NEW IMPLEMENTATION RULES OF THE UNIFIED PRC INCOME TAX

Document Sample
NEW IMPLEMENTATION RULES OF THE UNIFIED PRC INCOME TAX Powered By Docstoc
					NEWSLETTER

NEW IMPLEMENTATION RULES OF THE UNIFIED PRC INCOME TAX LAW1
by Daniel Chan, Patrice Marceau and Doris Ho, Hong Kong. February 2008 Further to our Tax Alert of April 2007 regarding the new Income Tax Law of the People's Republic of China (the "New EIT Law"), the State Council issued Detailed Implementation Regulations of the Enterprise Income Tax Law of the People's Republic of China (the "Regulations") on 6 December 2007 to provide (some) additional guidance on the meaning of the provisions of the New EIT Law as well as lay down ground rules on various conditions to claim tax deductions, tax incentives, amortization, etc. Unfortunately, but perhaps not surprisingly, the Regulations do not resolve all outstanding issues raised by the New EIT Law. Further clarifications are expected through circulars to be issued from time to time by the State Administration of Taxation ("SAT"). For instance, on 26 December 2007, the SAT (already) issued two Circulars which are of relevance for foreign investors2. Also, the interpretations of State, city and district bureaus throughout the country will have to be closely monitored to assess how the New EIT Law and the Regulations are applied on the “ground”. With the coming into force of the New EIT Law and the Regulations on 1 January 2008, the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises ("Old EIT Law for Foreign Investment") and the Provisional Regulations of the People's Republic of China on Enterprise Income Tax ("Old EIT Law for Domestic Investment") have ceased to apply effective from the same date. The transition is immediate and there are very few grandfathering rules (mostly in respect of certain tax incentives reviewed below). This Tax Alert discusses key aspects of the New EIT Law and the Regulations as well as the two (so far!) subsequent tax circulars.

1.

INCIDENCE OF TAXATION

The New EIT Law classifies taxpayers as either "Resident Enterprises" or "Non-Resident Enterprises". A Resident Enterprise is subject to EIT on its worldwide income, whereas a Non-Resident Enterprise is subject to EIT either on income derived from (or attributable to) an "establishment" in China or on its China-sourced income. 1.1 Resident Enterprises A resident Enterprise is either an enterprise incorporated in China pursuant to China laws and regulations or an enterprise incorporated pursuant to foreign laws and regulations but with a "place of actual management" in China. Under the Regulations, the term of "place of actual management" is defined as a place out of which an enterprise exercises substantial overall management and control on its production and operation, personnel, financial and property, etc. The definition is not particularly helpful as it fails to provide any clarity on the extent of activities required to reach the level of having a "place of actual management". The implication is that local tax bureaus will retain considerable Under the Regulations, the term of "place of actual management" is defined as a place out of which an enterprise exercises substantial overall management and control on its production and operation, personnel, financial and property, etc. The definition is not particularly helpful as it fails to provide any clarity on the extent of activities required to reach the level of having a "place of actual management". The implication is that local tax bureaus will retain considerable autonomy in interpreting the concept and this may well lead to widely diverging interpretations from bureaus to bureaus. This area will have to be closely monitored for enterprises considering managing regional operations from China.
1

It should be noted that there is no official English translation of the new law and regulations. As a result, it is possible that we are using in this article English

translations which differ from those used by others in translating the legislation. Ultimately, it is only the Chinese version which will be relevant for interpretation purposes.
2

Notice Concerning Provisional Arrangement and Implementation of preferential Income Tax Treatments passed by he State Council on 26 December 2007 (Guo

Fa [2007] No. 39) and Notice Concerning Provisional Arrangement on Preferential Tax Treatments Applying to High and New Technology Enterprises in Special Economic Zones and Shanghai Pudong New Area passed by the State Council on 26 December 2007 (Guo Fa [2007] No. 40)

NEWSLETTER

At this stage, to minimize the risk that non-China companies of a group could be deemed to have a place of actual management in China, management of the group should ensure (at least) that: • the directors of the foreign companies do not reside in China or sign resolutions in relation to the foreign companies in China; the official corporate or financial books of the foreign companies of the group are not kept in China; the foreign companies should maintain at least some high level executive and administrative functions outside China; and the general meetings of the shareholders of the foreign companies should not be held inside China.

