Notice On The Taxation Policies For Promoting The Development Of Startup Investment Enterprise issued on on 23 November 2007 and took effect on the same day
1.Who shall be eligible to apply for the preferential taxation policies?
Startup Investment enterprises which meet the requirements stipulated in the “Interim Measures on the Administration of Startup Investment Enterprises” and are approved by the Municipal Development and Reform Commission are eligible to apply for the preferential taxation policies under the “Notice on the State Administration of Taxation on the Taxation Policies for Promoting the Development of Startup Investment Enterprises”.
According to the Interim Measures, the term “startup investment enterprise” as mentioned refers to any enterprise organization registered and established within the territory of the People’s Republic of China for the purpose of mainly engaging in startup investment activities. The term “startup investment” as mentioned in the preceding sentence refers to any stock right investments that are injected into a startup enterprise in expectation of capital gains mainly by way of stock right transfer after the invested startup enterprise becomes mature or relatively mature. The term “startup enterprise” refers to any growing enterprise registered and established within the territory of the People’s Republic of China that is during the course of establishment or re-establishment, excluding those enterprises that have got listed in the open market.
The requirements for a Startup Investment Enterprises are as follows:
(1)It has been registered in the administrative department for industry and commerce;
(2)Its business scope conforms to the provisions of Article 12 of these Measures;
(3)The amount of its actual capital contributions is less than RMB 30 million yuan, or the amount of the down payment of its capital contributions is not less than RMB 10 million yuan, and all investors make a commitment to pay the balance of actual capital contributions in a sum of not less than RMB 30 million yuan within 5 years after the registration;
(4)The number of investors shall not exceed 200 persons. For a startup investment enterprise established in the form of a limited liability company, the number of investors shall not exceed 50 persons. The amount of investment made by a single investor into a startup investment enterprise shall not be less than 1 million yuan. All investors shall make investments in monetary form.
(5)It shall have at least 3 senior managers who have 2 or more years of startup investment experience or other relevant business experience to take charge of the investment management. If it entrusts another startup investment enterprise or startup investment management consulting enterprise as a management consulting institution to undertake its investment management responsibilities, this management consulting institution shall have at least 3 senior managers who have 2 or more years of startup investment experience or other relevant business experience to undertake the investment management responsibilities.
2.How to apply for preferential tax treatment?
Startup Investment enterprises intending to apply for preferential tax treatment shall file the required documents with the competent local taxation authorities and complete the “Application Form for Tax Credit and Exemption for Investments by Venture Capital Enterprises” and the “Form for the Basic Information about Small to Medium High-Tech Enterprises Invested in by Venture Capital Enterprises” within 2 months after the end of the taxation year.
Startup Investment enterprises applying for preferential tax treatment shall declare the allowable income tax deductions for the year only after the applications are approved by both the municipal finance bureau and taxation authorities.
Regulations On The Implementation Of The Corporate Income Tax Law Of The People's Republic Of China, issued by the State Council of the PRC on December 6,2007 and will take effect on January 1,2008.
1.What are the provisions governing IP transactions under the Regulations?
The Regulations provide legal definitions and additional rules on intellectual property as supplementary provisions to the new Corporate Income Tax Law (CIT Law) that: (1) licensing fees refers to income gained by an enterprise in consideration of granting rights to use a patent, non-patent technology, trademark, copyright and other rights subject to licensing; (2) intangible assets stipulated in the CIT Law include patent rights, trademark rights, copyright, non-patent technology and goodwill; (3) exemption and deduction of corporate income tax for qualifying transfers of technology refers to the first RMB5 million payment for a transfer of technology within one year which shall be exempted from corporate income tax and payments exceeding the aforesaid band which shall qualify for a 50% tax deduction; and (4) the key national supported high-tech enterprises stipulated in Article 28 of the CIT Law refers to enterprises which meet the requirements listed in the Regulations and possess core independent intellectual property rights.
2.What are the counting methods on corporate income with foreign exchange?
