Chapter 1 General Provisions
Article 1
These Regulations are formulated in accordance with the Enterprise Income Tax Law of the People’s Republic of China (hereinafter referred to as the “Enterprise Income Tax Law”).
Article 2
The term “resident enterprise” as mentioned in the Enterprise Income Tax Law refers to an enterprise that is established in China in accordance with Chinese law, or that is established in accordance with foreign law but whose effective management is located in China.
Article 3
The term “effective management” as mentioned in the Enterprise Income Tax Law refers to the substantive and overall management and control exercised over the manufacturing and business operations, personnel, accounting, and properties of an enterprise.
Article 4
The term “establishment or place” as mentioned in the Enterprise Income Tax Law refers to an institution or site where a non-resident enterprise engages in production or business operations within China, including:
(1) a management institution;
(2) a business institution;
(3) an office;
(4) a factory;
(5) a farm;
(6) a place for exploitation of natural resources;
(7) a place where contracted construction projects are carried out;
(8) a place where labor services are provided; and
(9) other institutions or places engaged in production or business operations.
Article 5
Where a non-resident enterprise engages in production or business activities through an agent within China, and the agent habitually concludes contracts, or habitually negotiates and concludes contracts on behalf of the non-resident enterprise, such agent shall be deemed as an establishment or place of the non-resident enterprise.
Article 6
Income sourced from within China as mentioned in the Enterprise Income Tax Law refers to income derived from sources within the territory of China, including:
(1) income from the sale of goods, where the place of delivery of the goods is within China;
(2) income from provision of services, where the services are performed within China;
(3) income from transfer of property, where the property is located within China, or where the enterprise transferring the property is established in China;
(4) income from equity investment, such as dividends and profit distribution, where the enterprise distributing the income is established within China;
(5) interest income, where the borrower is located within China, or where the establishment or place of the borrower is within China;
(6) rental income, where the property is used within China;
(7) royalty income, where the intangible assets are used within China; and
(8) other income determined as sourced from within China.
Article 7
Where it is difficult to determine the source of income, the competent tax authorities under the State Council shall determine the source in accordance with the principle of economic substance.
Chapter 2 Taxable Income
Article 8
The term “taxable income” as mentioned in the Corporate Income Tax Law of the People’s Republic of China refers to the balance of the total income of an enterprise in a tax year after deducting non-taxable income, tax-exempt income, various deductions, and allowable losses carried forward from previous years.
Article 9
The term “total income” as mentioned in the Enterprise Income Tax Law refers to the monetary and non-monetary income obtained by an enterprise from various sources.
Article 10
The term “non-taxable income” as mentioned in the Enterprise Income Tax Law refers to the following income:
(1) fiscal appropriations;
(2) administrative fees and government funds collected in accordance with the law; and
(3) other non-taxable income as prescribed by the State Council.
Article 11
The term “tax-exempt income” as mentioned in the Enterprise Income Tax Law refers to income that is exempted from enterprise income tax in accordance with the provisions of the Enterprise Income Tax Law and relevant regulations.
Article 12
The term “deductions” as mentioned in the Enterprise Income Tax Law refers to reasonable expenditures actually incurred by an enterprise in relation to the earning of income, including costs, expenses, taxes, losses, and other expenditures.
Article 13
The cost incurred by an enterprise for external investment shall not be deducted when calculating taxable income.
Article 14
Where an enterprise calculates taxable income, the depreciation expenses of fixed assets calculated in accordance with the provisions of the Enterprise Income Tax Law and these Regulations shall be allowed to be deducted.
Article 15
The depreciation expenses of the following fixed assets shall not be deducted when calculating taxable income:
(1) fixed assets that have not been put into use, other than buildings and structures;
(2) fixed assets leased in through operating leases;
(3) fixed assets leased out through financial leases;
(4) fixed assets that have been fully depreciated but are still in use;
(5) fixed assets unrelated to business activities;
(6) land that is separately valued and recorded as fixed assets; and
(7) other fixed assets whose depreciation expenses shall not be deducted.
Article 16
Where an enterprise calculates taxable income, the amortization expenses of intangible assets calculated in accordance with the provisions of the Enterprise Income Tax Law and these Regulations shall be allowed to be deducted.
Article 17
The amortization expenses of the following intangible assets shall not be deducted when calculating taxable income:
(1) self-developed intangible assets whose expenses have been deducted when calculating taxable income;
(2) self-created goodwill;
(3) intangible assets unrelated to business activities; and
(4) other intangible assets whose amortization expenses shall not be deducted.
Article 18
Where an enterprise calculates taxable income, the expenses incurred as long-term deferred expenses shall be deducted by amortization in accordance with the provisions of the Enterprise Income Tax Law and these Regulations.
Article 19
The following expenditures incurred by an enterprise shall be treated as long-term deferred expenses:
(1) expenses incurred for renovation of fixed assets that have been fully depreciated;
(2) expenses incurred for renovation of leased-in fixed assets;
(3) expenses incurred for major repair of fixed assets; and
(4) other expenditures that shall be treated as long-term deferred expenses.
Article 20
Where an enterprise uses or sells inventory, the cost of inventory calculated in accordance with the provisions of the Enterprise Income Tax Law and these Regulations shall be deducted when calculating taxable income.
Article 21
Where an enterprise transfers assets, the net value of the assets shall be deducted when calculating taxable income.
