Provisions for the Reduction and Exemption of Enterprise Income Tax

1. Favorable tax rates:

1) Income tax shall be paid at the rate of 15% by all kinds of enterprises in Shenzhen Special Economic Zone (SEZ) on their income from production, business operation and other sources.

2) Enterprises of a production nature in Shenzhen SEZ shall be subject to EIT at the rate of 10% where current-year output value of all export products amounts to 70% or more of total current-year output value of the products of enterprises after the period of EIT exemption or reduction expires.

 

2. Favorable policy of reduction and exemption:

1) Income tax on enterprises with foreign investment and income tax which shall be paid by foreign enterprises on their income derived from production, business operation and other sources shall be exempt from the 3% local income tax ;

2) Enterprises in Shenzhen SEZ engaged in port and dock construction where the period of operation is 15 years or more shall, following application by enterprises and approval thereof by tax authorities and commencing with the first profit-making year, be exempt from EIT from the first year to the fifth year, and subject to EIT at a rate reduced by half for the sixth year through the tenth year. ※Enterprises in Shenzhen SEZ§ refers to those who are taxed through tax audit, excluding enterprises taxed by means of ※fixed sum and fixed rate §. ※The first profit每making year§ mentioned above means the first tax year in which profits are obtained by an enterprise following commencement of production or business operation. Where an enterprise suffer losses during the early stages after establishment, such losses may be made up by the income of the following 5 tax years. The first profit-making year shall be the year in which profits are obtained after such losses are made up. (The same to the below.)

 3) Enterprises of a production nature in SEZ engaged in industry, agriculture, transportation, and so on , where the period of operation is 10 years or more shall , following application by enterprises and approval thereof by tax authorities and commencing with the first profit-making year, be exempt from EIT from the first year to the second year, and subject to EIT at a rate reduced by half for the third year through the fifth year. Enterprises engaged in basic industries (such as iron, charcoal, metallurgy, electricity and so on ) , or recognized as Advanced Technology Enterprises by the municipal government, shall be subject to EIT at a rate reduced by half for the sixth year through the eighth year.

 

※Enterprises of a production nature§ mentioned above means enterprises engaged in the following industries: machine manufacturing and electronics industries; energy resource industries (excluding exploitation of oil and natural gas); metallurgical , chemical and building materials industries; light industries, and textile and package industries; medical equipment and pharmaceutical industries; agriculture, forestry, animal husbandry, fisheries, and water conservation; architecture industries; communication and transportation industries (excluding passenger-transport); development of science and technology, geological survey and industrial information consultancy directly for services in respect of production , repairs and maintenance of production equipments and precision instruments; and other industries as specified by the Ministry of Finance and the State Administration of Taxation (SAT).

 

※Advanced Technology Enterprises§ refers to enterprises adopting technique, craftsmanship, and main equipments which belong to the foreign invested projects encouraged by the State, and which are characteristic of progressiveness and feasibility, for domestic shortness, research of new products, upgrading of similar products, or increasing export and substituting import.

 

Attention: if the business scope specified in licenses of enterprises excludes production, enterprises shall be denied the above rights for not being recognized as enterprises of a production nature, no matter whether they are engaged in production in practice, or how much production activity amounts to. However, if the business scope contains both production and non-production business, or it is limited to production business despite of the engagement in non-production business in practice, such enterprises shall follow the favorable tax policy below:

 

Enterprises engaged in production and non- production business shall, following application by enterprises and approval thereof by tax authorities and commencing with the first profit-making year, enjoy reduction or exemption where income from production amounts to 50% or more of the overall current income. Where non-production income amounts to 50% or more of the overall current income, enterprises shall be denied the above rights.

4) Enterprises engaged in service-oriented industries in Shenzhen SEZ, where the amount of total investment exceeds US 5 million or 10 million RMB and the period of operation is ten years or more shall, following application by enterprises and approval thereof by the tax authorities and commencing with the first profit-making year, be exempt from EIT in the first year and subject to EIT at a rate reduced by half for the second and third year.

5) New independent-accounting enterprises engaged in the enquiry industries (including technique, law, accounting, audit, taxation and so on), information industries (including: 1. collection, transmission, and process of audit, hi-tech, and economic information; 2. advertising industries; 3. data processing, datebase service, computer maintenance and so on) and technical service industries shall, commencing with the first operation year, be exempt from EIT from the first year to the second year .

