Interest Expenses Paid to Individuals Deductable from CIT

January 20, 2010 Posted by China Briefing Reading Time: < 1 minute

Jan. 20 – The State Administration of Taxation’s recently issued Circular Guoshuihan [2009] NO. 777 clarifies how interest expenses can be deducted from corporate income tax (CIT) when related to loans borrowed by companies from individuals.

According to the circular, issued December 31, 2009, interest paid on loans from related party individuals in including shareholders (natural persons) can be deducted from CIT. In addition, interest expenses paid to non-related individuals (natural persons), including employees is deductible, provided that the loan from the natural person is authentic and not associated with any illegal financing or other activities that violate relevant laws or regulations, and a loan contract has been signed between the company and the natural person.

This clarification is important to small and medium sized companies that sometimes need to receive extra funding and do not have the assets to support applying for loans from a bank or financial institution and so must turn to individuals. Not being able to deduct interest expenses paid to individuals could create a barrier for funding and so the circular’s clarification that these are indeed deductible is good news to taxpayers.

Although the circular does not further define related natural persons besides shareholders, it is probable that the principles established in implantation rules of the CIT law for related parties will apply.

For more information on corporate income tax considerations, contact Sabrina Zhang, the national tax partner for Dezan Shira & Associates at tax@dezshira.com.