New Income Tax Rates Apply From 1st January 2008

Tax reforms to unify domestic and foreign corporate profits tax have been under development for some time. There has been intense speculation on detail of these, reflecting differing views of the impact of such a change on FDI. It has been said, for example, that the Ministry of Commerce has resisted dramatic changes, whereas the Ministry of Finance has pressed for significant alterations in favour of domestic companies. The debate caused some delay - the draft was expected to go the Standing Committee of the National People’s Congress (NPC) in summer 2006 but did not do so until mid October. Finally on 16 March 2007 the Enterprise Income Tax Law passed the NPC. It will come into effect on 1 January 2008.

The new income rate for commercial businesses will be 25%. A lower rate of 20% is available to eligible small and low-profit enterprises and 15% for high and new technology enterprises.

In addition there will be a preferential tax treatment (exemption or reduction) for eligible venture investment in:

- agriculture, forestry, animal husbandry, fisheries

- construction projects that are of interest for the state

- environmental protection, energy efficiency or water conservation

- technology transfer

- encouraged areas (i.e. Western Development Region)

Foreign invested companies established before the promulgation of this law enjoy a five year transition period.

The Special Economic Zones such as Shenzhen will lose their 15% rates by 2013.

Taxation privileges will no longer be used to attract foreign investment. Instead, tax policy will be used to upgrade China’s industry, and especially to encourage the development of sectors such as high-tech, infrastructure facilities and environmental protection.

However, certain key areas of these reforms still require clarification. For example, the five year grace period for companies that applied for business licences prior to 1st January 2008 has not been determined in structure. Questions are still be answered concerning whether the new rate of 25% will be only introduced in 2013, or whether it will be “phased in” in annual 1 or 2% increases. The same applies to the Special Economic Zones.

Additionally, no qualifying criteria has been established to determine whether or not a company qualifies as a ‘hi-tech’ entity or a ‘small-medium enterprise’ and can take advantage of the lower rates of 15 and 20%.

Accordingly, while the new rate of 25% clears up many issues over the extent of the unification reform, there are still matters of clarification required for hi-tech, SME’s, and companies wanting to set up in SEZ’s. You will need professional advise from firms familiar with local regulations that can monitor these developments in order to answer these questions.

Advise: tax@dezshira.com for updates on how your regional zones will be implementing the transition from 15-25% rates.

Web with full office contacts: www.dezshira.com