6) Service-oriented enterprises engaged in services for the whole process of agricultural production (including providing technology and high-quality seeds, planting protection, seeds matching, machinery plowing, irrigation, insects and disease precaution, weather information, scientific management ,harvest and field-transportation and so on ) shall be temporarily exempt from EIT, where they are in various forms (including agri-tech popularization stations, planting protection stations, water preservation stations, forestry service stations, husbandry service stations, aquatic products stations, seeds-providing stations, agri-mahinery stations, weather forecasting stations, specialized associations for farmers, specialized cooperatives and so on ). Urban institutions shall also be exempt from EIT on their income from the above-mentioned services. Enterprises and institutions engaged in agricultural producing materials at the same time, shall differentiate their income, and pay EIT as stipulated .

 7) New independent-accounting enterprises engaged in post and telecommunication shall, following application by enterprises and approval thereof by tax authorities and commencing with the first operation year, be exempt from EIT in the first year and subject to EIT at a rate reduced by half in the second year.

8) New enterprises engaged in public utilities, commerce, logistics, foreign trade, travel service, storage service, residential service, educational service, health service and the like shall, following application by enterprises and approval thereof by tax authorities and commencing with the first operation year, be exempt from or subject to EIT at a rate reduced by half in the first year .

9) Enterprises suffered from natural disasters, such as wind, fire, water , earthquake and the like shall, following application by enterprises and approval thereof by tax authorities, be exempt from or subject to EIT at a rate reduced by half in a year.

10) New employment-targeting enterprises which employ the urban unemployed to the regulated proportion in the current year shall , following application by enterprises and approval thereof by tax authorities, be exempt from or subject to EIT at a rate reduced by half in 3 years .

 

(1) If the proportion of the current year amounts to 60% or more of the whole employment in the first operation year, enterprises shall be exempt from EIT in 3 years. The formula lies as follows :

the employment - arrangement proportion of the current year = the new employment number of the current year /(the original total employment number + the new employment number of the current year)

 (2) If the new employment proportion of the current year of amounts to 30% or more of the original total number of employment after the period of exemption expires, enterprises shall be subject to EIT at a rate reduced by half in 2 years, following application by enterprises and approval thereof by tax authorities. The formula lies as follows :

the new employment proportion of the current year = the new employment number of the current year /(the original total employment number + the new employment number of the current year)

 (3) The unemployed to enjoy the favorable taxation policy include: unemployed youngsters, lay-offs from the transformation of state-owned enterprises, cut-offs from the state organs and institutions, persons with identity transferred from countryside, and the let-out prisoners.

 (4) ※The total number of employment§ of the above enterprises, means all working staff, with temporary employment, contracted employment, and the retired included. ※Employment-targeting enterprises§ means those who are qualified for the range specified by Article 2 of Management Regulations for the Employment-targeting Enterprises (Decree 66, issued by the State Council in 1990). It is stipulated as follows: featured by independent self-management under the support of state and society, service-oriented enterprises are collective economic organizations which take on the task to arrange the urban unemployed. ※To take on the task to arrange the urban unemployed § means: enterprises must begin to operate with over 60% of their staff urban-employed; during the lasting period of the ex-employed, enterprises should employ a certain proportion of urban under-employed according to local-assigned task and business situation.

 

3. Favorable EIT policy to encourage hi-tech industries:

1) Enterprises of a production nature in Shenzhen SEZ where the period of operation is ten years or more shall, commencing with the first profit-making year, be exempt from EIT from the first year to the second year, and subject to EIT at a rate reduced by half for the third year through the fifth year. Those recognized as advanced technology or hi-tech enterprises after the period of exemption and reduction expires, shall be subject to EIT at a rate reduced by half in 3 years.

2) Since July 1 st 2000, new software-manufacturing enterprises in Shenzhen SEZ shall, commencing with the first profit-making year after recognition, be exempt from EIT from the first year to the second year , and subject to EIT at a rate reduced by half for the third year through the fifth year.

3) Since 2002, enterprises with the width of production line less than 0.8 micron to manufacture integrated-circuit products shall, commencing with the first profit-making year after recognition, be exempt from EIT from the first year to the second year, and subject to EIT at a rate reduced by half for the third year through the fifth year.

4) Enterprises with total investment over 80 billion RMB or with the width of the production line less than 0.25 um, where the period of operation is 15 years or more to engage in manufacturing integrated-circuit products shall, commencing with the first profit-making year after recognition, be exempt from EIT from the first year to the fifth year, and subject to EIT at a rate reduced by half for the sixth year through the tenth year.

5) Those engaged in integrated-circuit designing shall be treated as software enterprises, so as to enjoy the relevant tax policy to software enterprises.

