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China: Corporate Income Tax Incentives

In order to encourage investment in certain areas in the People’s Republic of China, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly published the notice Caishui 2014 No. 26 (Circular 26) regarding corporate income tax (CIT) preferential policies and catalogues (CIT Incentive Catalogues) for the Guangdong Hengqin New Area (Hengqin), the Fujian Pingtan Comprehensive Experimental Zone (Pingtan) and the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai) on 25 March 2014. Circular 26 is effective for seven years from 1 January 2014 to 31 December 2020. The salient points of Circular 26 are as follows.

KEY MEASURES

As stipulated in Circular 26, enterprises established in Hengqin, Pingtan and Qianhai (collectively referred as “Covered Areas”) will be eligible for the preferential CIT rate of 15%, if the following criteria are satisfied:

  1. Enterprises are engaging in encouraged industries which fall within the CIT Incentive. These can be found as the appendices of Circular 26
  2. Enterprises engaging in encouraged industries are defined as enterprises with income derived from their main businesses that fall within the CIT Incentive Catalogues accounts for more than 70% of their total income. (The definition of total income is stipulated in Article 6 of the CIT Law of the PRC).

For the case of enterprises with establishments both inside and outside the Covered Areas, Circular 26 clarifies that:

  1. Only income attributable to establishments inside the Covered Areas can be eligible for the preferential CIT rate of 15%. 
  2. In determining whether enterprises satisfy the above criteria, only establishments 

    inside the Covered Areas will be considered. Establishments outside the Covered Areas will not be considered.

In the circumstance where enterprises are eligible for both the preferential CIT rate of 15% as prescribed in Circular 26, as well as other preferential CIT policies prescribed in the CIT Law of the PRC and its implementation regulations and those stipulated by the State Council, all preferential policies can be applicable.

If the enterprises are eligible for other preferential CIT rates, they can choose the most preferential CIT rate. If the enterprises are eligible for a CIT holiday and subject to CIT with a 50% reduction, their CIT payable should be calculated according to the statutory CIT rate of 25% with a 50% reduction, i.e. they could have a 12.5% effective CIT rate. This is consistent with the practice for most other similar circumstances of overlapping CIT incentives.

  1. The aforementioned Covered Areas refer to the areas approved by the State Council under the Overall Development Plans in August 2009 (Hengqin), November 2011 (Pingtan) and August 2010 (Qianhai) respectively. Where tax authorities have difficulties in determining whether the core businesses of enterprises comply with the requirements prescribed in CIT Incentive Catalogues, they can request the relevant enterprises to provide certification issued by competent administrative authorities at the provincial level or their authorised subordinates.

Each of the above Covered Areas has their own individual CIT Incentive Catalogues and there are:

  • 72 industry sectors under five categories for Hengqin. Hengqin’s CIT Incentive Catalogues mainly include high technology; research and development and production of pharmaceutical sections
  • 21 industry sectors under four categories for Qianhai. Qianhai’s CIT Incentive Catalogues mainly include service related sectors
  • 127 industry sectors under five categories for Pingtan. Apart from the high technology sectors, Pingtan’s CIT Incentive Catalogues also include a number of agriculture and marine related sectors

Please note that details of the specific sectors within each category are stated in the appendices of Circular 26. The following table provides a summary of the broad categories of encouraged industry under the respective CIT Incentive Catalogues as stipulated in Circular 26.

CIT Incentive Catalogues

CIT Incentive Catalogues

POINTS TO NOTE

As noted from the above table, certain sectors within the New/High Technology category are included in the CIT Incentive Catalogues of the Covered Areas. There is thus an overlap of certain industries between this CIT Incentive Catalogues and the New/High Technology Catalogue under the CIT Law of China, the latter of which also entitles eligible enterprises (referred to as New/High Technology Enterprises or NHTE) to a reduced CIT rate of 15%. To qualify as a NHTE, enterprises would need to satisfy certain qualifying criteria, but Circular 26 has not made reference to these qualifying criteria under the CIT Incentive Catalogues. It is not explicitly stated in the Circular 26 whether the enterprises would need to satisfy the NHTE qualifying criteria in order to enjoy the reduced CIT rate under the CIT Incentive Catalogues. As a result, enterprises should closely monitor any potential development in this area and whether local authorities issue any supplementary rules and guidelines.

For Qianhai and Hengqin, the industries covered under Circular 26 are different from those industries covered in the Industry Catalogue of the respective locations published previously. In particular, the financial services category has not been included in the CIT Incentive Catalogues. Thus, investors should pay attention to any potential policy development in this area.

Given that only certain sectors within the broad category are within the scope of the CIT Incentive Catalogues, investors should study and understand the scope of the encouraged industries eligible for the preferential CIT treatment. In addition, as only establishments inside the Covered Areas will be considered in assessing the eligibility to the CIT incentives, investors should carefully plan any operational arrangement and establishment structure inside and outside the Covered Areas.

In addition to the preferential CIT treatment, investors should also be aware of the individual income tax rebate policies in the Covered Areas and take into account the available incentives in determining operational structure and human resources arrangement.

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