Enterprise Income Tax in China

　　This article looks at how foreign investors are taxed in People’s Republicof China (PRC) under the enterpriseincome tax (EIT)， regardless of whetherthe investor is operating as a whollyforeign-owned enterprise， equity jointventure or legal person cooperativejoint venture (collectively， foreigninvestedenterprises or FIEs).

　　PRC EIT law

　　The current PRC EIT Law came into effectin 2008 and applies to PRC residententerprises and nonresident enterprises.An enterprise is a resident of China ifit is established in China or if its placeof effective management is in China.

　　Effective management is defined assubstantial and overall managementand control over manufacturing andbusiness operations， human resources，and financial and property aspects of anenterprise. Thus， an enterprise registeredoutside China， but with its place ofeffective management located in China，is still considered a resident enterprise.A resident enterprise is taxed inChina on its worldwide income. A nonresidententerprise with an establishmentin China is subject to EIT in Chinaon all income effectively connectedwith the establishment； an establishmentfor these purposes is any establishmentengaged in business operatingactivities within the territory of China.A nonresident enterprise without anestablishment in China is subject to taxon its income derived from China.

　　The standard EIT rate for a residententerprise is 25 percent， which may bereduced by specific tax incentives. Forinstance， a preferential tax rate of 15percent is applicable to high and newtechnology enterprises. This rate alsoapplies to qualified high-tech serviceenterprises in 21 specified cities (e.g.，Beijing， Shanghai， Tianjin， etc.) betweenJuly 1， 2010 and December 31， 2018.Encouraged industries in west Chinaalso can enjoy a reduced 15 percent EITrate from 2001 to 2020.

　　The EIT rate applicable to a nonresidententerprise with an establishment inChina is 25 percent. PRC-source incomereceived by a nonresident enterprise(such as dividends， interest， royaltiesand capital gains) is subject to PRCincome withholding tax at a rate of 10percent， provided the enterprise doesnot have an establishment in China， orif the enterprise does have an establishmentin China， the income is noteffectively connected with the establishment.The 10-percent domestic ratemay be reduced under a tax treaty.

　　Tax treaties

　　China has 96 comprehensive double taxtreaties in force， including many treatieswith African countries， and seven comprehensivetreaties signed but not yet inforce. China’s treaties largely follow theOECD Model Convention， but they alsohave adopted certain provisions fromthe UN Model Convention.

　　The taxation of a PRC resident enterpriseis not affected by the existence ofa tax treaty. However， the taxation of anonresident enterprise may be affectedby the treaty between China and thejurisdiction in which the nonresidententerprise is resident. Thus， in determininghow a nonresident enterprise maybe taxed in China， it is always necessaryto look at both PRC domestic tax lawand the applicable treaty， if any.In the following discussions， we willfirst examine how an FIE will be taxedin China and in next month’s columnwe will use the China-South Africa taxtreaty to illustrate how an investor fromSouth Africa may be subject to tax inChina on its investment in an FIE (exceptfor capital gains derived from a transferof the parent company’s interest in theFIE， which will be addressed in a separatearticle).

　　Taxation of an FIE

　　An FIE is a resident enterprise and thussubject to tax in China on its worldwideincome at a rate of 25 percent， unless itqualifies for a tax incentive.

　　Taxable income for PRC tax purposesis the amount remaining fromthe gross income of the FIE in a taxyear after the deduction of allowableexpenses and losses， nontaxable andtax-exempt items， and any prior yearloss carry forward. All documented andreasonable costs actually incurred inconnection with operating activities aredeductible， unless they are specificallyidentified as nondeductible in the taxlaw. A 50-percent super deduction isgranted for qualified R&D expenditureif so approved by the responsible taxauthorities.