6) Export-oriented enterprises shall, following application by enterprises and approval thereof by tax authorities, subject to EIT at the rate of 10% where the current-year output value of all export products amounts to 70% or more of the total current-year output value of the products of enterprises after the period of EIT exemption or reduction expires .

7) Key software-manufacturing enterprises in national planning layout shall subject to EIT at the rate of 10%, if they aren't exempt from EIT in the current year.

8) New products ranked in national tests and appraisal plans, patented products first manufactured in Shenzhen SEZ and on sale for less than 3 years, new products ranked in provincial tests and appraisal plans, and practical new models first manufactured in Shenzhen SEZ and on sale for less than 2 years, shall be subsidized on their income tax of new profits by municipal financial authorities, after the recognition of relevant departments.

9) Net annual income less than 300,000 RMB from the technique transfer or from technical consultancy, service, training during the process of transfer by internal enterprises and institutions shall be exempt from EIT temporarily. The part over 300,000 RMB shall be levied EIT as stipulated. The above-mentioned business and services by scientific-research units, colleges and universities shall be exempt from EIT temporarily.

10) Payroll expense to working staff by hi-tech enterprises shall be deducted totally as current cost from income before taxation of EIT. So do the payroll and training expenses by software manufacturing enterprises.

11) To promote equipments upgrading and technical transformation, hi-tech enterprises shall accelerate depreciation of production and research equipments according to practical situation, relevant regulations and the approval of tax authorities.

12) Software products purchased by enterprises and institutions with the cost reaching standards of fixed assets or intangible properties shall be treated as fixed assets or intangible properties. To achieve this, internal enterprises should apply to competent tax authorities, foreign invested enterprises with total investment over US 30million should apply to SAT, and foreign invested enterprises with total investment less than US 30 million could condense depreciation or amortisation period with 2-year period as the shortest, following the application by enterprises and approval thereof by competent tax authorities.

13) As for the production equipments of enterprises engaged in manufacture of integrated circuit , internal enterprises should apply to competent tax authorities, foreign invested enterprises with total investment over US 30million should apply to the SAT, and foreign invested enterprises with total investment less than US 30 million could condense the depreciation period with 3-year period as the shortest, following the application by enterprises and approval thereof by competent tax authorities.

14) From Jan. 1 st , 2002 to Dec 31 st, 2010, any investor of an integrated-circuit manufacturing or assembling enterprise which reinvests its share of profit obtained from the enterprise directly into that enterprise by increasing its registered capital, or uses the profit as capital investment to establish other integrated-circuit manufacturing or assembling enterprises with the operation period not less than 5 years, shall be refunded 40% of the income tax already paid on the reinvested amount. If the investor withdraws its investment before the expiration of the period of 5 years, it shall repay the refunded tax.

15) From June 24 th , 2000 to Dec 31 st 2010, general VAT taxpayers who sell the self-exploited and self-manufactured software products shall be refunded the extra 3 % of VAT tax burden, after being levied at the rate of 17%. The refunded tax shall, excluded from the taxable income to be exempt from EIT, be used to research and exploit software products and expand production capacity.

16 Real technological development expense of enterprises shall be deducted from taxable income before EIT. If the technological development expense of the current year within the territory of PRC increases by 10% of that of the year before, 50% of the expense of the current year shall be deducted from taxable income before EIT. If the increasing rate is over 10%, and 50% of the expense is larger than the current-year taxable income, the deduction shall be limited to the current-year taxable income, while the excessive part shall not be deducted in the current year or later.

 

4. Favorable EIT policy for institutions and social organizations:

 

The following income of institutions and social organizations shall be exempt from EIT. To be concrete:

1) governmental fund, capital, and extra income which are established and collected under the approval of the State Council or the Ministry of Finance, and governed by financial budget or special off-budget accounts ;

2) administrative charges which are governed by financial budget or special off-budget accounts under the approval of the State Council or provincial governments, or under the co-approval of provincial financial and planning departments;

3) the off-budget capital which shall not be governed by special off-budget accounts upon the approval by the Ministry of Finance;

4) income from the after-EIT profits of independent accounting business units affiliated to institutions;

5) special subsidies for the development of public utilities from competent or higher-level authorities of institutions;

6) governmental subsidies achieved by social organizations ;

7) member fees collected according to regulations of civil administration or financial authorities of provincial or higher level;

8 ) social donations;

9) other items approved publicly by the State Council.

 

5. Favorable EIT policy for civil-welfare enterprises:

Civil-welfare enterprises established by civil administration and social-welfare enterprises established by sub-district offices shall, with the employment rate of 4 kinds of handicapped persons reaching 35% of total employment, be exempt from EIT temporarily. Such enterprises shall subject to EIT at a rate reduced by half with the above-mentioned rate between 10% to 35% .