Pursuant to the Regulations on the Implementation of the Corporate Income Tax Law, an enterprise that pays income tax in advance shall convert the taxable foreign currencies to RMB at the mean RMB exchange rate in the last day of the month or the quarter for the purpose of calculating the taxable income.
If the tax is levied on an annual basis, the unpaid corporate income tax liability shall be calculated in RMB after conversion of the taxable foreign currencies at the RMB exchange rate in the last day of the year. In payment of the tax balance or tax refund, the balance or refund shall be calculated in RMB after conversion of the corresponding foreign currencies at the mean RMB exchange rate in the day such payment or refund is officially confirmed.
3.What is the scope of corporate income tax deduction that an enterprise may claim for insurance premiums and losses?
The Regulations on the Implementation of the Corporate Income Tax Law specify the scope of corporate income tax deduction that an enterprise may claim for insurance premiums and losses.
In compliance with the relevant rules of the State Council, claims for deduction of the remaining value of a loss after deducting damages payable by the liable party and insurance reimbursements shall be permitted.
Insurance premiums within a certain scope and set of criteria shall be deductible if such premiums are payable for: (1) basic social insurance including basic medical insurance, unemployment insurance, industrial injury insurance; (2) pensions; (3) mandatory housing provident funds, additional medical insurance premiums and pensions payable for investors or employees; and (4) property insurance premiums payable by enterprises as required by the law.
Except for the stipulated commercial insurance premiums, all other insurance premiums payable by enterprises on behalf of investors and employees shall not be deductible.
4.Are there any preferential taxation policies for environmental protection under the Regulations?
Yes. The Regulations provide that enterprises engaging in qualifying projects for environmental protection as well as energy and water conservation shall be exempted from corporate income tax for the first three years and shall have a 50% corporate income tax deduction from the fourth to sixth years after the tax year in which the enterprises earn their first income. The Regulations also allow enterprises which purchase and use equipment specially designed for environmental protection as well as energy and water conservation to deduct 10% of the total investment in such equipment from their taxable amount in the tax year in which the equipment in question is purchased; should the taxable amount be lower than the allowable deduction, the remaining allowable deduction value may be carried forward to the next 5 tax years. However, this preference will be terminated if the enterprise transfers or leases the special facilities within 5 years. Enterprises which transfer or lease out such equipment within 5 years of the purchase shall be disqualified from the aforesaid preferential tax treatments and be liable to recovery of the previous allowable deduction.
Impact Of New Enterprise Income Tax Law And New China-Hong Kong Tax Arrangement On Financial Institutions, written by Deloitte on September 21, 2007
The new Enterprise Income Tax Law (New Law), promulgated on 16 March 2007 and effective on 1 January 2008, will replace existing tax laws and regulations governing domestic enterprises, foreign enterprises (FEs), and foreign-invested enterprises (FIEs).
Circular Guoshuihan [2007] No. 403, issued by the State Administration of Taxation (SAT Circular) on 4 April 2007, provides guidance on the interpretation of the Mainland China-Hong Kong double tax arrangement that entered into effect on 1 January 2007 in the case of Mainland China.
1. What are the new tax rates for foreign financial institutions according to the New Law?
Under the New Law, foreign-invested financial institutions are subject to the new general 25% rate as from 1 January 2008. Since these institutions are subject to a 33% rate under the existing Foreign Enterprise Income Tax Law, the new rate will result in a drop of eight percentage points.
Foreign-invested banks set up in Special Economic Zones (SEZs) are currently subject to a reduced rate of 15%, regardless whether they engage in hard currency or RMB business. When set up in the other designated zones, foreign-invested banks may enjoy the 15% rate for hard currency business. For SEZs and certain other zones designated by the State Council (e.g. Pudong), the reduced 15% rate is expected to be increased in phases up to 25% through annual two percentage point increases under the five-year grandfathering provision in the New Law.
