Recap of Key 2013 Corporate Income Tax Regulatory Updates

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Key Corporate Income Tax (CIT) Regulatory Updates:

Caishui [2013] No. 70 – Additional Permissible R&D-related Deductions

China’s SAT released Guoshuifa [2008] No. 116 (Circular 116) in 2008 to allow companies with research and development (R&D) activities to deduct relevant expenses from their CIT taxable income. Circular 70, which supplements Circular 116, came into effect at the beginning of 2013 and further expanded the scope of deductible R&D expenses. Currently, in addition to the ones stipulated in Circular 116, the R&D expenses listed below are also deductible from a company’s CIT taxable income:

  • Basic pension, basic medical insurance, unemployment insurance, work-related injury insurance, maternity insurance and housing funds contributed by the enterprise for employees directly engaged in R&D activities;
  • Expenses for the operational maintenance, adjustment, inspection, and repair of instruments and equipment dedicated to R&D activities;
  • Expenses for purchasing sample products or sample machines that do not constitute fixed assets, and general testing;
  • Expenses for clinical trials of new drugs; and
  • Expenses for authentication of R&D results.

Depending on location, it may be necessary to hire a CPA or CTA (Certified Tax Agent) firm to issue an audit or attestation report on the R&D expenses that are eligible for deduction.

SAT Announcement [2013] No. 19 – CIT Treatment on Cross-border Secondment of Expatriates by Non-Resident Enterprises

Announcement 19, which entered into effect on June 1, 2013, clarifies the CIT treatment of secondment of expatriates to China by foreign companies. According to Announcement 19, when a non-resident enterprise (NRE) dispatches personnel to China to provide services, and the NRE normally examines and assesses the performance of the dispatched personnel, and is wholly or partially responsible for their performance, the NRE will be deemed to have a place of business or an establishment in China. This means that the foreign company will be exposed to Chinese CIT on both incomes originating from China, and incomes that are obtained outside of China but have a substantial connection with the establishment in China. If a dispatching enterprise is a contracting country that has entered into a double taxation agreement (DTA) with China, and the establishment or place of business is relatively fixed and permanent in nature, it will be deemed a permanent establishment (PE) in China and the relevant DTA will prevail.

SAT Announcement [2013] No. 9 – Withholding Tax for NRE

Prior to the commencement of the value-added tax (VAT) in lieu of business tax (BT) pilot collection in 2012, the transfer of intangible properties such as land use rights, trademark, patent, non-patented technology, copyright and goodwill was subject to 5 percent BT imposed on the transferor. As such, when an NRE transferred intangible assets to a domestic company in China, the NRE was subject to 5 percent BT. The domestic payment before the payment goes outbound. Since implementation of the VAT reform, the transfer of intangible assets is now subject to 6 percent VAT instead of BT. The domestic company is responsible for withholding the VAT from the payment in addition to CIT. According to Announcement 9, which came into effect on February 19, 2013, the amount of VAT paid is deductible from the tax base of the CIT.

SAT Announcement [2013] No. 41 – Treatment of Mixed Investments

Announcement 41, which clarifies the CIT treatment of incomes and expenses from mixed investments, came into effect on September 1, 2013. Mixed investment refers to investment that combines features of both equity investment and debt investment. Under China’s CIT law, dividend income from equity investment is exempt from CIT for the recipient, but the dividends distributed cannot be deducted from the taxable income of the distributor. Returns on debt investments are considered interest income and taxable for the recipient, but is considered an interest expense for the distributor and deductible from their taxable income.

Announcement 41 clarifies that for eligible mixed investments, the investor and the investee could claim the returns on investment as interest income and interest expense, respectively. Therefore, the returns are taxable for the investor, and deductible from the taxable income of the investee.

Eligible mixed investments should meet these criteria: the investee must pay interest on a regular basis according to the interest rate agreed to in the investment contract or agreement, and must redeem the investment or repay the principal upon expiration of the investment period or the satisfaction of specific conditions. Meanwhile, the investor should not have any ownership over the net assets of the investee; should not have the right to vote or be elected; and should not participate in the daily production and operation of the investee.

An example of mixed investment is when a trust company collects money from institutional investors and individuals, and provides loans and investments to various projects in exchange for the investees’ equity shares. The trust company usually does not have ownership of the investee’s net assets, nor does it engage in any of the votes or daily operations of the investee. A trust financing contract usually has provisions stipulating fixed annual returns and buy-back deals which require the investee to purchase the equity shares back from the trust company at a premium after a certain number of years.

This article is an excerpt from the January and February 2014 issue of China Briefing Magazine, titled “Annual Audit and Compliance in China.” In this issue of China Briefing, we discuss annual compliance requirements for foreign-invested enterprises, including wholly-foreign owned enterprises, joint ventures and foreign-invested commercial enterprises, as well as the less demanding requirements for representative offices. We also highlight the most recent tax and legal changes that will significantly influence the way companies do business in China in 2014.

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