The Implementation Rules for China's new Corporate Income Tax Law

The State Council released the Implementation Rules to the CIT Law on 6 December 2007.

In this blog, I highlight some of the key changes brought by the new Implementation Rules.

1. Withholding Tax

    The withholding tax rate under the CIT Law on China-sourced passive income(for example,dividends,interests,royalties,rentals,gains on transfer of properties,etc.)received by a non-tax resident enterprise is 20%. Under the Implementation Rules,the withholding tax rate is generally reduced to 10%,which may be further reduced under a bilateral income tax treatly to which China is a party.

     In contrast with the current exemption of withholding tax on cross-border dividends in China, the 10% withholding tax may further increase the tax cost in China of offshore holding structures. The effective use of the China treaty network will become more important once the CIT Law comes into effect.

2. High and new technology enterprises

    The CIT Law provides a preferential tax treatment for "high and new technology"enterprises in the form of reduced CIT rate of 15%. The Implementation Rules emphasises the ownership of "core proprietary intellectual property" being essential to the qualification for this preferential rate.

     The Implementation Rules also refer to certain categories of products and services to be prescribed in a catalogue by relevant government agencies,as well as certain threshold requirements for R&D expenditures,the number of R&D personnel,and so on. Neither the catalogue nor the thresholds,however,have been promulgated as the date of this publication. Enterprises,therefore,cannot be certain whether they will quality for this substantial tax reduction under the new CIT Law.

     In addition,enterprises involved in high and new technology related activities may be entitled to other incentives under the Implementation Rules, including:

•    A 50% bonus deduction or amortisation for R&D expenditures
•    a reduction in taxable income for a portion of the venture capital invested in mid-to small-size high and new technology enterprises.
•     a combination of tax exemption and tax reduction for income derived from technology transfers
•     accelerated depreciation or shortend depreciable life on fixed assets.

3.  Tax incentives

     Existing tax incentives under the current income tax law are om most cases teminated with limited grandfathering relief,while new incentives are introduced under the Implementation Rules.

     Enterprises investing in qualified infrastructure projects and qualified environmental protection and energy and water conservation projects will be entitled to three-year tax exemption,followed by a three-year 50% reduction,with the incentive beginning from the first year when income is derived. The existing "two-year holiday/three-year reduction"preferential treatment for manufacturing enterprise established prior to the promulgation of the CIT Law os one of the tax incentive that is grandfathered.

    Tax incentives that will be terminated under the Implementation Rules include:

• exemption on cross-border dividend repatriation
• tax refunds on reinvestestment
• extendded tax holidays(for three years)for FIEs with advanced technologies.
• extended tax holidays for export -oriented FIEs
• investment tax credits for investment in domestic equipment
• "two-year exemption,three-year 50% reduction" for additional investment
• withholding tax examption on technology transfers.

    The Implementation Rules also set out certain preferential tax treatment that is not available under the existing corporate income tax rules. For example, a reduced tax rate of 20%,as opposed to the regular rate of 25%,for small scale enterprises with low profits and a 50% bonus amortization on certain R&D expenditures.

   More concerning points on this issue, will be continued.......