2. Are there any tax holidays for Foreign-invested banks (FIBs) under the New Law?
Yes. FIBs set up in the SEZs or zones designated by the State Council have been eligible for tax holidays, consisting of a one year full tax exemption, followed by a two year 50% tax reduction if certain conditions are satisfied. The conditions are expressed in Article 75(5) of the FEIT Detailed Implementation Rules issued in 1991. They are “the capital contribution of the foreign investor or the funds for business activities allocated by the head office bank to the branch bank exceeds US $ 10 million; the period of operations is ten years or more shall; application by the enterprise and approval thereof by the local tax authorities”
3. What is the tax residence test in the New Law?
There are two now - the place of incorporation and the place of effective management.
Current tax law relies solely on the place of incorporation to determine the residence of an enterprise for tax purposes. Domestic enterprises and FIEs are taxed on their worldwide income, whereas FEs are taxed only on certain Mainland China-source income if the FE does not have a permanent establishment (PE) in Mainland China. If there is a PE, all income effectively connected to the PE will be taxable.
The New Law adds an additional test to determine residence as from 2008: the “place of effective management” test. As a result, an FE that is “effectively managed” in Mainland China will be deemed to be a Chinese tax resident and, thus, subject to Mainland China’s Enterprise Income Tax (EIT) on its worldwide income in the same manner as a domestic enterprise or FIE.
4. How to interpret the “Six Months in any 12-Month Period” in determining a PE?
Although an FE might not be resident in Mainland China, it must still manage its PE risks. FEs that have a PE in Mainland China will be taxed in Mainland China on income attributable to the PE. For example, a securities company or other investment advisor would normally seek to leverage the PE provisions under a tax treaty between its home country and Mainland China to obtain better protection from Chinese taxation. For such companies in Hong Kong, the New DTA (effective from 1 January 2007 in the case of Mainland China) provides that a PE will be created in Mainland China if the Hong Kong company furnishes services, including consultancy services, in Mainland China for a period or periods aggregating more than six months in any 12-month period. This rule does not require that there be any office or other fixed place of business in Mainland China.
The SAT Circular contains a somewhat rigid interpretation of the word "month" for this PE determination. In counting the 12-month period, it may start from any date of “arrival” and end at any date of “departure”. In addition, a "month" can only be eliminated from the six-month period if the Hong Kong company does not have any employees present in Mainland China for a continuous period of 30 days. Following this logic, presence for one day in Mainland China by one employee could constitute a "month", and any such aggregate six "months" in any 12 months could create a PE for a Hong Kong company in Mainland China.
Under the SAT Circular, this PE interpretation also applies to other tax treaties where no specific guidance previously has been provided with respect to calculation of a “month”. In other words, the impact of this new interpretation on the counting of days for PE purposes will be far-reaching since it is not limited to Hong Kong but applies to other countries that have concluded tax treaties with Mainland China that include six-month service PE rules (e.g. the treaty with the U.S.).
5. What other new regulations are provided in the New Law?
1) New controlled-foreign company rules
The New Law includes a controlled foreign corporation (CFC) rule that will apply to domestic enterprises that control overseas subsidiaries. In brief, the undistributed earnings of an overseas subsidiary might have to be included in the taxable income of its domestic enterprise parent even though no actual dividend has been paid. Chinese FIs will have to review the position of their subsidiaries in Hong Kong and other countries in light of this new rule.
2) New General Anti-Avoidance Rule
The New Law includes a broadly drafted general anti-avoidance rule (GAAR) that allows the tax authorities to make adjustments where an enterprise has entered into an arrangement that reduces taxable revenue or income and has no commercial purpose.
3) New Thin Capitalisation Rule
The New Law includes a broadly worded thin capitalization provision that will disallow a deduction for interest expense on related party borrowings that exceed specified ratios (not yet announced). The most likely targets for the new thin capitalization rule will be foreign FIs that operate in Mainland China either through subsidiaries or other establishments.