• •

•

As the practice develops in this area, it may well be that doing the above will be more than sufficient but it could also be that additional safeguards will be required. In the absence of clearer guidance, it is simply impossible to tell at this stage. Before moving on to other topics, it is worth noting that “word on the street” is that the concept of "place of actual management" was introduced to counter "round-tripping" investment (i.e., domestic individuals or enterprises establishing offshore companies to hold PRC-based investments). In our view, little comfort should be gained out of that. Indeed, even if we assume that this was the reason for the new rule, it remains to be seen whether the authorities will restrict its application only to such circumstances. Clearly, experience in China and other jurisdictions shows that, once armed with vague widely defined concepts, there is a temptation for a tax authority to extend it beyond its original intent (particularly if it can generate additional revenues!). This can be particularly true in China where, in the absence of clear central guidance, State, city and district bureaus throughout the country are vested with considerable latitude for interpreting and applying the law. Over time, we suspect that many different practices will evolve depending on the specific tax authority dealing with the issue. 1.2 Non-resident Enterprises "Non-resident Enterprise" refers to an enterprise established pursuant to foreign laws and regulations which does not have its "place of actual management" within China. Non resident Enterprises are taxed in China on the profits attributable to an establishment in China (even offshore profits) as well as on profits from passive income earned from China sources. Under the Regulations, the term of “establishment” means entities or places that carry out production and operation activities within the territory of China, including: • • • • management entities, operational entities, offices; factories, farms, places of extraction of natural resources; places where labour services are rendered; places where engineering projects such as construction, installation, assembling, repair or exploration is conducted; other entities or sites conducting business activities; and "business agents" conducting business activities within the territory of China, including entrusting entities or individuals to sign contracts habitually on behalf of their principals, storing and delivering their principals’ goods or commodities and conducting other business activities habitually on behalf of their principals.

• •

The definition of "establishment" under the Regulations is substantially similar to that under the Old EIT Law for Foreign Investment. One significant difference however: the concept of "business agents" is considerably wider than before. Under the previous rules, only agents which were habitually signing business contracts or storing and delivering goods on behalf of the Non-resident Enterprises could be considered “establishments”. Under the new regime, such agents would be merely one subset of the types of agents which may cause an “establishment” to have been created in China. There is no guidance at the moment as to who may be considered an agent for these purposes.

NEWSLETTER

2.

WITHHOLDING INCOME TAX ("WIT")
2.1 Tax rate The New EIT Law provides for 20% WIT on the passive income (including dividend, royalty, interest, rental income, etc.) derived by Non-resident Enterprises in China. However, the Regulations provide for a reduction of the rate from 20% to 10%. This is the same treatment as applied before except for one major exception: the longstanding WIT exemption on dividend income paid to foreign investors is no longer applicable. There is by now no planning that can be done to avoid the new rule. 2.2 Incidence and Timing of WIT The Regulations impose the liability for WIT on the payor. The payor is the withholding agent and is required to withhold at source the WIT on the earlier of when the payment is actually made or becomes due. Specifically, the withholding obligation arises: • • for dividend, when the dividend is declared; and for royalty, interest and rental, when the payment is due according to the relevant contract.

2.3 Use of offshore holding companies A Non-Resident Enterprise may consider interposing an offshore holding company in a jurisdiction with which China has a tax agreement in order to mitigate the WIT liabilities. The table below compares the WIT rates applying to jurisdictions usually considered for investments in China:

No Treaty Interest Dividends Royalties Capital gains 10% 10% (4) 10% 10%

Hong Kong 7% 5% (5) 7% 10% (7)

Mauritius 10% 5% 10% 10% (7)

Barbados (1) 10% 5% 10% Tax exempt

Singapore (2) 0%/7%/10% (3) 5% (5) 6%/10% (6) 10% (7)

1. 2. 3. 4. 5. 6.

