Implementing Rules of the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises

Implementing Rules of the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises


Implementing Rules of the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises

Order of the State Council [1991] No.85

Jun 30, 1991

Chapter I General Provisions
 
Article 1 These Rules are formulated in accordance with the provisions of Article 29 of the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises (hereinafter referred to as the "Tax Law").
 
Article 2 "Income from production and business operations" mentioned in Article 1, paragraph 1 and paragraph 2 of the Tax Law means income from production and business operations in manufacturing, mining, communications and transportation, construction and installation, agriculture, forestry, animal husbandry, fishery, water conservation, commerce, finance, service industries, exploration and exploitation, and in other trades.
"Income from other sources" mentioned in Article 1, paragraph 1 and paragraph 2 of the Tax Law means profits (dividends), interest, rents, income from the transfer of property, income from the provision or transfer of patents, proprietary technology, income from trademark rights and copyrights as well as other non-business income.
 
Article 3 "Foreign-invested enterprises" mentioned in Article 2, paragraph 1 of the Tax Law and "foreign companies, enterprises and other economic organizations which have establishments or places in China and engage in production or business operations" mentioned in Article 2, paragraph 2 of the Tax Law are, unless otherwise especially specified, generally all referred to as "enterprises" in these Rules.
"Establishments or places" mentioned in Article 2, paragraph 2 of the Tax Law refers to management organizations, business organizations, administrative organizations and places for factories and the exploitation of natural resources, places for contracting of construction, installation, assembly, and exploration work, places for the provision of labor services, and business agents.
 
Article 4 "Business agents" mentioned in Article 3, paragraph 2 of these Rules means companies, enterprises and other economic organizations or individuals entrusted by foreign enterprises to engage as agents in any of the following:
(1) representing principals on a regular basis in the arranging of purchases and signing of purchase contracts and the purchasing of commodities on commission;
(2) entering into agency agreements or contracts with principals, storing on a regular basis products or commodities owned by principals, and delivering on behalf of principals such products or commodities to other parties;
(3) having authority to represent principals on a regular basis in signing of sales contracts or in accepting of purchase orders.
 
Article 5 "Head office" mentioned in Article 3 of the Tax Law refers to the central organization which is established in China by an enterprise with foreign investment as a legal person pursuant to the laws of China and which is responsible for the management, operations and control over such enterprise.
Income from production and business operations and other income derived by the branches within or outside China of an enterprise with foreign investment shall be consolidated by the head office for purposes of the payment of income tax.
 
Article 6 "Income derived from sources inside China" mentioned in Article 3 of the Tax Law refers to:
(1) income from production and business operations derived by foreign-invested enterprises and foreign enterprises which have establishments or places in China, as well as profits (dividends), interest, rents, royalties and other income arising within or outside China actually connected with establishments or sites established in China by foreign-invested enterprises or foreign enterprises;
(2) the following income received by foreign enterprises which have no establishments or sites in China:
(a) profits (dividends) earned by enterprises in China;
(b) interest derived within China such as on deposits or loans, interest on bonds, interest on payments made provisionally for others, and deferred payments;
(c) rentals on property leased to and used by lessees in China;
(d) royalties such as those received from the provision of patents, proprietary technology, trademarks and copyrights for use in China;
(e) gains from the transfer of property, such as houses, buildings, structures and attached facilities located in China and from the assignment of land-use rights within China;
(f) other income derived from China and stipulated by the Ministry of Finance to be subject to tax.
 
Article 8 "Tax year" mentioned in Article 4 of the Tax Law begins on January 1 and ends on December 31 under the Gregorian Calendar.
Foreign enterprises that have difficulty computing taxable income in accordance with the tax year stipulated in the Tax Law may, upon approval by the local tax authorities of an application submitted by such enterprises, use their own 12-month fiscal year as the tax year.
Enterprises commencing business operations in the middle of a tax year or actually operating for a period of less than 12 months in any tax year due to such factors as merger or shut-down shall use the actual period of operations as the tax year.
Enterprises that undergo liquidation shall use the period of liquidation as the tax year.
 
Article 9 "The competent authority for tax affairs under the State Council" mentioned in Article 8, paragraph 3 and Article 19, paragraph 3, Item (4) of the Tax Law and Article 72 of these Rules refers to the Ministry of Finance and the State Tax Bureau.

Chapter II Computation of Taxable Income
 
Article 10 "The formula for the computation of taxable income" mentioned in Article 4 of the Tax Law is as follows:
(1) Manufacturing:
(a) taxable income = (profit on sales) (profit from other operations) (non-business income) - (non-business expenses);
(b) profit on sales = (net sales) - (cost of products sold) - (taxes on sales) - [ (selling expenses) (administrative expenses) (finance expenses) ];
(c) net sales = (gross sales) - [ (sales returns) (sales discounts and allowances) ];
(d) cost of products sold = (cost of products manufactured for the period) (inventory of finished products at the beginning of the period) - (inventory of finished products at the end of the period);
(e) cost of products manufactured for the period = (manufacturing costs for the period) (inventory of semi-finished products and products in process at the beginning of the period) - (inventory of semi-finished products and products in process at the end of the period);
(f) manufacturing costs for the period = (direct materials consumed in production for the period) (direct labour) (manufacturing expenses).
(2) Commerce:
(a) taxable income = (profit on sales) (profit from other operations) (non-business income) - (non-business expenses);
(b) profit on sales = (net sales) - (cost of sales) - (taxes on sales) - [ (selling expenses) (administrative expenses) (finance expenses) ];
(c) net sales = (gross sales) - [ (sales returns) (sales discounts and allowances) ];
(d) cost of sales = (inventory of merchandise at the beginning of the period) { (purchase of merchandise during the period) - [ (purchase returns) (purchase discounts and allowances) ] (purchasing expenses) } - (inventory of merchandise at the end of the period).
(3) Service trades:
(a) taxable income = (net business income) (non-operating income) -(non- operating expenses);
(b) net business income = (gross business income) - [ (taxes on business income) (operating expenses) (administrative expenses) (finance expenses) ].
(4) Other lines of business: Computations shall be made with reference to the above formulas.
 
