Rules for the Implementation of the Income Tax Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures

Rules for the Implementation of the Income Tax Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures

Cai Shui Zi [1980] No. 226

December 14, 1980
　
Article 1 These Rules are formulated in accordance with the provisions of Article 17 of the Income Tax Law of the People's Republic of China for Chinese-foreign Equity Joint Ventures (hereinafter referred to as the "Tax Law").
　
Article 2 "Income derived from production and business operations" mentioned in Article 1 of the Tax Law means income derived from production and business operations in the fields of industry, mining, communications, transportation, agriculture, forestry, animal husbandry, fisheries, poultry farming, commerce, tourism, catering, service trades and other fields of production and business operations.
"Other income" mentioned in Article 1 of the Tax Law means: income from dividends, bonuses, interest and income from the leasing or transfer of property, patent rights, proprietary technology, trade mark rights, copyrights and other such property.
　
Article 3 "The local income tax of 10% of the assessed income tax" mentioned in Article 3 of the Tax Law means the local income tax computed and imposed on the basis of the actual amount of the income tax paid by a joint venture.
A reduction or exemption from the local income tax because of special reasons shall be decided by the people's governments of the respective provinces, autonomous regions or municipalities directly under the Central Government in which the joint venture is located.
　
Article 4 A foreign partner in a joint venture which remits its share of profits obtained from the joint venture shall file a return with the local tax authorities and the remitting agency shall withhold income tax of equal 10% of the amount remitted. Amounts not remitted shall not be subject to tax.
　
Article 5 "The first profit-making year" mentioned in Article 5 of the Tax Law means the year in which a joint venture begins to realize profits after the losses, if any, of the initial stage of its operation have been set off in accordance with the provisions of the Tax Law.
　
Article 6 A foreign partner in a joint venture which reinvests its share of profit obtained from the venture in the same venture or in other Chinese-foreign equity joint ventures for a period of not less than 5 consecutive years may, on the basis of the certificate of enterprise receiving such reinvestment, and upon examination, verification by and approval of the tax authorities to which payment of tax was made, receive refund of 40% of the income tax already paid on the amount reinvested.
　
Article 7 The tax year of a joint venture refers to each year of the Gregorian calendar commencing January 1 and ending December 31.
　
Article 8 The taxable income shall be calculated according to the following formulas:
1.Industry:
(1) manufacturing cost for the period = direct materials consumed in production for the period + direct labor + manufacturing expenses;
(2) cost of the products manufactured for the period = inventory of semi-finished products and products in process at the beginning of the period + manufacturing cost of the period - inventory of semi-finished products and products in process at the end of the period;
(3) cost of products sold = cost of the products manufactured for the period + inventory the products at the beginning of the period - inventory of the products at the end of the period;
(4) not sales = gross sales - (sales returns + sales discounts and allowances);
(5) profit on sales = net sales - cost of products sold - tax on sales - cost of sales - (selling expenses + overhead expenses);
(6) taxable income = profit on sales + profit from other operations + non-operating income - non-operating expenses.
2.Commerce:
(1) net sales = gross sales - (sales returns + sales discounts and allowances);
(2) cost of sales = inventory of merchandise at the beginning of the period + [purchases of merchandise during the period - (purchase returns + purchase discounts and allowances) + purchase expenses] -inventory of merchandise at the end of the period;
(3)profit on sales = net sales - tax on sales - cost of sales - (selling expenses + overhead expenses);
(4)taxable income = profit on sales + profit from other operations + non-operating income - non-business operating expenses.
3.Service trades:
(1)net business income = gross business income - (tax on business income + operating expenses + overhead expenses);
(2)taxable income = net business income + non-operating income - non-operating expenses.
4.Other lines of business: calculation shall be made with reference to the above formulae.
　
Article 9 The following items shall not be itemized as costs, expenses or losses in the calculation of the taxable income:
1.expenditures related to the acquisition or construction of machinery, equipment, buildings, facilities and other fixed assets;
2.expenditures related to the acquisition of intangible assets;
3.interest on equity capital;
4.income tax payments and local surtax payments;
5.fines for illegal business operations and losses caused by the confiscation of property;
6.penalties for the overdue payment of taxes and tax fines;
7.the portion of losses caused by windstorms, floods, fires and other such disasters, which is compensated by insurance proceeds;
8.donations other than those for public welfare and relief purposes; and
9.the portion of the business expenses incurred within the tax year in excess of either 3 thousandths of gross sales of 10 thousandths of gross business income and entertainment expenses not relevant to production and business operations.
　
Article 10 The depreciation on fixed assets used by a joint venture shall be calculated on an annual basis.
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