New Income Tax Law Comes Into Effect In China

by Mary Swire, for LawAndTax-News.com, Hong Kong

02 January 2008

China's State Council, or the cabinet, publicized over the weekend policies aimed at cushioning the impact of the new unified corporate income tax law.

The new law, which took effect on Jan. 1, 2008, replaced two earlier regulations that date back more than a decade and unifies income tax rates for domestic and foreign-funded companies at 25%.

The cabinet said that the new law would be phased in over five years. Companies that currently pay income tax of 15% will pay 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012.

Companies that are exempt from taxes or have concessional rates will retain their preferences until the original expiration date.

Companies can make a one-time choice of the tax system that will be most beneficial.

The cabinet said the transitional steps targeted companies registered with industry and commerce administrations before March 16, 2007.

Companies in the western part of the country aren't affected by the new law but will continue to enjoy preferential rates under regulations jointly issued by the Ministry of Finance, the State Administration of Taxation and China's Customs authority.

Also, the country will offer incentives for key high-tech companies registered in special economic zones, including Shenzhen, Zhuhai, Shantou, Xiamen and Hainan, as well as in Shanghai Pudong New Area, on and after January 1st, 2008.

These companies must have proprietary technology and must comply with a range of requirements to be classified as high-tech enterprises.

For earnings collected within their district of registration, such companies would be exempted from corporate income tax for the first two tax years and pay income tax of just 12.5% from the third to the fifth tax years. Gains from outside these areas must be calculated separately.

Until now, Chinese companies have been subject to a statutory income tax rate of 33%, while many foreign investors have been given tax waivers or reduced tax rates as an incentive to invest in China.

The new law has, for the first time since 1978, put domestic and foreign firms on an equal footing in terms of taxation in a government effort to promote fair competition.

China has been among the top destinations for foreign direct investment (FDI) since it opened up to the world. It has been the largest recipient of FDI among all developing nations for 15 successive years.

Yet it attracts per capita foreign investment of just 53 US dollars, less than one third of the world average and one-twelfth that of developed nations, according to the Ministry of Commerce.

The government has become increasingly selective over what types of foreign investment should be preferred and says it doesn't believe the unified arrangements will have much impact on inward FDI.

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