 

6. Reduction and exemption regulations to provision for EIT :

※Provision for EIT§ refers to an income tax levied on any foreign corporation, enterprise or economic equity which has no establishment in china but derives dividend, interest, rental, royalty, guarantee fees and other income from sources in China. ※Taxable income§ means all income with no reduction of expenses if there is no otherwise regulation. It is stipulated by tax laws that any foreign enterprise which has no establishment in China but derives dividend, interest, rental, royalty, guarantee fees and other income from sources in china; or though it has an establishment or a place in China, the said income is not effectively connected with such establishment or place, shall pay an income tax of 10% on such income, or shall enjoy favorable tax policy of exemption or reduction for the following indirect investment:

1) The profit of a foreign investor derived from an enterprise with foreign investment shall be exempt from income tax. ※Profit§ means income through rights to share profit in proportion to investment or through other non-claim relations, in a word, dividend.

2) The following interests are exempt from income tax:

(1) Income from interest on loans made to Chinese government or Chinese state banks by international financial organizations ;

(2) Income from interest on loans made at a preferential interest rate to Chinese state banks by foreign banks, including interest on loans made at the rate of international inter-bank call loan by foreign banks, and interest on loans made to Chinese state banks or to trust and investment enterprises approved by the State Council to engage in international transaction of foreign currency.

(3) Income from interest by deferred payment on the buyers' credit provided by sellers to Chinese enterprises for the purchase of technical equipments and goods;

(4) Income from interest by credit or trading contracts between foreign and Chinese enterprises(excluding those in SEZs) to provide loans, advance payments and deferred payments, shall be levied at the rate of 10% during the valid period of the contracts. Among these, income from interest on favorable and low-interest loans shall, following the application by enterprises and approval thereof by tax authorities, be exempt from income tax;

3) Income tax on royalty received for the supply of technical know-how in scientific research, exploitation of energy resources, development of communication industries, agricultural, forestry, and animal husbandry production, and the development of important technologies may, upon the approval by SAT under the State Council, be exempt from income tax, where the technology supplied is advanced or the terms are preferential.

 

※Profit from enterprises with foreign investment§ mentioned in Item 1) means income from the net profit after EIT has been reduced or exempted or paid by enterprises with foreign investment. ※international financial organizations§ mentioned in Item 2) refers to International Monetary Fund, the World Bank, Asian Development Bank, International Exploitation Association, International Fund for Agricultural Development and so on; ※Chinese state banks §mentioned in Item 2) refers to People's Bank of China, Commercial and Industrial Bank of China, Agricultural Bank of China, Bank of China, Construction Bank of China, Communication Bank of China, Investment Bank of China, and other financial organs approved by the State Council to engage in international transaction of foreign currency. Reduction and exemption range of ※royalty§ mentioned in Item 3) refers to the following items :

 

1 royalty received for the supply of the following know-how in agricultural, forestry, animal husbandry and fishery development:

(1) know-how to improve soil ,exploit barren mountain, and make use of natural resources;

(2) know-how to cultivate new breeds of animals and plants and new technique to produce agri-chemicals with high quality and low poison;

(3) know-how to manage production scientifically, maintain ecological balance, and strengthen the ability to combat natural disasters;

2 royalty received for the supply of know-how to sci-institutions, colleges and other hi-tech organs for hi-tech researches and experiments;

3 royalty received for the supply of know-how to exploit energy resources and develop communication industries;

 

4 royalty received for the supply of know-how to preserve energy and prevent environmental pollution;

 

5 royalty received for the supply of the following know-how to exploit important hi-tech :

(1) significant technique to produce advanced electrical equipments;

(2) nuclear technology;

(3) technique for the mass production of integrated circuit;

(4) technique to produce light-integrated or micro-wave semi-conductors, micro-wave integrated circuit, and micro-wave electron tubes;

(5) technique to produce computers and mini-processors of super speed ;

(6) technique of light-cabled communication;

(7) technique to directly transmit electricity of super-high pressure from long distances;

(8) technique to liquidize and utilize charcoal and gas.

 

7. Favorable regulations for reinvestment:

Any investor of an enterprise with foreign investment which reinvests its share of profit obtained from the enterprise directly into that enterprise by increasing its registered capital, or uses the profit as capital investment to establish other enterprises with foreign investment, where the operation period is not less than 5 years, shall be refunded 40% of the income tax already paid on the reinvested amount. The above-mentioned investors reinvesting to establish export-oriented or advanced technology enterprises, shall be refunded total of the income tax already paid on the reinvested amount .