1. Introduction 1
1.1 Legal Framework---Sources of Law and Regulations and Their Implementation 1
1.1.1 Tax Laws 1
1.1.2. Tax Regulations Issued by the State Council 2
1.1.3. Tax Regulations Issued by the MOF and the SAT 3
1.2 Development of Corporate Income Tax System 8
1.2.1. 1949-1980: Early Taxation System of New China 8
1.1.1. 1980-1990: Multiple Tax Systems in Early Years of China's Open Door Policy and Economic Reform 9
1.2.3. Tax Reforms of 1991 and 1993--Two Corporate Income Tax Systems 10
1.2.4. Tax Reform of 2007--Unification of Two Tax Systems 11
2. Taxpayers 13
2.1 Resident Enterprise 13
2.1.1. Enterprises Organized under Chinese Laws 14
2.1.2. Enterprises Organized under Foreign Laws 20
2.2 Non-Resident Enterprise 22
2.2.1 Foreign Company Carrying on Trade or Business in China 23
2.2.2. Foreign Company Receiving Income from China That is not Connected with Establishment in China 26
2.2.3. Representative Office of Foreign Enterprise 27
3. Tax Base and Rate 31
3.1 General 31
3.2 Small Scale Enterprises with Low Profitability 32
3.3 Deemed Profit Rate and Deemed CIT 33
3.3.1. Resident Enterprise 33
3.3.2. Non-Resident Enterprise with Establishment in China 36
3.3.3. Foreign Representative Office 39
3.4 Non-Resident Enterprise without Establishment in China 42
4. Income 44
4.1 Revenue from the Sale of Goods 45
4.2 Revenue from the Provision of Services 47
4.3 Revenue from Transfer of Property 49
4.4 Dividends 52
4.5 Interest Income 53
4.6 Rental Income 54
4.7 Royalties 56
4.8 Donation Income 57
4.9 Income from Real Estate Development 58
4.10 Other Revenue 62
5. Deductions 65
5.1 Inventories 66
5.2 StaffExpenses 66
5.2.1. Salary and Wages 66
5.2.2. Pension and Insurance Premiums 68
5.2.3. StaffWelfare Expenses 68
5.2.4. Labor Union Fund Contributions 69
5.2.5. StaffEducation Expenses 70
5.3 Entertainment Expenses 71
5.4 Interest Expenses 71
5.5 Research and Development Expenses 77
5.6 Leasing Expenses 78
5.7 Management fees 78
5.8 Donations 79
5.9 Sponsorship Expenses 82
5.10 Advertising Expenses 83
5.11 Foreign Exchange Losses 84
5.12 Dividends 84
5.13 Penalties 85
5.14 Provisions 85
5.14.1. Provisions for Loan Losses for Financial Institutions 86
5.14.2. Reserves for Institutions that Provide Credit Guarantee for Small- and Medium-Sized Enterprises 88
5.14.3. Provisions for Securities Companies 89
5.14.4. Reserves for Insurance Companies 91
5.15 Deduction of Reinsurance Claims 93
5.16 Commission Expenses 93
5.17 Asset Losses 94
5.17.1. Time of and Approval for Deduction 94
5.17.2. Evidence of Asset Losses 96
5.17.3. Recognition of Monetary Asset Losses 98
5.17.4. Recognition of Non-Monetary Asset Losses 100
5.17.5. Recognition of Debt Investment Losses 106
5.17.6. Recognition of Equity Investment Losses 111
5.17.7. Loss of Managed Investment 112
5.17.8. Loss on Guarantee 112
5.17.9. Non-Deductible Losses 112
5.18 Expenses of Real Estate Development 113
5.18.1 Maintenance Costs 113
5.18.2. Common Facilities 114
5.18.3. Financial Charges and Commission 115
5.18.4. Other Expenses 115
5.18.5. Calculation of Tax Basis 115
5.19 Net Operating Losses 119
5.20 Taxes 120
6. Depreciation and Amortization 121
6.1 Fixed Assets 121
6.1.1. Tax Basis 122
6.1.2. Normal Depreciation Method and Recovery Periods 123
6.1.3. Accelerated Depreciation 124
6.2 Biological Assets 126
6.3 Oil and Gas Enterprises 127
6.3.1. Expenses of Acquisition of Exploration Right 127
6.3.2. Exploration Expenses 127
6.3.3. Depreciation of Development Assets 128
6.3.4. Abandonment Costs 129
6.4 Intangibles 130
6.5 Long-Term Deferred Expenses 131
6.6 Pre-operating Expenses 132
7. Mergers and Acquisitions 133
