China Issues Preferential Taxation Policies for Energy-Saving Service Sector

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Feb. 18 – In order to encourage a greener management of resources and energy during production, China recently issued a new circular clarifying the preferential taxation policies that companies involved in energy management projects will receive, if they meet certain criteria.

Co-issued by the Ministry of Finance and the State Administration of Taxation on December 30, 2010, the “Circular on Issues Concerning the Value-added Tax, Business Tax and Corporate Income Tax Policies for Promoting the Development of the Energy-saving Service Sector (caishui [2010] No.110)” came into effect on January 1, 2011. The circular outlined the treatment of value-added tax (VAT) and business tax. The treatment of corporate income tax (CIT) was discussed separately.

1. VAT and Business Tax

According to the Circular, the taxable business income earned by qualified energy-saving service companies engaging in energy management contracting projects shall be temporarily exempted from business tax.  Furthermore, when an energy-saving service company transfers its taxable goods from qualified energy management contracting projects to energy-consuming enterprises, the VAT arising therefrom shall be temporarily exempted.

To qualify for these exemptions, both of the following criteria must be met:

  • The relevant technology of the energy management contracting project implemented by the energy-saving service company shall meet the requirements specified in the General Technical Rules for Energy Performance Contracting  (GB/T24915-2010) promulgated by the General Administration of Quality Supervision, Inspection and Quarantine and the Standardization Administration
  • The format and content of the energy-saving benefit sharing contract signed between the energy-saving service company and the energy-consuming company shall comply with the Contract Law and the General Technical Rules for Energy Performance Contracting  (GB/T24915-2010)

2. CIT

With regards to CIT exemptions, qualified energy-saving service companies engaging in energy management contracting projects that meet the relevant stipulations of the CIT Law are exempt from CIT for the first year to third year of participation, starting from the tax year in which it receives the first sum of manufacturing operation income. For the fourth to sixth years of participation, CIT will be levied at a rate of half of the 25 percent statutory tax rate.

The Circular also provides that when calculating the taxable income of the energy-consuming company, all actual and reasonable expenses paid as part of the energy management contract can be deducted for the relevant period, and for tax purposes distinction will no longer be made between service fees and asset purchase prices.

In addition to the above, the energy-saving service company must also meet all the following criteria to qualify for these exemptions:

  • The enterprise must possess a registered capital of no less than RMB1 million and is capable of providing professional energy-saving services independently
  • The energy management contracting project implemented by the energy-saving service company must meet the criteria of Items One to Eight of Category Four, “Energy Saving Emission Reduction Technology Transformation,” in the “Circular on the Catalogue (Trial) for Environmental Protection, Energy and Water Conservation Projects Qualified for Corporate Income Tax Preferential Treatments,” which was issued by the Ministry of Finance, State Administration of Taxation, National Development and Reform Commission (Caishui [2009] No. 166)
  • The total investment from the energy-saving service company shall contribute greater than 70 percent (inclusive) to the total investment on the energy management contracting project
  • The energy-saving service company shall boast competent and professional staff to ensure the stable implementation of the project

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