The PRC tax and accounting systems applicable to foreign investments in the PRC have undergone constant change since the PRC opened its door to the outside world in 1978.
The Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises which has been effective since July 1st, 1991 has unified the income tax laws applicable to equity joint ventures and other forms of foreign investments. It is an observable trend that the accounting and tax systems are developing towards the international standards. A brief discussion on various forms of investments, the general tax regimes for these investment vehicles, and individual taxation for foreign expatriates is detailed below.
Forms of investment in the PRC
Currently, forms of foreign investments in the PRC can be classified into two categories: foreign investment enterprises (FIE) and foreign enterprises (FE). FIE includes 3 forms of investments: equity joint venture (EJV), cooperative/contractual joint venture (CJV) and wholly foreign owned enterprises (WFOE). FE refers to foreign companies which have establishments in the PRC and engage in production or business operations, and which, though without establishments in the PRC, have an income from sources within the PRC. FEs include branches, representative offices, contractors etc. FIE in general enjoys more preferential tax treatments than FE.
General tax regimes
Here is a brief outline of the general PRC tax regime applicable to foreign investments in the PRC:
Enterprise income tax (EIT)
FIEs and FEs which carry on business with establishments in the PRC are generally subject to EIT at a flat rate of 30 per cent, plus a local tax of 3 per cent, on their taxable profits. Any FE without establishment in the PRC which derives profits, interest, rent, royalty and other income sourced within the PRC is subject to a withholding tax of 20 per cent on the income. The tax rates may be reduced by various preferential treatments available in the PRC. EIT law provides for a tax loss to be carried forward for a maximum of 5 years, but no provision of carryback is available.
Preferential treatments are available to certain enterprises for the reduced EIT rate of 15 per cent, including:
* FIE and FE in the Special Economic Zones (SEZs) engaged in production and business operations.
* Production FIE engaged in technologically-advanced, capital intensive, or energy, transportation and port construction projects in the Coastal Economic Open Zones (CEOZ) urban districts of cities of Economic and Technological Development Zones (ETDZ) or SEZ.
* FIE established in Shanghai Pudong New Area and engaged in production, energy or transport projects.
An FIE of a production nature established in CEOZ or in the old urban districts of cities where the SEZ or the ETDZ are located, will be subject to a reduced EIT rate of 24 per cent.
An FIE engaged in production activities with an operation period of not less than 10 years will enjoy a tax holiday of full exemption from EIT for thefirst two years from the first profit-making year and a reduction of EIT by 50 per cent in the following 3 ears. The first profit-making year refers to the year when the FIE begins to make profits after all allowable losses are utilized. Prolonged tax holidays are available for technologically advanced enterprises (TAE) and export oriented enterprises (EE).
In addition to the tax holiday, a foreign investor of an FIE can obtain a tax refund of 40 per cent of the normal EIT paid on his reinvestment profits into a FIE in the PRC, if the latter will operate for at least an additional 5 years. If the reinvestment is used to establish or expand a TAE or EE in the PRC, the foreign investor will get a full refund of the EIT paid on the reinvested amount. The refund does not apply to local taxes paid.
Individual income tax for foreigners
Individual income tax is levied on an individual's income in accordance with his length of residency, intention and the source of income. In general, if the individual is in the PRC for:
* less than 90 days within the calendar year, his income will not be subject to tax.
* more than 90 days but less than one year, he will be subject to tax on income that is sourced within the PRC.
* more than one year but less than five years, he will be subject to tax on income that is sourced within the PRC plus any other income that is sourced outside the PRC but remitted into the PRC.
* more than five years, he will be taxed on his worldwide income.
However, if the foreign employee has no intention of establishing a permanent residence in the PRC, he will only be subject to tax on the income sourced within the PRC regardless of the length of stay and remittance. Individuals who are residents of tax treaty countries travelling into the PRC for not more than 183 days in any calendar year are also exempt from taxation.
In addition, the 90-day exemption is not available to foreign individuals whose salaries are charged to an operation carried on in the PRC, who is a resident representative of the foreign companies in the PRC, or whose employer is engaged in offshore oil exploration activities.
Foreign individuals are taxed according to e following progressive tax rates:
Monthly taxable income (RMB) Marginal tax rate (percentage)
Over 12000: 45
Tax returns are filed monthly. Effective from August 1st, 1987, individual income tax payable has been reduced by 50 per cent.
Generally, benefits in kind or expense reimbursement is not taxable but cash allowances are subject to tax. To minimise the overall taxes the overseas allowance of the expatriate resident may be structured in two portions, ie the cash portion and the expense reimbursement portion. Under the existing practice, actual reimbursement on expenses such as meals and lodging, local transportation, long-distance telephone calls, laundry etc, are not taxable.
As the PRC moves towards international standards, changes in the tax arena are inevitable. Therefore, careful planning to take advantage of the available tax incentives is crucial in any foreign investments in the PRC.
Arthur Andersen Hua Qiang Beijing Office, Room 2526-9 China World Tower, CWTC, 1 Jianguomenwai Dajie, 100004 Beijing. Tel: +861 505 3333, Fax: +861 505 2309.
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