China-Barbados tax treaty is expected to be revised shortly. China-Singapore tax treaty has come into effect from 1 January 2008. 0% applies to interest income derived by the specified governmental bodies of Singapore from China; 7% applies to interest income derived by a Singapore bank or financial institution from China; and 10% for all other cases. Prior to the 1 January 2008, after-tax dividends derived by foreign investors from foreign investment enterprises ("FIEs") were exempt from WIT. WIT rate at 5% will apply if the shareholding of a Singaporean or Hong Kong resident company in an FIE is 25% or more. If not, WIT rate at 10% will apply. WIT rate at 6% will apply on royalty payment paid by a Chinese company to a Singaporean resident company for the use of, or the right to use, industrial, commercial or scientific equipment. WIT rate at 10% will apply for all other cases. Full tax exemption in China is available on capital gain derived by resident companies from Hong Kong, Singapore and Mauritius from the disposal of shares in a Chinese company, provided that (i) the foreign investor's shareholding in the Chinese company is less than 25%; and (ii) the Chinese company is not primarily comprised of immovable property.

7.

NEWSLETTER

3.

TAXABLE INCOME AND DEDUCTIBLE EXPENSES

The tax rules and provisions set out in the Regulations for ascertaining taxable income and deductible expenses generally follow the new accounting standards in China. However, for purposes of calculating an enterprise's taxable income, any discrepancies or inconsistencies will be resolved on the basis of the New EIT Law, the Regulations and circulars which may be issued from time to time. Other than income calculated as per the financial statements, the Regulations provide that an enterprise may have to account for a deemed income arising from any exchanges which do not involve monetary consideration (e.g. a barter transaction) as well as the provision of goods, properties or services as a donation (i.e. for consideration less than market value), debt repayment, sponsorship, fund raising, advertisements, samples, staff welfare, profit distributions, etc. On the expense side, the general rule is that an enterprise will be allowed to deduct reasonable expenses actually incurred by the enterprise and relevant to the earning of its income. "Reasonable expenses" refers to necessary and normal expenses in line with the enterprise's ordinary business operations. In addition, the following are expenses subject to special treatment. • Employee related expenditures: Reasonable salaries and wages actually incurred by an enterprise can be deducted. Domestic enterprises will no longer be subject to statutory caps as was the case under the previous regime. There is however no definition or guidance as to what constitutes "reasonable salaries and wages" for EIT purposes. Expenditures subject to a cap for tax deductions:

•

Employee welfare expenses Trade union expenses Employee education expenses

• • • •

No more than 14% of total salary expenses No more than 2% of total salary expenses No more than 2.5% of total salary expense Exceeding portion can be carried forward to subsequent years No more than 60% of actually incurred entertainment expenses; AND Deduction cannot exceed 0.5% of annual turnover No more than 15% of total sales revenue Exceeding portion can be carried to subsequent years No more than 12% of annual turnover Limited to donation to qualified charitable organizations

Entertainment expenses

•

• Advertising expenses

• •

Charitable donation

• •

•

Inter-company charges: Management fee paid between enterprises, rental and royalty fee paid between operating branches and interest expenses paid between operating branches of non-bank enterprises are not allowed to be deducted.

NEWSLETTER

•

Depreciation of fixed assets: Straight line method should be used for calculating the depreciation expenses. In addition, the Regulations remove a pre-determined prescribed residual value to assets (usually at least 10%) and now allow the enterprises themselves to assign, on a reasonable basis, the residual value based on the nature and use of the specific asset. This will allow full depreciation allowances in respect of assets with no residual value after use. The Regulations also provide minimum depreciation periods for different categories of fixed assets. However, for fixed assets subject to rapid technological obsolescence or constant shocks and erosion, the depreciation period can be less than otherwise provided upon application to the relevant tax bureau of the enterprise justifying a shorter period. Similarly, an enterprise can apply to its relevant tax bureau for use of a depreciation method other than straight line (such as double-declining balance method and sum-of-the-years-digits method) in appropriate circumstances.

