China Clarifies Method of CIT Calculation Derived from Capital Gains and Other Income

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Dec. 15 – The State Administration of Taxation (SAT) issued the “Announcement on Corporate Income Tax (CIT) Treatment on Capital Gains and Certain Other Income Derived by Enterprises” (SAT Announcement [2010] No. 19) on October 27 to clarify the CIT calculation method with regards to income from capital gains and other avenues.

Announcement No. 19 defines income derived from the transfer of property, debt restructuring, donations, and the waiving of debts as one-off taxable income in the tax year, no matter if the income is monetary or non-monetary. Compared to the old CIT law that allows enterprises to spread the aforementioned taxable income items evenly over five years, the new announcement clarifies that any unsettled income between January 1, 2008 and November 27, 2010 – when Announcement No. 19 takes effect – shall be recognized as taxable income in 2010.

One thing worth noting is that Announcement No. 19 does not contradict the “Circular on CIT Treatment during Enterprise Restructuring” (Caishui [2009] No. 59), which defines qualified enterprise restructuring that can receive special tax treatment. The taxable income after the qualified special debt restructuring can be amortized evenly over five tax years if it accounts for over 50 percent of the enterprise’s total taxable income of the tax year.

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