Article 2 of the new Enterprise Income Tax Law makes a distinction between enterprises which are 'Resident Enterprises' and 'Non-resident Enterprises'. Resident Enterprises are defined as 'enterprises incorporated in China or incorporated in other jurisdictions but having management organizations in China. ' Non-resident Enterprises are defined as 'enterprises incorporated in other jurisdictions and with offices but no management organizations in China, or without offices and management organizations but having income generated in China'.

Under the new law, Resident Enterprises and Non-resident Enterprises are subject to different rates, 25% and 20% respectively. Further, global income for Resident Enterprises will be subject to China taxation. The question is how does one determine whether it has a management organization in China? This aspect also requires further clarification through implementation rules to draw a line between which companies incorporated in other jurisdictions outside of China are considered to be Resident Enterprises. This will assist foreign incorporated enterprises in determining corporate structuring, impacting on their classification as resident or non-resident.

For new investors, the tax law will, obviously, affect its decision whether or not to come to China. Further, for current FIE's, there is an even greater need to reexamine corporate structures in order to strategically minimize tax burden given the increased complexity of the tax system and less-favorable treatment afforded to foreign investors.

It is difficult to determine whether the new EIT Law will impact on foreign investment in China. Among other elements such as low labor costs, low price of raw materials, and a huge market, the existing favorable tax treatment is but one of many. However, for domestic firms, the new law will definitely enhance their competitiveness on the international market.

We will be providing a regular update on any changes or issuances of regulations affecting the new corporate tax rate. For any specific inquiries, please see our contact information below.

Century Dragon

Tel: 010-85325600

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info@century-dragon.com