China Begins Phasing Out Foreign Company Tax Perks

by Mary Swire, Tax-News.com, Hong Kong

14 November 2007

Regulations have been drafted that will phase out certain tax privileges enjoyed by foreign-invested enterprises operating in China, as part of a major corporate tax reform due to go into effect in January 2008.

According to a report from the China Securities Journal, which cited an unnamed official familiar with the situation, the executive regulations, which have been passed to the State Council for approval, would bring about an increase in the 15% income tax rate paid by foreign companies operating in special bonded zones to 25% over five years.

These regulations would apply to bonded zones such as the Shenzhen Special Economic Zone, economic development zones in coastal cities like Hongqiao, the Economic and Technological Development Zone in Shanghai, and high-tech development zones, including Zhongguancun Science Park in Beijing, the report stated. In addition, the 24% rate paid by foreign companies in coastal regional development zones, such as the Yangtze River Delta and the Pearl River Delta, would rise directly to 25% in 2008, the report added.

Foreign companies currently benefiting from tax holidays will, however, retain these benefits for the full ten-year term of the holiday, the report revealed. Under these tax holiday schemes, qualifying firms pay corporate tax at 0% for the first five years, and at 50% of normal rates for the next five years.

Companies investing in China's under-developed middle and western regions will also pay a lower 15% rate of corporate tax until 2010, the journal reported.

An important new corporate tax law harmonising the rates paid by domestic and foreign enterprises is due to come into force in China on January 1, 2008. The long-awaited reforms, which were finally approved by the National People's Congress - China's highest legislative body - this year, would unify corporate tax at a rate of 25%. While this would mean a cut in tax for domestic firms, foreign-backed companies could see their tax bill increase.

The headline rate of corporate tax in China is 33%, but foreign-backed companies can take advantage of many investment incentives to effectively reduce their corporate tax rate to as low as 10% in some cases.

As part of this unification process, China's State Administration of Taxation announced in September that corporate taxes will be cut for domestic companies in eight industry sectors. The new corporate tax rates went into effect immediately, and replaced tax rates put into place in 2000. According to the Interfax news agency, the new corporate tax rates by industry are as follows: agriculture, forestry, animal husbandry, and fishery- 3% to 10%; manufacturing- 5% to 15%; wholesale and retailing- 4% to 15%; transport- 7% to 15%; construction- 8% to 20%; catering- 8% to 25%; entertainment- 15% to 30%; and other industries- 10% to 30%.

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