Concessions on Business Tax, VAT and Customs Duty

1. Incomes derived by research and development centers established by FIEs and foreign wholly-owned enterprises and incomes derived by foreign enterprises and foreign individuals from technology transfer, technology development and related consultancy and technical services are exempt from business
2. The raw materials, auxiliary materials, parts, components, accessories and packaging materials imported by FIEs for the outward processing or assembly of products and for the production of goods for export are exempt from import tariffs based on the quantity of finished products actually processed and exported. Alternatively, import tariffs are levied on the imported materials and parts first and rebates are made later based on the quantity of finished products actually processed and exported.
3. FIEs are entitled to full VAT rebate on the purchase of domestically-produced equipment within their investment amount if such equipment is listed in the catalogue of duty-free imports.
4. Imports of equipment and supporting technologies, accessories and parts for own use by FIEs under the “encouraged category” or “restricted category II”, foreign-invested R&D centres, FIEs with advanced technologies and export-oriented FIEs, are exempt from import tariffs and import-related taxes .
5. Imports of equipment for own use by foreign investment projects encouraged and supported by the state within their total investment amount are exempt from tariffs and VAT (unless otherwise stipulated by the state). Imports of equipment and supporting technologies, accessories and spare parts for own use by foreign-invested R&D centers within their total investment are exempt from tariffs and import-related taxes in accordance with the Circular of the State Council on the Adjustment of Tax Policy on Equipment Imports if the import items cannot be produced in China or if the performance of the like domestic products or technologies cannot meet their demand.

Concessions on Corporate Income Tax

(a) Preferential Tax Rate
Enterprises in the following regions (sectors) are subject to corporate income tax at the reduced rate of 15%:
1. Foreign enterprises with establishments or venues in special economic zones and engaged in production and business operations;
2. Production FIEs established in economic and technological development zones approved by the State Council and in the Pudong New Area in Shanghai;
3. Technology- and knowledge-intensive projects launched by FIEs in old urban districts of special economic zones, economic and technological development zones and coastal economic open areas approved by the State Council with long investment recovery periods and foreign investment exceeding US$30 million;
4. Production FIEs engaged in energy, transportation and port construction projects;
5. Production FIEs engaged in export processing in bonded areas;
6. Recognised high-tech FIEs in state new- and high-technology industrial development zones approved by the State Council.
b) Exemption and Reduction of Corporate Income Tax
1. Production FIEs with an operation period of over 10 years (excluding projects for the exploration of petroleum, natural gas, rare metals and precious metals) are eligible for corporate income tax exemption in the first two profit-making years and for reduction by half in the following three years. With the approval of the State Administration of Taxation (SAT), FIEs engaged in agriculture, forestry and animal husbandry and FIEs established in the economically-backward remote and border areas may be levied corporate income tax at the reduced rate of 15%-30% for another 10 years after the expiration of the above said tax exemption and reduction period.
2. Sino-foreign joint ventures engaged in port and wharf construction and with an operation period of over 15 years are eligible for corporate income tax exemption in the first five profit-making years and for reduction by half in the following five years.
3. Infrastructure projects related to airports, ports, wharfs, railways, highways, power stations, coal mines and water conservancy facilities with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and reduction by half in the following five years.
4. Infrastructure projects related to airports, ports, railways, highways and power stations as well as agricultural development in the Pudong New Area in Shanghai with an operation period of over 15 years are eligible for corporate income tax exemption in the first five years and for reduction by half in the following five years.
5. The following types of enterprises are eligible for corporate income tax exemption in the first profit-making year and for reduction by half in the second and third years with the approval of the local tax authorities:
– FIEs engaged in services in special economic zones with foreign investment exceeding US$5 million and with an operation period of over 10 years;
– Foreign-invested banks, Sino-foreign joint-venture banks and other financial institutions in special economic zones and other areas designated by the State Council with foreign capital investment exceeding US$10 million and with an operation period of over 10 years.
6. Recognized high-tech Sino-foreign joint venture enterprises in state-level high-technology development zones with an operation period of over 10 years are exempt from corporate income tax in their first two profit-making years with the approval of the tax authorities.
7. Foreign-invested export-oriented enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% following the expiration of the corporate income tax exemption and reduction by half concession if their export value amounts to over 70% of their total output value in the current year.
8. Foreign-invested high-tech enterprises are entitled to pay corporate income tax at the reduced rate of 15% or 10% for three years following the expiration of the corporate income tax exemption and reduction by half concession if their status of high-tech enterprises remains unchanged.
9. The income of foreign banks from interest on loans at preferential interest rates to China’s state banks is exempt from corporate income tax.
10. Foreign leasing companies that lease equipment to Chinese enterprises and are paid leasing fees by products or in the form of product buy-back are exempt from corporate income tax.
11. FIEs that undergo restructuring or merge with other enterprises to form joint-stock companies are eligible for a two-year corporate income tax exemption and three-year reduction by half concession.

Tax Rebate on Re-investment by FIEs

Any foreign investor of an FIE re-investing its profit obtained from the enterprise directly into that enterprise or using the profit as capital investment to establish other FIEs with an operation period of at least five years is, upon approval granted by the competent tax authorities, eligible for a 40% refund of the corporate income tax already paid on the re-invested amount. If the foreign investor re-invests its profit directly in establishing or expanding an export-oriented or high-tech enterprise in China, the corporate income tax already paid on the re-invested amount will be 100% refunded.

Other Exemptions and Reductions of Income Tax

1.The profits of foreign investors derived from FIEs are exempt from income tax.
2. The interest revenue of international financial institutions derived from loans to the Chinese government or state banks and the interest revenue of foreign banks derived from loans to Chinese state banks at preferential rates are exempt from income tax.
3. Royalties paid to foreign enterprises for their provision of special technologies to China for scientific research, exploitation of energy resources, development of transportation, production of agriculture, forestry and animal husbandry, and development of important technologies, are eligible for income tax at the reduced rate of 10%, with the approval of SAT. For those enterprises that involve advanced technologies or offered favorable terms, income tax will be exempted.
4. In the case of FIEs or foreign enterprises with establishments or venues engaged in production or business operations within the territory of China, 40% of their investment in the purchase of domestically-produced equipment is exempt from income tax.
5. With the approval of the tax authorities, FIEs that have increased their technological development expenses by more than 10% over the previous year are allowed to offset their taxable income in the current year by 50% of the amount of technological development expenses.
6. The governments of various provinces, autonomous regions and municipalities have also introduced local income tax exemptions or reductions for those sectors or projects where foreign investment is encouraged.

Individual Income Tax Concession for Foreigners

The following incomes of foreigners are eligible for individual income tax concession:
1. Housing allowance, food allowance, removal expenses and laundry fees received in non-cash forms or in the form of cash reimbursement.
2. Travel allowance at reasonable levels.
3.The portion of home visit allowance, language course fees and children’s education expenses deemed reasonable by the tax authorities.
4. Dividends and bonuses received from FIEs.
5.Any foreign individual who resides in China consecutively or accumulatively for not more than 90 days (or 183 days for those from countries that have signed tax agreements with China) in a tax year is exempt from individual income tax if his wage or salary is not paid or borne by his employer in China and is not borne by a resident establishment or permanent venue of his employer in China.
6.Any foreign individual who resides in China for more than a year but less than five years is required to declare and pay individual income tax on his wage or salary paid by his employer both inside and outside China during his duration of work in China. With the approval of the competent tax authorities, he may be allowed to pay tax only on that part of his wage or salary paid by his employer inside China.