Detailed Rules for the Implementation
of the Income Tax Law of the People's Republic of China
on Enterprises with Foreign Investment and Foreign Enterprises
Article 1 These Rules were formulated in accordance
with the provisions of Article 29 of the Income Tax Law of the
People's Republic of China on Enterprises with Foreign Investment
and Foreign Enterprises (hereinafter referred to as the "Tax
Law").
Article 2 'Income from production and business' in Paragraphs
1 and 2 of Article 1 of the Tax Law, refers to income from production
and business operations in manufacturing, mining, communications
and transport, construction and installation, agriculture, forestry,
animal husbandry, fishing , water conservation, commerce, finance,
service industries, exploration and exploitation, and in other
trades.
'Other income' from Paragraphs 1 and 2 of Article 1 of the Tax
law refers to profits (dividends), interest, rental income,
income from the transfer of property, income from the supply
or transfer of patents, special technology, income from trademark
rights and copyrights as well as other non-business income
Article 3 'Enterprises with foreign investment' in Paragraph
1, Article 2 of the Tax Law, and 'foreign companies, enterprises
and other economic organizations which have established organizations
or sites within the borders of China and engage in production
or business' in Paragraph 2, Article 2 of the Tax Law, are,
unless otherwise particularly specified, all referred to as
'enterprises' in these Detailed Rules.
'Established organizations or sites' in Paragraph 2, Article
2 of the Tax Law, refers to management organizations, business
organizations, administrative organizations, and sites for factories
and the exploitation of natural resources, sites for undertaking
construction, installation, assembly and exploration work, and
sites for supplying labor services, and business agents
Article 4 'Business agents' in Paragraph 2, Article 3 of these
Detailed Rules refers to companies, enterprises and other economic
organizations or individuals entrusted by foreign enterprises
to engage as agents in any of the following ways:
A. To represent the principals on a regular basis in arranging
purchases, signing purchase contracts and purchasing commodities
on commission;
B. To enter into agency agreements or contracts with the principals
to store, on a regular basis, products or commodities of the
principals, and to deliver such products or commodities on behalf
of principals, to other parties;and
C. To have authority to represent principals on a regular basis
in signing sales contracts or in accepting purchase orders.
Article 5 'Head office' in Article 3 of the Tax Law refers to
the central organization of an enterprise with foreign investment
which is organized in China as an enterprise legal person, according
to the laws of China, and which is responsible for the management,
operations and control over such enterprise.
For Income Tax payment purposes, the head office of an enterprise
with foreign investment shall consolidate all income form production
and business and other income derived from its branches within
or outside China .
Article 6 'Income derived from sources inside China ' in Article
3 of the Tax Law refers to:
A. Income from production and business operations of enterprises
with foreign investment and foreign enterprises which have established
organizations or sites in China, as well as profits (dividends),
interest, rental income, royalties and other income arising
within or outside China which is actually connected with organizations
or sites established in China by enterprises with foreign investment
or foreign enterprises;
B. the following income received by foreign enterprises in China
who have not established organizations or sites;
a. profits(dividends) earned by enterprises in China ;
b. interest derived within China such as on deposits or loans,
interest on bonds, interest on other provisional payments and
deferred payments;
c. rental income derived from 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. incomes received from the transfer of property within the
borders of China, such as houses, buildings, structures and
attached facilities, and from the assignment of land-use rights,
etc.;
f. other income derived from within the borders of on which
tax is levied according to determination of the Ministry of
Finance.
Article 7 Where Chinese-foreign contractual joint ventures do
not have legal person status, each partner may separately calculate
and pay Income Tax in accordance with relevant State tax laws
and regulations; where such an enterprise submits an application
which is approved by local tax authorities, Income Tax may be
calculated and paid on a consolidated basis in accordance with
the provisions of the Tax Law.
Article 8 'Tax year' in Article 4 of the Tax Law begins on January
1 and ends on December 31 of the Gregorian Calendar.
Where foreign enterprises have difficulty calculating taxable
income in accordance with the tax year stipulated in the Tax
Law, they may, after approval of their submitted application
to the local tax authorities, use their own 12-month fiscal
year for tax calculations.
Where enterprises commence operations in the middle of a tax
year or actually operate for a period of less than 12 months
in any tax year due to such factors as merger or shut-down,
they shall use the actual period of operation as the tax year.
Enterprises that undergo liquidation shall use the period of
liquidation as the tax year.
Article 9 The responsible authority for taxation affairs under
the State Council referred to in Paragraph 3 of Article 8 and
Item(4) in Paragraph 3 of Article 19 of the Tax Law and in Article
72 of these Rules, is the Ministry of Finance and the State
Administration of Taxation
Chapter 2 Calculation of Taxable Income
Article 10 The formula for the calculation of taxable income
referred to in Article 4 of the Tax Law is as follows:
A. 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)
+ (financial expenses)];
c. net sales = (gross sales) - [(sales returns) +(sales discounts
and allowances) ];
d. cost of products sold = (cost of products manufactured in
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 in 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 = (materials directly
consumed in production for the period) + (direct labor costs)
+ (manufacturing expenses).
B. 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 goods sold) - (taxes
on sales) - [(selling expenses) + (administrative expenses)
+(financial 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).
C. 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)
+ (financial expenses)].
D. Other Types of Business: Calculations shall be made by referring
to the above formulas.
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