7.1 General 133
7.2 Classification of Reorganizations 134
7.3 Parties to Reorganization and Date of Reorganization 135
7.4 Ordinary Reorganizations 136
7.4.1. Change of Legal Forms of Enterprise 136
7.4.2. Enterprise Debt Restructuring 137
7.4.3. Stock Acquisition 138
7.4.4. Asset Acquisition 141
7.4.5. Merger 144
7.4.6. De-merger 146
7.4.7. Documentation and Filing Requirements 151
7.5 Special Reorganization 153
7.5.1. Common Requirements to Qualify as Special Reorganization 153
7.5.2. Debt Restructuring 155
7.5.3. Stock-to-Stock Transaction 157
7.5.4. Stock for Asset Transaction 160
7.5.5. Mergers 161
7.5.6. De-merger 165
7.5.7. Consideration Other than Qualified Stock 168
7.5.8. Cross-Border Reorganization 172
7.5.9. Step Transactions 178
7.5.10. Filing Requirement 179
7.6 Tax Incentives Existing Prior to Transaction 183
7.7 Contribution of Assets in Enterprise Formation 187
7.8 Financing Acquisition 188
7.8.1. Debt at the Subsidiary Level 188
7.8.2. Debt at the Parent Level 189
7.9 Indirect Transfer of Resident Enterprise by Non-Resident Enterprise 190
7.10 China Implem entation of Global Mergers and Acquisitions 191
7.10.1. Global Merger with Direct China Subsidiaries 192
7.10.2. Global Merger with Indirect China Subsidiaries 192
7.10.3. Taxable Asset Acquisition 193
7.10.4. Taxable Stock Acquisition 194
7.11 Consideration of Taxes Other than CIT 195
7.11.1. Value Added Tax 195
7.11.2. Business Tax 200
7.11.3. City Maintenance and Construction Tax and Education Surcharge 201
7.11.4. Land Appreciation Tax 202
7.11.5. Deed Tax 202
7.11.6. Stamp Duty 203
7.11.7. Customs Duty 204
8. Tax Incentives 205
8.1 Agriculture, Forestry, Animal Husbandry, and the Fishery Industry 205
8.2 Public Infrastructure 206
8.3 Environmental Protection and Resources Conservation 208
8.4 Super Deduction of Research and Development Expenditures 210
8.5 Technology Transfer 211
8.6 High and New Technology Enterprises 213
8.6.1. Qualifications 214
8.6.2. Application Procedures 219
8.6.3. Application for Tax Incentives 221
8.7 Software and Integrated Circuits 222
8.8 Animation Enterprises 223
8.9 Venture Capital Investment Enterprises 225
8.10 Clean Development Mechanism Projects 227
8.11 Service Outsourcing Business 228
8.11.1. Scope of Advanced Technology Services 229
8.11.2. Qualification for Advanced Technology Service Enterprises 231
8.11.3. Procedures for Recognition of Advanced Technology Service Enterprises 232
8.12 Employment of Disabled Personnel 232
8.13 Culture Enterprises 234
8.14 Rural Finance 235
8.15 Transition Rules for Tax Incentives Granted under Old Tax Law and Regulations 236
8.16 Local Tax Incentives 239
9. Income from Foreign Countries and Regions 241
9.1 Taxable Income from Foreign Country or Region 241
9.1.1. Computation of Taxable Income of Foreign Branch 242
9.1.2. Computation of Taxable Income from Other Foreign Sources 243
9.1.3. Foreign Sourced Income of Non-Resident 244
9.1.4. Allocation of Common Expenses 244
9.2 Foreign Tax Credit 245
9.2.1. Creditable Taxes 245
9.2.2. Direct Foreign Tax Credit 247
9.2.3. Indirect Foreign Tax Credit 248
9.2.4. Limitations on Foreign Tax Credit 254
9.2.5. Simplified Method 258
9.2.6. Sparing Tax Credit 260
9.2.7. Documentation for Claiming Foreign Tax Credit 261
9.3 Controlled Foreign Corporation 262
9.4 General Anti-Avoidance Provision 264
10. Income Tax Treaties 266
10.1 Legal Authority and Interpretations of Tax Treaties 266
10.2 Treaty Network 268
10.3 Resident 272
10.4 Beneficial Owner 274
10.5 Permanent Establishment 276
10.5.1. Definition 276
10.5.2. Work Site of Construction, Assembly, and Installation 277