•

Amortization of intangible assets: Straight line method should be used. Generally, the minimum amortization period for intangible assets will be at least 10 years. Amortization of goodwill: Amortization expenses relating to self-developed and acquired goodwill is allowed except for goodwill acquired as a result of the disposal of the entire business or upon liquidation.

•

4.

PREFERENTIAL TAX TREATMENTS

The new EIT regime provides special incentives for a number of industries as well as for some geographical areas. We have set out in the Annex the more significant tax incentives relevant to foreign investors.

5.

GRANDFATHERING
5.1 Grandfathering of tax holiday FIEs obtaining business license after 16 March 2007 are no longer entitled to any tax holiday. FIEs who had obtained their business license before 16 March 2007 and were enjoying tax holidays can continue to enjoy such preferential treatments for the remaining period. However, where such FIEs have yet to begin their tax holidays, they will be deemed to begin in 2008 irrespective of their profits position. 5.2 Grandfathering of preferential tax rate The new tax rate (i.e. 25%) will be phased in over a 5-year transitional period as follows: • • • • • • 2008: 18% 2009: 20% 2010: 22% 2011: 24% 2012: 25% Thereafter: 25%

5.3 Grandfathering of enterprises in Shanghai Pudong The Old EIT Law for Foreign Investment provided that manufacturing FIEs or High and New Technology Enterprises ("HNTE") located in Shanghai Pudong New Area ("Shanghai Pudong") were entitled to a reduced tax rate at 15%. However, in practice, all FIEs, regardless of whether they were certified as manufacturing FIEs or HNTEs, in Shanghai Pudong enjoyed the reduced tax rate at 15%. It is unclear in the New EIT Law, the Regulations or Guo Fa [2007] No. 39 whether those non-manufacturing FIEs and non-HNTEs will be eligible to grandfathering. We expect that further circulars will be issued to provide clarification on this issue.

NEWSLETTER

6.

NEW SECTION ON SPECIAL TAX ADJUSTMENT

This particular section of the New EIT Law deals with a number of rules of general application in respect of the application of the new regime. They include rules dealing with: tax adjustment methods in related transactions, Cost sharing arrangements, Transfer pricing document requirements, Controlled foreign company, Debt equity ratio, General antiavoidance rule and Interest levied on special tax adjustments. 6.1 Tax adjustment methods in related transactions The New EIT Law and Regulations generally follow the previous regime in relation to the tax adjustment methods available to the tax authorities upon reviewing inter-company transactions. Generally, there is no preferential method for tax adjustment purposes. The only rule is to reach a result which the tax authorities consider just and reasonable. What that actually means is likely to vary widely from bureaus to bureaus. 6.2 Cost sharing arrangement (“CSA”) A CSA is an arrangement between two or more related parties to share the costs and risks associated with developing or acquiring intellectual property, and/or providing or receiving services under an agreed-upon method. Under the CSA, each participant is intended to benefit from the results of such arrangement. According to the Regulations, a CSA should be devised on arm's length principles with cost allocated to each entity commensurate with its expected benefit from the arrangement. Timely documentation on the terms of the CSA will have to be filed with the relevant tax authority before deduction of the relevant costs will be authorised. However, the Regulations are silent on the timing for filing, the information/documents to be filed, procedures, etc. Again, upcoming circulars should clarify the issues. 6.3 Transfer pricing documentation requirements The Regulations require that an enterprise must submit the following documents/information with its annual tax returns: • • Pricing policy, calculation method and illustration of the related party transactions; Resale or final prices of related party transactions that involve the transfer of assets, asset use right and/or the provision of services; and Product price, pricing method and profit level, etc., of the comparable enterprises.

