Business Expenses and China’s New CIT Law

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By Sabrina Zhang

Dec. 2 – China’s Corporate Income Tax Law that came into effect on January 1, 2008 will for the first time affect audit reporting for business in China, including foreign invested enterprises. With preparation for 2008 year end accounts now underway, foreign investors in China will have to follow a new set of guidelines concerning certain aspects of their financial reporting, with a particular emphasis on the treatment of expenses to be booked into the accounts.

We highlight the main categories of these::

Advertising and promotional expenses
These are permitted to be up to 15 percent of the total business income for the year, unless otherwise agreed by the relevant tax departments of the State Council. Amounts in excess of this may be carried forward to the next year.

Business entertainment expenses
Provided that is related to the businesses production and operational activities, up to 60 percent of such expenses may be deductible, but only to a maximum of 0.5 percent of the total sales revenues for the year.

Donations
Charitable donations incurred by a company are permitted to be deductible up to 12 percent of the total annual profit.

Commercial insurance expenses
Premiums for commercial insurance policies paid by a business for its employees are not deductible except for premiums paid pursuant to the state regulations for staff conducting special types of production work.

Sponsorship expenses
These are not deductible unless they are of a non-advertising nature and not relevant to the business operation.

Staff education expenses
These are permitted up to 2.5 percent of total wages and salaries. Excess amounts may be carried forward.

Provisions
Provisions are not generally deductible.

Reserve funds
These funds are deductible for appropriate use in protecting the environment, pursuant to relevant laws.

Management fees
Fees paid between enterprises, rental and royalty between business units, and interest paid between business entities of a December China Briefingnon-business nature are not deductible.

Sabrina Zhang is the national tax partner for Dezan Shira & Associates. Full details of deductible expenses and a complete explanation of further items to consider for the preparation of the 2008 audit can be found in the December issue of China Briefing Magazine (click on picture to download), available for free – subscribe today. Sabrina Zhang can be contacted for advice on China tax and audit issues at tax@dezshira.com.