Article 22
Losses incurred by an enterprise in a tax year may be carried forward and offset against taxable income of subsequent tax years, but the carry-forward period shall not exceed five years.
Article 23
Where a non-resident enterprise obtains income as specified in the third paragraph of Article 3 of the Corporate Income Tax Law of the People’s Republic of China , the taxable income shall be calculated in accordance with the following methods:
(1) for income from equity investment such as dividends and profit distribution, and income from interest, rental, and royalties, the full amount of income shall be taxable income;
(2) for income from transfer of property, the balance of the total income after deducting the net value of the property shall be taxable income; and
(3) for other income, taxable income shall be calculated by reference to the methods provided in the preceding two items.
Article 24
The specific scope and standards for income and deductions, and the specific methods for tax treatment of assets as provided in this Chapter, shall be formulated by the finance and tax authorities under the State Council.
Chapter 4 Tax Preferential Treatment
Article 82
The State shall provide tax preferences for enterprise income tax to industries and projects that are supported and encouraged by the State.
Article 83
The tax-exempt income as prescribed in Article 26 of the Corporate Income Tax Law of the People’s Republic of China includes the following:
(1) interest income from government bonds;
(2) income from equity investment such as dividends and profit distribution between qualified resident enterprises;
(3) income from equity investment such as dividends and profit distribution received by a non-resident enterprise from a resident enterprise, where such income is effectively connected with its establishment or place within China; and
(4) income derived by qualified non-profit organizations.
Article 84
The tax reduction or exemption as prescribed in Article 27 of the Enterprise Income Tax Law shall be implemented in accordance with the following provisions:
(1) income derived from agriculture, forestry, animal husbandry, and fishery projects;
(2) income derived from investment in and operation of infrastructure projects that are supported by the State;
(3) income derived from environmental protection, energy conservation, and water conservation projects that meet the prescribed conditions;
(4) income derived from technology transfer that meets the prescribed conditions; and
(5) income derived by non-resident enterprises as specified in the third paragraph of Article 3 of the Enterprise Income Tax Law.
Article 85
Where an enterprise engages in projects listed in Items (1) to (3) of Article 84 of these Regulations, the enterprise may enjoy enterprise income tax exemption for the first three years starting from the year in which the first revenue is generated, and a 50 percent reduction of enterprise income tax for the following three years.
Article 86
The conditions and scope for tax exemption or reduction for income derived from agriculture, forestry, animal husbandry, and fishery projects, and for income derived from infrastructure projects, environmental protection, energy conservation, and water conservation projects, shall be prescribed by the finance and tax authorities under the State Council.
Article 87
Income derived from qualified technology transfer shall be exempted from enterprise income tax up to the prescribed limit, and the portion exceeding such limit shall be subject to enterprise income tax at a reduced rate.
Article 88
For a qualified small and low-profit enterprise, the reduced enterprise income tax rate as prescribed by the Enterprise Income Tax Law shall be applied.
Article 89
For a high and new technology enterprise that is supported by the State, the reduced enterprise income tax rate as prescribed by the Enterprise Income Tax Law shall be applied.
Article 90
The standards and conditions for qualified small and low-profit enterprises, and for high and new technology enterprises, shall be prescribed by the finance and tax authorities under the State Council.
Article 91
Where an enterprise is eligible for multiple tax preference policies, it may choose to apply the most favorable one, unless otherwise provided by laws or administrative regulations.
Chapter 6 Special Tax Adjustments
Article 123
Where a business transaction between an enterprise and its associated party does not comply with the arm’s length principle and reduces the taxable income or tax payable of the enterprise or its associated party, the tax authorities shall have the right to make adjustments using reasonable methods in accordance with the law.
Article 124
The cost incurred by an enterprise and its associated party in jointly developing or acquiring intangible assets, or in jointly providing or receiving labor services, shall be allocated in accordance with the arm’s length principle when calculating taxable income.
Article 125
An enterprise may propose in advance to the tax authorities the pricing principles and calculation methods for transactions conducted with its associated parties. Upon mutual agreement, the enterprise and the tax authorities may enter into an advance pricing arrangement.
Article 126
When filing its annual enterprise income tax return, an enterprise shall submit a report on transactions conducted with its associated parties.
Article 127
Where an enterprise fails to submit the report on associated transactions, or submits false or incomplete information that does not truthfully reflect associated transactions, the tax authorities shall have the right to determine taxable income in accordance with the law.
Article 128
Where a resident enterprise, or a resident enterprise together with Chinese resident individuals, controls an enterprise established in a country or region with an effective tax burden that is significantly lower than the tax rate prescribed in Article 4 of the Corporate Income Tax Law of the People’s Republic of China , and the profits of such enterprise are not distributed or are under-distributed without reasonable business needs, the portion of the profits attributable to the resident enterprise shall be included in the taxable income of the resident enterprise for the current period.
Article 129
Where the ratio of debt investment to equity investment received by an enterprise from its associated parties exceeds the prescribed standard, the interest expenses incurred shall not be deducted when calculating taxable income.
Article 130
Where an enterprise reduces its taxable income or tax payable by implementing arrangements that do not have reasonable commercial purposes, the tax authorities shall have the right to make adjustments using reasonable methods.
Article 131
Where a tax adjustment is made in accordance with this Chapter and additional tax is payable, the tax authorities shall levy the tax and impose interest in accordance with relevant regulations.
Disclaimer: The regulation of company registration in China is translated by FDIChina for reference only. There may be different interpretations of the Chinese version.