Update on PRC Enterprise Income Tax

Since it released the new Enterprise Income Tax (EIT) Law and Detailed Implementation Rules for the EIT Law (DIR), the PRC government has supplemented these with the following major Notices:

	Guofa (2007) 39
	Guofa (2007) 40
	Caishui (2008) 1
	Guoshuifa (2008) 23
	Guokefahuo (2008) 172

Tax relief during transitional periods
Notice Guofa (2007) 39 allows for enterprises established on or before 16 March 2007 to be "grandfathered". That means the EIT rate for those which enjoyed a lower rate under the previous law will be progressively increased to 25% over a five-year period starting in 2008.

For example, if an enterprise paid EIT at a rate of 15% during 2007, it will be charged the following rates over the next five years:

2008: 18%
2009: 20%
2010: 22%
2011: 24%
2012: 25%

On the other hand, an enterprise which paid an EIT rate of 24% in 2007 will be charged a rate of 25% during 2008.

Enterprises that previously enjoyed fixed-period preferential EIT arrangements (for example, a two-year tax exemption period followed by a 50% tax reduction for three years) will continue to benefit from the tax holiday prescribed under the old tax law until the tax holiday ends. 2008 will be regarded as the first profit-making year of those enterprises which were entitled to preferential treatment concerning EIT under the old law, but which have not previously begun their first profit-making year.

Tax incentives
One of the new EIT Law's major changes is that tax incentives are now granted to companies in industries that are encouraged or supported by the State, rather than on the basis of their geographical location. Other than those allowed under the new EIT Law and DIR, the PRC government will also grant tax incentives to newly established High/New Technology Enterprises in designated areas.

Notice Guofa (2007) 40 allows a two-year tax exemption period followed by a three-year 50% tax-rate reduction period for High/New Technology Enterprises that were established after 1 January 2008 in the Shanghai Pudong New Zone, Shenzhen, Zhuhai, Shantou, Xiamen and Hainan special economic zones. It should be noted that the two-year tax exemption period takes effect during the first year that a qualified enterprise generates revenue, rather than profit.

Notice Caishui (2008) 1 provides tax incentives to the following industries:

Software production companies

	tax refunded under the VAT refund policy that is used by enterprises for R&D and the expansion of their production facilities is exempt from EIT
	a recognised newly established software production enterprise may enjoy a two-year EIT exemption period followed by a 50% reduction for three years
	staff training expenses are fully tax deductible
	enterprises may enjoy a shorter depreciation/amortisation period (a minimum of two years) for their software purchases

Integrated circuit companies

	integrated circuit (IC) design companies may enjoy all the above tax incentives available to software production enterprises
	subject to the approval of the tax authorities, they may enjoy a shorter depreciation period (a minimum of three years) for production equipment
	IC production enterprises with a minimum investment of RMB 8 billion or which produce ICs with a width of less than 0.25um will be eligible for   o a reduced EIT rate of 15%   o a further five-year EIT exemption period plus a 50% reduction in EIT for an additional five years, provided the term of operation is more than 15 years
	IC production enterprises that produce ICs with a width of less than 0.8um will receive a two-year EIT exemption period, followed by a 50% reduction for three years
	enterprises that operate for at least five years and use their post-tax profits to establish an IC production or packaging enterprise between 1 January 2008 and 31 December 2010 will be eligible to receive:   o a 40% refund of the tax they have paid, or   o an 80% refund of the tax they have paid if they are re-investing in China's western region

Securities investment funds
EIT is being temporarily waived on:

	income derived from the securities market, including gains from sales of stocks and bonds, and interest and dividends derived by securities investment funds
	income derived from investments in securities funds
	gains derived by securities investment fund managers from the trading of stocks and bonds

Tax incentives repealed
At the same time, a number of previous tax incentives have now been repealed, including:

	tax refunds on the reinvestment of after-tax profits (unless the enterprise concerned completed the re-investment and registered with the local office of the State Administration of Industry and Commerce before 31 December 2007)
	tax credits for purchasing equipment manufactured inside the PRC after 1 January 2008
	all other previous notices and incentives, except for those specified in the EIT Law, DIR, Guofa (2007) 39, Guofa (2007) 40, Caishui (2008) 1 and Guoshuifa (2008) 23

Withholding tax on dividends
Under Caishui (2008) 1, a zero percent rate of withholding tax on dividends will still apply if the repatriated dividends were accumulated prior to 1 January 2008. Under the DIR, a 10% dividend withholding tax will apply for repatriated dividends earned after 1 January 2008.

Measures on High/New Technology Enterprises
Measures Concerning High/New Technology Enterprises and the Catalogue of High/New Technology Supported by the State were both published on 14 April 2008. The former contains detailed definitions of High/New Technology Enterprises, as well as the processes and procedures for applying to receive this designation. Approved High/New Technology enterprises will enjoy a reduced EIT rate of 15%.

However, it should be noted that further Assessment Guidelines will be forthcoming. These will contain more details regarding the criteria and qualifications that apply to applicants.

  

	Winnie Tsui
	winnie.wy.tsui@gthk.com.hk