Article 11 The computation of taxable income of an enterprise shall, in principle, be on an accrual basis. The following income from business operations of an enterprise may be determined by stages and used as the basis for the computation of taxable income:
(1) Where products or commodities are sold by installment payment methods, income from sales may be recognized according to the invoice date of the products or commodities to be delivered; income from sales may also be recognized according to the date of payment to be made by the buyer as agreed upon in the contract;
(2) Where construction, installation and assembly projects, and provision of labor services extend beyond one year, income may be recognized according to the progress of the project or the amount of work completed;
(3) Where the processing or manufacturing of heavy machinery, equipments and ships for other enterprises extends beyond one year, income may be recognized according to the progress of the project or amount of work completed.
 
Article 12 Where Chinese-foreign contractual joint ventures operate on the basis of product-sharing, the partners thereto shall be deemed to receive income at the time of the division of the products; the amount of income shall be computed according to the price sold to third party or with reference to prevailing market prices.
Where foreign enterprises are engaged in the co-operative exploration of petroleum resources, the partners thereto shall be deemed to receive income at the time of the division of the crude oil; the amount of income shall be computed according to a price which is adjusted periodically with reference to the international market prices of crude oil of similar quality.
 
Article 13 In respect of income obtained by enterprises in the form of non-monetary assets or rights and interests, such income shall be computed or appraised with reference to prevailing market prices.
 
Article 14 "Exchange rate quoted by the State exchange control authorities" mentioned in Article 21 of the Tax Law refers to the buying rate quoted by the State Administration of Exchange Control.
 
Article 15 In respect of income obtained by enterprises in foreign currency, upon payment of income tax in quarterly installments in accordance with the provisions of Article 15 of the Tax Law, taxable income shall be computed by converting the income into Renminbi according to the exchange rate quotation on the last day of the quarter. At the time of final settlement following the end of the year, no recompilation and reconversion need be made in respect of income in a foreign currency for which tax has already been paid on a quarterly basis; only that portion of the foreign currency income of the entire year for which tax has not been paid shall, in respect of the computation of taxable income, be converted into Renminbi according to the exchange rate quotation on the last day of the tax year.
 
Article 16 Where an enterprise is unable to provide complete and accurate certificates of costs and expenses and is unable to correctly compute taxable income, the local tax authorities shall determine the rate of profit and compute taxable income with reference to the profit level of other enterprises in the same or similar trade. Where an enterprise is unable to provide complete and accurate certificates of revenues and is unable to report income correctly, the local tax authorities shall appraise and determine taxable income by the use of such methods as cost (expense) plus reasonable profits.
When the tax authorities appraise and determine profit rates or revenues in accordance with the provisions of the preceding paragraph, and where other treatment is provided by the laws, regulations and rules, such other treatment shall be applicable.
 
Article 17 Foreign air transportation and ocean shipping enterprises engaged in international transport business shall use 5% of the gross revenues from passenger and cargo transport and shipping services arising within China as taxable income.
 
Article 18 Where an enterprise with foreign investment invests in another enterprise within China, the profits (dividends) so obtained from the enterprise receiving such investment may be excluded from taxable income of the enterprise; however, expenses and losses incurred in such above-mentioned investments shall not be deducted from taxable income of the enterprise.
 
Article 19 Unless otherwise stipulated by the State, the following items shall not be itemized as costs, expenses or losses in the computation of taxable income:
(1) expenses in connection with the acquisition or construction of fixed assets;
(2) expenses in connection with the transfer or development of intangible assets;
(3) interest on capital;
(4) various income tax payments;
(5) fines for illegal business operations and losses due to the confiscation of property;
(6) surcharges and fines for overdue payment of taxes;
(7) the portion of losses due to natural disasters or accidents for which there has been compensation;
(8) donations and contributions other than those used in China for public welfare or relief purposes;
(9) royalties paid to the head office;
(10) other expenses not related to production or business operations.
 
Article 20 Reasonable administrative expenses paid by a foreign enterprise with an establishment or site in China to the head office in connection with production or business operations of the establishment or site shall be permitted to be itemized as expenses following agreement by the local tax authorities after an examination and verification of documents of proof issued by the head office in respect of the scope of the administrative expenses, total amounts, the basis and methods of allocation, which shall be provided together with an accompanying verification report of a certified public accountant.
Administrative expenses in connection with production and business operations shall be allocated reasonably between foreign-invested enterprises and their branches.
 
Article 21 Reasonable interest payments incurred on loans in connection with production and business operations shall be permitted to be itemized as expenses following agreement by the local tax authorities after an examination and verification of documents of proof, which shall be provided by the enterprises in respect of the loans and interest payments.
  ......
Please consent to the LexisNexis Terms and Conditions and Privacy Policy.