•

It is expected that further disclosure will be required in the context of related party transactions. Other than the annual filing requirements set out above in relation to related party transactions, the Regulations also provide that an enterprise subject to a transfer pricing investigation, as well as its related parties and other enterprises involved in the transactions, may be required to timely provide additional relevant information (such as pricing policy, calculation method and illustration of the related party transactions) as may be requested by the authorities. Failure to produce the requested documents will empower the tax authorities to levy tax on the enterprise based on a deemed taxable income, assessed according to (i) industry profit rate; (ii) cost plus reasonable expenses and profits; (iii) reasonable percentages of overall profits of the group company; or (iv) any other reasonable method as may be appropriate in the circumstances.

NEWSLETTER

6.4 Controlled foreign corporation ("CFC") As Chinese corporate investors begin to spread their wings outbound, the New EIT Law and Regulations introduce rules to tax them on the basis of CFC legislation common in sophisticated tax jurisdictions. The rules apply where the effective tax rate applicable in the relevant jurisdiction is substantially lower (50%) than China, i.e., an effective tax rate below 12.5%. Under the CFC rules, Chinese investors may be taxed as dividend distribution on their portion of undistributed or under-distributed profits retained by the CFC. The rules however acknowledge that a CFC is entitled to retain earnings equivalent to that necessary to secure "reasonable needs for its continuing business operation". The definition of CFC according to the Regulations is • A foreign company with (a) at least 10% of voting shares directly or indirectly held by a Resident Enterprise or a related Chinese resident individual shareholder; and (b) at least 50% of total shares jointly held by a Resident Enterprise or a related Chinese resident individual shareholder; or A company effectively controlled by a Resident Enterprise or a Resident Enterprise and a related Chinese resident individual shareholder because of its shareholding or other connections, such as capital, operations or sales, etc.

•

6.5 Debt equity ratio According to the New EIT Law, the debt equity ratio in respect of related parties must not exceed a certain threshold to preserve the right to a full deduction of the interest expense. Any interest arising from the debt exceeding the debt equity ratio will not be deductible for EIT purposes. The Regulations provide that "debt investment from related parties"4 includes any financing that an entity has received directly or indirectly from related parties to the extent that the entity is required to repay the principal and interest or any financing from a related party compensated by means similar to interest. The Regulations further stipulate that debt investment received indirectly from a related party includes: • • • debt investment provided by an unrelated party but through a related party; debt investment provided by an unrelated party but guaranteed or secured by a related party; or other indirect debt investment from related parities in the nature of debt.

With the introduction of a debt equity ratio, foreign investors may have to review structures financed through banks but somehow secured by a related foreign party. 6.6 General anti-avoidance provision The general anti-avoidance provision in the New EIT Law is similar to those adopted in many other jurisdictions. If an enterprise's transaction or business structure does not have a reasonable business purpose but results in a reduction of taxable income, the PRC tax authorities will be entitled to adjust the enterprise's taxable income as it deems appropriate. According to the Regulations, "without reasonable business purpose" means "with the main purpose to obtain tax benefits such as reduction, elimination or deferral of tax payments". However, the Regulations are silent on the meaning of "main purpose" which leaves considerable uncertainty as to the exact scope of the anti-avoidance rule. Local bureaus’ interpretations will have to be closely monitored to ascertain what the new rule means on the “ground”.

4

According to Article 109 of the Regulations, related parties refer to enterprises, other entities and individuals, which have any of the following relationships with an

enterprise: - direct or indirect control over such matters as finance, business operations, purchases and sales, etc., - both directly or indirectly controlled by a third party; - other relationship due to associated interests.

NEWSLETTER

6.7 Interest levied on special tax adjustments A special interest can now be levied on unpaid taxes arising from any special tax adjustment. The new interest increases the cost of non compliance and sends the message that taxpayers need to maintain proper accounts and operate on the basis of sound business practices. The interest levy mechanism is different from that used for interest payable on non-payment or underpayment of taxes (where interest is a daily surcharge of 0.05% of the outstanding amount from the due date to the date of payment). The new interest levy takes the form of daily interest calculated: • where the taxpayer has provided adequate transfer pricing documentation, on the basis of the RMB base lending rate issued by the People's Bank of China ("PBOC"); and where the tax payer has failed to produce adequate transfer pricing documentation, at that rate plus 5%.

