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Tax Connect Flash | China tax regulation update

Corporate Income Tax ("CIT") related issues

Circular number: SAT Decree [2011] No. 34 Issuance date: 2011-6-9 Effective date: 2011-7-1

This Regulation covers the following topics:

  • Under CIT Law, interest expenses for loans from non-financial institutions are deductible only within the limit of "comparable interests" that would be charged for loans from financial institutions. The Regulation provides details as to how to determine "comparable interests".
  • Tax treatments for capital reduction or withdrawal. For investors, the withdrawal shall be divided into three parts: investment cost withdrawal, dividends and capital gains. There are different tax treatments for each part.
  • Detailed rules are provided for depreciation treatments of building/construction renovation and expansion.
  • Valid supporting documents (tax invoices) for costs and expenses shall be ready before the annual CIT declarations in order to be deductible. Costs for uniform clothing for employees are deductible business expenses.

CIT treatment for investment in treasury bonds

Circular number: SAT Decree [2011] No. 36 Issuance date: 2011-6-22 Effective date: 2011-1-1

This regulation provides detailed rules for calculating tax exempted interest income from treasury bond investment and taxable capital gains from disposal of treasury bonds.

Notice regarding the Tax Information Exchange Treaty with BVI and the relevant Protocol

Circular number: SAT Announcement [2011] No. 37 Issuance date: 2011-6-22 Effective date: 2010-12-30

China and BVI signed the Treaty and the Protocol on 7 December 2009. The Treaty and Protocol became effective on 30 December 2010 and are applicable to taxable income obtained since 1 January 2011. The enforcement of the Treaty and the Protocol will facilitate tax information exchange between tax authorities of China and BVI.

Implementing Rules of Individual Income Tax Law Amended

Circular number: State Council Decree No. 600 Issuance date: 2011-7-19 Effective date: 2011-9-1

Monthly deduction for expatriates remains the same. Before the amendment, the monthly standard deduction for expatriates is RMB 4800 = RMB 2000 (for Chinese local tax payers) + additional deduction of RMB 2800 (for expatriates). After the amendment, the monthly standard deduction for expatriates is RMB 4800 = RMB 3500 (for Chinese local tax payers) + additional deduction of RMB 1300 (for expatriates).

Free Trade Treaty between China and The Republic of Costa Rica

Circular number: State Council Tariff Committee Circular [2011] 13 Issuance date: 2011-6-24 Effective date: 2011-8-1

The Free Trade Treaty became effective on 1 August 2011. This is the 10th Free Trade Treaty concluded by China. The Free Trade Treaty provides more favourable import tariff rates than those available under the WTO framework.

Individual Income Tax for disposal of operational investment

Circular number: SAT Announcement 2011 No.41 Issuance date: 2011-7-25 Effective date: 2011-7-25

The regulation clarifies that all kinds of payments received by an individual (in the name of share price, compensation, default penalties, etc.) for disposal of investment shall be included in the calculation of the capital gains.

CIT incentive for qualified investment in Western China

Circular number: Circular Caishui [2011] 58 Issuance date: 2011-07-27 Effective date: 2011-1-1

From 1 January 2011 to 31 December 2020, enterprises registered in Western China which are classified as encouraged enterprises are entitled to a reduced CIT rate of 15%. Encouraged enterprises shall fall within the Catalogue of Encouraged Industries for Western China which will be issued at a later time.

Administrative Measure on Tax Resident Enterprises ("TREs") Registered Off-shore but Controlled by a Chinese Enterprise or Enterprise Group

Circular number: SAT Announcement [2011] No.45 Issuance date: 2011-7-27 Effective date: 2011-9-1

Under the PRC Corporate Income Tax Law, foreign enterprises will be regarded as TREs if their effective management is located in China. The Measures provide detailed rules regarding competent tax authorities, procedures of recognition of TRE status, tax registration and de-registration, declaration, accounting, etc. It is not clear whether the same rules will also be applied to foreign enterprises controlled by Chinese individual tax residents if such foreign enterprises are managed from China.

Issues regarding the amended Individual Income Tax Law

Circular number: SAT Announcement [2011]No. 46 Issuance date: 2011-7-29 Effective date: 2011-9-1

This regulation clarifies that the amendments to the IIT Law and its Implementing Rules (new tax rates and monthly deduction) shall apply to income actually received after 30 August 2011.