4) Specific Incentive for Venture Capital
The New Law provides a specific tax incentive to venture capital funds established in Mainland China, which allows such funds a deduction against their taxable income for a certain percentage of their investments in industries encouraged by the Chinese government. In the absence of detailed rules under the New Law, venture capital funds may apply a recent tax circular for guidance on how the tax deduction mechanism is to apply. Under this circular, after two years of investment in small and medium-sized and unlisted high/new tech enterprises, a venture capital enterprise may deduct 70% of its original investment in the qualifying investees against its taxable income, subject to certain conditions.
What would the affect of the New Corporate Income Tax Law have if it was implemented in 2008?
In late December 2006, the Standing Committee of the 10th National People's Congress of the People's Republic of China PRC approved a draft Corporate Income Tax Law. The law meant that a unification of the enterprise income tax rate of 25%. The Draft Tax Law would also eliminate certain preferential tax rates currently available only to foreign-invested enterprises.
The Standing Committee will next submit the Draft Tax Law to the full NPC for voting during its next session in March 2007. If approved the expected Draft Tax Law will take effect on 1 January 2008 (the "Effective Date").
While the Draft Tax Law has not been made public, press reports have highlighted these features
1.Unified Corporate Income Tax Rate
As noted, the Draft Tax Law would unify the EIT rate at 25%. This rate is higher than the 15% to 24% rate enjoyed by some FIEs located in special foreign investment zones or operating in certain sectors, but lower than the 33% rate currently applicable to other enterprises, including domestic enterprises. In addition, the Draft Tax Law would offer a possible 20% rate for small enterprises meeting certain eligibility criteria (to be defined by the State Council in the anticipated implementation regulation).
2. Fewer Tax Preferences For FIEs
Currently, FIEs enjoy many preferential tax policies, including reduced tax rates for FIEs located in Economic and Technological Development Zones and full exemption and partial tax reduction/exemption for FIEs engaged in production operations during tax holidays. The Draft Tax Law would eliminate such preferential tax policies and replace them with the following:
· A 15% preferential tax rate will apply to high-tech businesses that promote technological development.
· Other tax incentives will apply to venture capital enterprises, as well as foreign and domestic companies engaged in infrastructure construction, environmental protection, water conservation, and production safety projects.
· Tax incentives will remain available for investors seeking to invest in the inland provinces or other less-developed regions of the PRC.
3.Transition Period
Under the Draft Tax Law, existing FIEs will be given a 5-year grace period during which they would pay taxes at a gradually increasing rate every year. The transitional period would impact FIEs as follows:
· FIEs that have started their tax holiday: existing FIEs currently enjoying a fixed-period of tax reduction/exemption under the current law can continue to enjoy tax incentives for the remaining period; in other words they will be "grandfathered" to retain their tax breaks for any unused years.
· FIEs that have not yet started their tax holiday: for existing FIEs that have yet to make a profit and thus have not enjoyed any tax reduction/exemption incentives, the tax exemption and reduction period will be calculated from the Effective Date.
· FIEs established after the Effective Date: FIEs that are established after the Effective Date or that commence business operations following the Effective Date will only be able to enjoy any tax exemptions or reductions available to them under the new regime.
Therefore, although the Draft Tax Law has yet to become formal law, foreign investors currently contemplating the establishment of an FIE in the PRC which might enjoy tax holidays under the current regime may wish to expedite the process.
Despite the fact that the Draft Tax Law may be subject to change prior to the next NPC session in March, foreign investors are likely to expect a unified EIT rate of around 25%, a unification of preferential tax policies for select industries and enterprises operating in certain sectors, and transitional measures to cushion the impact of the Draft Tax Law.
What are the proposed changes to taxation in Hong Kong for 2007/2008
The Hong Kong Budget was presented to the Legislative Council on 28 February 2007 and these were the proposed these changes.