•

Also of note, the period for calculating the interest will begin on 1 June of the year after the tax year to which the tax adjustments relate up to the date of payment. It should be noted that the interest levied on special tax adjustment is an administrative levy imposed by the Chinese government and therefore, is not a deductible expense for EIT purposes.

7.

CONCLUSION
The new EIT regime in China is clearly a significant reform of the Chinese tax system. By aiming to provide a level playing field between domestic and foreign enterprises, the New EIT Law affects negatively mostly foreign enterprises which previously enjoyed preferential treatment under the Chinese tax system. The new system increases both their tax liabilities and their filing requirements. In addition, there are many areas where the New EIT Law and Regulations provide no or limited guidance and this means that State, city and district bureaus will continue to exert considerable influence on how provisions will be applied in their particular area. Over time, the result may well be a tapestry of different practices and interpretations which will have to be closely monitored in planning entry or further investment in China. For more information or advice on the above, please visit our website www.dlapiper.com or contact our China tax professionals.

Daniel Chan Partner T: +852 2103 0821 E: daniel.chan@dlapiper.com Patrice Marceau Partner T: +852 2103 0554 E: patrice.marceau@dlapiper.com Doris Ho Associate T: +852 2103 0759 E: doris.ho@dlapiper.com

NEWSLETTER

ANNEX: PREFERENTIAL TAX TREATMENTS
(I) Exempt Income

Income exempted from EIT Interest from state issued bonds Dividends or stock dividends on equity investment derived in China by: • • • Resident Enterprise from another Resident Enterprise Non-Resident Enterprise with “establishment or site” from another Resident Enterprise Except publicly-issued tradable stock held for a consecutive period of less than 12 months

Relevant Sections Art. 26(1) Law Art. 82 Regulations Art. 26(2)(3) Law Art. 83 Regulations

Income earned by qualified non-profit organizations (defined in Art. 84 Regulations)

Art. 26(4) Law Art. 84 Regulations

NEWSLETTER

(II)

Tax Exemption or Reduction

Item Income from agriculture, forestry, livestock, fishing industry • • •

Tax exemption and reduction Tax exemption: qualified projects defined in Art. 86(1) Regulations 50% reduction : qualified projects defined in Art. 86(2) Regulations Except restricted and prohibited projects 3-year exemption followed by 3year 50% reduction

Relevant Sections Art. 27(1)Law Art. 86 Regulations

Income from qualified public infrastructure projects • ports, airports, railways, roads, urban public transportation, electricity, water power etc. as defined in Catalogue Regarding Enterprise Income Tax Incentive for Public Infrastructure Projects (to be issued) Contracted projects for construction and internal construction projects for self-use not included.

•

Art. 27(2) Law Art. 87 Regulations

•

Income from qualified environmental protection, energy and water saving projects Qualifications to be defined by competent finance and tax divisions of the State Council. Income derived by Resident Enterprises from qualified technology transfer

•

3-year exemption followed by 3year 50% reduction

Art. 27(3) Law Art. 88 Regulations

• •

Tax exemption: income < RMB 5M 50% reduction: income > RMB 5M

Art. 27(4) Law Art. 90 Regulations

NEWSLETTER

Passive Income derived by NonResident Enterprises: • • • • • Dividends; Interests; Royalty; Rental; and Other passive income

•

•

• •

Tax exemption: loan interests income derived by foreign government from PRC government; Tax exemption: loan interests income derived by international financial organizations from PRC government or Resident Enterprises at preferential terms; Tax exemption: other income approved by state Council; 10% WIT rate: other PRC-sourced passive income.