10.5.3. Provision of Services 278
10.5.4. Preparatory and Auxiliary Activities 280
10.5.5. Conclude Contracts by Non-Independent Agent 282
10.5.6. Independent Agent 283
10.5.7. Relationship between Parent and Subsidiary 284
10.6 Dividends, Interest, and Royalties 285
10.7 Capital Gains 282
10.8 Elimination of Double Taxation 303
10.9 Non-Discrimination 304
10.10 Mutual Agreement Procedures 305
10.11 Exchange of Information 305
10.12 How to Obtain Treaty Benefits 310
10.12.1 Claims for Treaty Benefits for Dividend, Interest, Royalty, and Gains on Transfer of Properties 311
10.12.2. Claims for Benefits under Other Treaty Provisions 314
10.12.3. Record Retention, Examination, and Penalties 315
11. Transfer Pricing 317
11.1 General Principle 317
11.2 Related Parties 318
11.3 Types of Transactions Covered 320
11.4 Transfer Pricing Methodologies 320
11.4.1. Comparable Uncontrolled Price Method 321
11.4.2. Resale Price Method 323
11.4.3. Cost-Plus Method 323
11.4.4. Transaction Net Margin Method 324
11.4.5. Profit Split Method 325
11.5 Reporting and Contemporaneous Documentation 326
11.5.1. Annual Filing 326
11.5.2. Contemporaneous Documentation 326
11.6 Transfer Pricing Audit and Adjustment 329
11.7 Advance Pricing Arrangement (APA) 332
11.8 Cost-Sharing Agreement (CSA) 339
11.9 Corresponding Adjustments and International Negotiation 342
11.10 Penalties, Interest, and Statute of Limitation 343
12. Withholding of Tax at Source 345
12.1 Income not Effectively Connected with Establishment in China 345
12.3 Interest Paid to Foreign Bank and Foreign Branch 349
12.3 Income of Foreign Service Providers 349
12.4 Withholding on Payment to Individuals 350
12.5 Penalties on Withholding Agent 351
12.6 Enforcement in Conjunction with Foreign Exchange Regulations 351
13. Liquidation 354
13.1 Definition 354
13.2 Tax Year 356
13.3 Treatment to Liquidating Company 357
13.4 Treatment to Shareholders 359
13.5 Tax Withholding on Liquidation 361
13.6 Liquidation of Company Whose Shares are Traded on Stock Exchanges 362
14. Tax Filings and Payments 364
14.1 Tax Bureaus 364
14.2 Tax Registration 368
14.3 Provisional Tax Filing and Payment 370
14.4 Annual CIT Filing 377
14.5 Translation of Foreign Currency 378
14.6 Filing of Withholding Tax 378
14.7 Interest and Penalties 379
14.7.1. Late Payment Charge and Interest 379
14.7.2. Administrative Penalties 380
14.7.3. Criminal Penalties 381
14.8 Statute of Limitation 382
14.9 Confidentiality of Tax Information 383
15. Tax Audit and Appeal 385
15.1 Offices in Charge of Tax Audit 385
15.2 Types of Tax Audits 386
15.3 Procedures of Tax Audits 387
15.3.1. Jurisdiction of Audit Bureau 387
15.3.2. Audit Target Selection 388
15.3.3 Tax Inspection 389
15.3.4. Review and Decision of Tax Audit 392
15.3.5. Enforcement of Tax Audit 393
15.4 Tax Administrative Appeal 394
15.5 Tax Litigation 398
15.5.1. Juridical System 398
15.5.2. Judicial Trial in First Instance 398
15.5.3. Judicial Trial in Second Instance 401
15.5.4. Petition for Review of Legally Effective Judgment 402
15.5.5. Role of Procuratorate 403
15.5.6. Enforcement of Judgment 403
15.5.7. Compensation to Taxpayers 404
APPENDIX 405
Corporate Income Tax Law of the People's Republic of China (unofficial English translation) 405
Corporate Income Tax Law of the People's Republic of China (Chinese version) 414
The Implementation Rules for the Corporate Income Tax Law of the People's Republic of China (unofficial English translation) 421
The Implementation Rules for the Corporate Income Tax Law of the People's Republic of China (Chinese version) 446
GLOSSARY 463
KEY WORDS 465
TABLE OF AUTHORITIES 469
INDEX 505