Salaries Tax
The marginal tax rates and tax bands are restored to the 2002/2003 levels of 2%, 7%, 12% and 17%, with bands at $35,000 each. Basic and married person’s allowances remain at $100,000 and $200,000 respectively. Child allowance has been increased from $40,000 to $50,000 per child, and an additional one-off child allowance of $50,000 for each child will be offered in the year of birth. The maximum amount of deduction for self-education expenses has been increased from $40,000 to $60,000 per year. The government has decided to wave 50% of salaries tax and tax under personal assessment for 2006/2007, subject to a ceiling of $15,000, which would be deducted from the taxpayers’ final tax payable for the year.
Government Duties and Charges
The government reduced alcohol duties on wine to 40% and on beer and other liquor with the alcohol content of less than 30% to 20%. Stamp duty on transactions of properties worth between $1 million and $2 million has been cut from 0.75% of the property value to a fixed amount of $100. However, tobacco duties, fuel duties, betting duties, hotel accommodation tax and stamp duty on Hong Kong stocks remain unchanged.
Profit Tax
The profit tax rates remain at 17.5% for companies and 16% for unincorporated businesses in 2007/2008.
What are the current updates On Land Appreciation Tax?
In a move widely seen as a Government effort to further cool down the real property market in China and intensify tax collections, the State Administration of Taxation has issued Guoshuifa [2006] No. 187 (“Circular 187”) announcing its intention to strengthen the collection of LAT. Circular 187 provides clarifications and guidelines on LAT income recognition, deductible expenses, assessment timing and other issues, with which the SAT hopes to reduce the ambiguities in the existing LAT rules and practices and create a uniform platform for LAT enforcement and collection across the nation.
What is Land Appreciation Tax (LAT) and what affects will it have on Taxpayers?
LAT, which became effective from 1994, is a tax on the gain realized on the transfer of land, buildings and associated structures. In general, LAT is imposed on taxable gains derived by companies (including property developers) and individuals from the transfer of real properties. The applicable LAT rate is progressive and ranges from 30% to 60%, depending on the amount of the taxable gain calculated after taking into consideration allowable prescribed deductions.
LAT is also a local tax collected by provincial and local governments at the location of the real property. However, due to various economic reasons, it has not been actively collected in past years. More recently, the Central Government and the SAT have increasingly stepped up efforts in pushing local governments to enforce and collect LAT.
In the China residential market where pre-sales are common, LAT is often pre-collected based on a certain percentage of the gross sales proceeds. However the final settlement is rarely enforced. One of the most important implications of Circular 187, which will become effective from 1 February 2007, is that the SAT has provided rules for both voluntary and tax authorities’ initiated LAT settlements. The latter “triggering conditions” can potentially require LAT payments prior to the sale of all units. In addition, the SAT has specified that the unit of LAT assessment and settlement should be each real property development project or each phase of a real property development project as approved by the government authorities.
Circular 187 also provides clarifications and guidelines on LAT income recognition, deductible expenses, assessment timing and other issues. With these clarifications and guidelines, the SAT hopes to reduce the ambiguities in the existing LAT rules and practices and create a uniform platform for LAT enforcement and collection across the nation.
The active enforcement and collection of LAT based on Circular 187 will no doubt bring about a profound impact on the bottom line of property developers and owners, especially those who have acquired land or real property at low cost. In addition, any non-voluntary LAT settlement requested by the tax authority will adversely affect the cash flow position of a property developer.
Going forward, property developers and property investors will definitely need to factor in the cost and timing of LAT in their profitability and cash flow planning. Provisions for LAT may also need to be accrued in the books of developers, which could impact their financial position. It is also possible that the additional cost of LAT could make some real estate investment projects unattractive for investors.
The issuance of Circular 187, of course, provides the SAT’s guidance and clarification on many matters regarding the settlement of LAT to both taxpayers and local tax authorities. However the circular does leave some implementation details to be determined by the provincial-level tax authorities. As a result, taxpayers with real estate projects will need to pay close attention to the implementation regulations to be issued by the local tax authorities as well as local practice in the locations of their real estate projects.
