in special economic zones and other areas approved by the State Council, provided that foreign investors invest capital worth more than ten million U.S. dollars or operating funds allocated by the head office of a bank to a branch exceed 10 million U.S. dollars, if they have an operational duration of more than ten years, starting from their first profit-making year, the enterprise income tax shall not be levied or collected in the first year and shall be levied and collected at the reduced tax rate by 50% from the second year to the third year.
i. As regards Sino-foreign joint ventures established in the state high- and new-tech industrial development zones designated by the State Council which are considered high- and new-tech enterprises and which have an operational duration of more than ten years, after applications are filed by such ventures and upon approval by the local taxation department, starting from their first profit-making year, the enterprise income tax shall not be levied and collected in the first two years.
j. For foreign-financed enterprises established in special economic zones which are engaged in the service sector, whose foreign investment exceeds five million U.S. dollars and which have an operational duration of more than 10 years, after applications are filed by such enterprises and upon approval by the special economic zone taxation department, beginning from their first profit-making year, the enterprise income tax shall not levied and collected in the first year and shall be levied and collected at the reduced tax rate by 50% in the second and third years.
k. If the annual export value of a foreign-funded export-oriented enterprise, after the expiration of the term of exemption from and the reduction of the enterprise income tax granted in accordance with provisions, exceeds 70% of its product output value in the same year, the enterprise income tax may be levied and collected at the reduced prescribed tax rate by 50%. However, if export-oriented enterprises in special economic zones and economic and technological development zones and those which have already paid the enterprise income tax at the 15% tax rate comply with the above-mentioned requirements, the enterprise income tax shall be levied and collected at the 10% tax rate.
l. If foreign-financed technologically advanced enterprises remain as technologically advanced enterprises after the expiration of the term of exemption from and reduction of the enterprise income tax granted in accordance with provisions, the enterprise income tax may be levied and collected at the reduced tax rate by 50% for another three years.
m. As for foreign-funded enterprises engaged in agriculture, forestry and animal husbandry and foreign-funded enterprises located in underdeveloped remote areas, after the expiration of the term of exemption from and the reduction of the enterprise income tax granted in accordance with provisions, with their applications and approval by the competent taxation department of the State Council, the reduced rate of the enterprise income tax to 15% to 30% can continue to apply to their taxable amounts over the next ten years.
n. If a foreign-investor in a foreign-funded enterprise directly re-invests the after-tax profits he/she draws from his/her enterprise in that enterprise, increases the registered capital or takes his/her profits as capital to invest in establishing another foreign-funded enterprise with an operational duration of not less than five years, with the investor's application and approval by the taxation department, 40% of his/her re-investment part of the paid income tax shall be refunded.
(3) Preferential terms for encouraging re-investment
If a foreign business person in a foreign-funded enterprises does not remit abroad the after-tax profits he/she draws but uses them as continued investment within the territories of China with a term of not less than five years, four% of his/her re-investment part of the paid income tax shall be refunded (the local income tax is not included in the preferential terms).
(4) Preferential terms for offsetting losses
The annual losses incurred by foreign-funded enterprises and agencies and sites established by foreign enterprises within the territories of China which are engaged in production and operations may be offset by the income made in the next tax payment year. If the losses cannot be fully offset in the next year, they may continue to be offset in the following year, but the longest offsetting period shall not exceed five years.
(5) Preferential terms in pre-deduction of income tax
a. Profits obtained by foreign investors from foreign-funded enterprises are exempt from the income tax.
b. Incomes from the interests on loans extended by international financial institutions to the Chinese government and the incomes made by state-owned banks from interests are exempt from the income tax.
c. Incomes made by foreign banks from the interests of loans with preferential interest rates extended to Chinese state-owned banks are exempt from the income tax.
d. With respect to the royalties derived by providing patented know-how for scientific research, energy development, the development of the transport sector and production of agriculture, forestry and animal husbandry, as well as the development of important technology, with the approval of the competent taxation department of the State Council, the income tax may be levied and collected at the reduced rate of 10%; and those with advanced technology or with preferential terms can be exempted from the income tax.
In terms of the local income tax, people's governments at all levels have also set forth more preferential terms for reduction of and exemption from the local income tax.
II. Tariffs
To further increase the use of foreign funds, as of January 1, 1998, China does not levy tariffs or the import link value-added tax on imported equipment and technology and a reasonable amount of imported accessories for importers' own use and parts imported together with the equipment in accordance with contracts for the projects involving foreign investment that fall under the category of encouragement and the category B of restriction in the "Guidance Catalog for Industries Seeking Foreign Investment," as well as foreign government loans and loans extended by international financial institutions, except for the commodities listed in the "Catalog of Imported Commodities Not Subject to Tariff Exemption for Projects Involving Foreign Investment."
What should be noted is that China's tax laws provide for many preferential terms and that foreign investors enjoy a whole range of preferential terms. They are advised to employ a public accountants' office with a good knowledge of China's tax laws to make arrangements from the commencement of their investment
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Last modified: July 4,
2000