Art. 3(3) & 27(5) Law Art. 91 Regulations

NEWSLETTER

(III)

Tax Exemption or Reduction Enterprises Reduced EIT Rate • Reduced tax rate : 20% Relevant Sections Art. 27(1) Law Art. 86 Regulations

Small-scale and low-profit enterprises: • • • Industrial enterprises: annual taxable income < RMB 0.3M, staff<100, total asset value<RMB 30M Non-industrial enterprises: annual taxable income <RMB 0.3M, staff<80, total asset value<RMB 10M Except Restricted and Prohibited Enterprises

High and new technology enterprises (“HNTE”) heavily supported by the State: • • Ownership of core proprietary property rights Products (service) is recognized in New and HighTechnology Industry Heavily Supported by the State R&D expense is not less than a stipulated proportion of sales income Revenue from high-tech product sales is not less than a stipulated proportion of total revenue Number of technical personnel is not less than a stipulated proportion of the total number of staff; and Other criteria set out in Administrative Measures Regarding Certification of High and New Technology Enterprises (to be issued)

• •

Reduced tax rate : 15% Preferential tax rate of 15% applies to certified HNTEs nationwide

Art. 27(2) Law Art. 87 Regulations

• • •

•

Venture capital investment in small and medium-size unlisted High and New Technology companies for 2 years or more

•

•

Extra deduction of 70% of the investment amount after holding the investment for 2 years; Unused amount can be carried forward to subsequent years Exemption or reduction should be determined by government in autonomous regions and approved by provincial government 2-year exemption followed by 3-year 50% reduction (1st year from deriving production income)

Art. 27(3) Law Art. 88 Regulations

Enterprises set up in autonomous regions • Except Restricted and Prohibited Enterprises

•

Art. 27(4) Law Art. 90 Regulations

Production enterprises set up in special economic zones (i.e. Shenzhen, Zhuhai, Xiamen, Shantou and Hainan) and Shanghai Pudong

•

Art. 3(3) & 27(5) Law Art. 91 Regulations

NEWSLETTER

(IV)

Additional Deduction

Expenses R&D expenses for new technology, new products and new process of production •

Additional Deductions R&D expenses incurred on developing intangible asset: 150% R&D expenses Intangible asset cost: amortization on 150% cost Extra deduction of 200% of salary expenses

Relevant Sections Art. 30(1) Law Art. 95 Regulations

•

Disabled workers / employees encouraged to be employed by the State Venture capital investment in small and medium-size unlisted High and New Technology companies for 2 years or more

•

Art. 30(2) Law Art. 96 Regulations

•

•

Extra deduction of 70% of the investment amount after holding the investment for 2 years; Unused amount can be carried forward to subsequent years Shortened depreciation lives : As short as 60% of the depreciation period as required by law Accelerated depreciation : Double-declining balance method and sum-of-the-years-digits method Only 90% of income is taxable

Art. 31 Law Art. 97 Regulations

Accelerated Depreciation on Fixed Assets • • Fixed assets subject to rapid technological obsolescence Fixed assets subject to constant shocks and erosion

•

Art. 32 Law Art. 98 Regulations

•

Income derived from efficiently utilization of resource by salvage to manufacture products meeting national standard • Resources as categorized under Catalogue Regarding Income Tax Incentive on Utilizing Resources (to be issued) Resources for producing state restricted and prohibited products not included

•

Art. 33 Law Art. 99 Regulations

•

NEWSLETTER

Special equipment purchased for protection of environment, energy and water saving, raising manufacturing safety, etc. Equipment categorized under: • Catalogue Regarding Income Tax Incentive on Specific Environmental Protection Equipment Catalogue Regarding Income Tax Incentive on Specific Energy and Water Saving Equipment Catalogue Regarding Income Tax Incentive on Specific Safety Production Equipment.

•

• •

Extra 10% of the investment in special equipment can be deducted from tax payable, Unused amount can be carried forward for 5 years Equipment disposed of or leased out within 5 years will be subject to claw back for tax previously reduced

Art. 34 Law Art. 100 Regulations

•

•

(to be issued)

Dibb Lupton Alsop are part of DLA Piper Group, a global legal services organisation, the members of which are separate and distinct legal entities. For further information please refer to www.dlapiper.com/structure A list of offices across Asia, Europe and the US can be found at www.dlapiper.com Switchboard +852 2103 0808