Do you operate business or make investments in China, or have intentions in entering the Chinese market? This article will provide a brief overview over the tax updates, which could be of interest for foreign enterprises.
The article presents a brief overview of different proposals (so-called “Measures”) on various new tax updates. The Measures were issued in 2017 but not all of them have been implemented yet. Even though the Measures are merely instructional and therefore do not constitute legislation nor other binding provisions, foreign enterprises should be aware of them when going forward and looking for new investment opportunities in the Chinese market.
- More sectors in China are suggested to be opened up to foreign capital
While sectors such as finance, telecommunications, internet, culture, education, and transportation to a great extent are monopolized in China and not clearly dealt with in the Measures, other sectors are expected to have the access restrictions for foreign investors lifted or deleted. These sectors are for example accounting, auditing, architectural design, credit investigation and rating services. Some access restrictions on industries in the manufacturing sector will be cancelled, such as motorcycle, fuel ethanol production and manufacturing of rail transportation equipment. In later 2017 and 2018, the opening-up policies of several relevant sectors have been implemented. For example, in August 2018, China released new regulations to ease foreign ownership restrictions in the banking sector and financial asset management companies.
- Foreign investors are encouraged to migrate their business to central, western and northeast regions in China
These foreign investment enterprises (FIE) are thus granted financial subsidies and preferential land policies from the state, provided that certain requirements are fulfilled. FIEs conducting encouraged business activities included in the “Preferential Industry Catalogue for Foreign Investment in Central and Western Regions” (the Central and Western Catalogue), can also enjoy a reduced corporate income tax rate of 15 percent. The Central and Western Catalogue covers a very various and wide range of sectors.
- Further emphasis on the opening of certain sectors
This includes the opening-up of several more sectors to foreign capital including advanced manufacturing sectors such as new energy automobile, vessel design, repair of regional and general aviation aircraft, international marine transport and railway passengers transportation in the transportation sector.
- Tax deferral treatment on certain investments – “encouraged project”
Foreign investors can enjoy a tax deferral on profits directly reinvested in projects encouraged by the state provided that certain requirements are fulfilled. A wide range of sectors and industries is covered. Enterprises reinvesting in China should therefore seek knowledge in whether its investment would qualify for the deferral.
- Foreign tax credit
Chinese tax-resident enterprises (TRE) (including the regional headquarters of a multi-national corporate (MNC)) are subject to corporate income tax on income derived from both China and offshore. The enterprise can claim foreign tax credit within a limited amount for income tax already paid overseas. Tax policies are proposed to support the repatriation of qualified overseas income by TREs and MNCs to China.
- Special provisions for “Qualified Technology Advanced Service Enterprises”
So-called TASEs (“Qualified Technology Advanced Service Enterprises”, including foreign enterprises registered within the territory of China), in pilot cities can enjoy a reduced corporate income tax rate of 15 percent. The tax deductible cap of staff education expenses is increased to 8 percent of the total expenses for wages and salaries. The proposal suggests to extend this preferential treatment to be applicable on qualified TASEs in the rest of the country.
The tax deferral treatment for reinvestment, the foreign tax credit and the extended scope of corporate income tax (CIT) preferential treatment applicable to qualified TASE to the rest of the country all came into effect by the end of 2017. We will make observations and follow up the development in case of any update in this regard.
Source: PwC China NTPS
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