Compilation of Corporate Income Tax Policies – Deduction Section
Table of Contents
3. Non-Deductible Items Before Tax
4. Deduction Voucher Requirements
5. Loss Compensation
6. Foreign Tax Credits
Main Text
When calculating taxable income, the following expenses are not deductible:
1. Dividends, bonuses, and other equity investment income payments to investors;
2. Corporate income tax payments;
3. Tax penalties;
4. Fines, penalties, and losses from confiscated property;
5. Donations outside the provisions of Article 9 of this law;
6. Sponsorship expenses;
7. Unapproved reserve expenditures;
8. Other expenses unrelated to income generation.
(Excerpt from Article 10 of the Corporate Income Tax Law of the People’s Republic of China)
Management fees paid between enterprises, rent and royalties paid between business institutions within enterprises, and interest paid between non-bank business institutions are not deductible.
(Excerpt from Article 49 of the Implementation Regulations of the Corporate Income Tax Law of the People’s Republic of China)
The sponsorship expenditures referred to in item (6) of Article 10 of the Corporate Income Tax Law are various non-advertising expenditures incurred by enterprises that are unrelated to production and business activities.
(Excerpt from Article 54 of the Implementation Regulations of the Corporate Income Tax Law of the People’s Republic of China)
The unapproved reserve expenditures referred to in item (7) of Article 10 of the Corporate Income Tax Law are those that do not meet the provisions of the Ministry of Finance and the tax authorities regarding asset impairment reserves, risk reserves, and other reserve expenditures.
(Excerpt from Article 55 of the Implementation Regulations of the Corporate Income Tax Law of the People’s Republic of China)
1. Administrative reconciliation payments made by administrative counterparties are not deductible before income tax.
(Excerpt from Circular [2016] No. 100 of the Ministry of Finance and the State Administration of Taxation regarding tax policy issues related to administrative reconciliation payments)
Taxpayers using invoices that do not meet regulations, especially those lacking the full name of the payer, are not allowed to use them for pre-tax deductions, tax credits, export tax refunds, and financial reimbursements.
(Excerpt from Circular [2008] No. 80 on Further Strengthening the Management of Ordinary Invoices)
Invoices that do not meet regulations cannot be used as pre-tax deduction vouchers.
(Excerpt from Circular [2008] No. 88 on Strengthening Corporate Income Tax Management)
For related costs and expenses actually incurred by the enterprise in the current year, if the effective vouchers for such costs and expenses are not obtained in time for various reasons, the enterprise may provisionally account for them at the book amount during the quarterly income tax prepayment; however, effective vouchers for these costs and expenses must be provided during the annual settlement and payment.
(Excerpt from the State Administration of Taxation Announcement No. 34 of 2011 regarding several issues of corporate income tax)
The State Administration of Taxation has announced the “Management Measures for Pre-Tax Deduction Vouchers for Corporate Income Tax” (Announcement No. 28 of 2018) to strengthen the management of pre-tax deduction vouchers for corporate income tax, standardize tax law enforcement, and optimize the business environment.
This announcement is made.
State Administration of Taxation
June 6, 2018
Management Measures for Pre-Tax Deduction Vouchers for Corporate Income Tax
Article 1 To standardize the management of pre-tax deduction vouchers (hereinafter referred to as “pre-tax deduction vouchers”) for corporate income tax, these measures are formulated according to the Corporate Income Tax Law of the People’s Republic of China (hereinafter referred to as “Corporate Income Tax Law”) and its implementation regulations, the Tax Collection and Administration Law of the People’s Republic of China and its implementation rules, and the Invoice Management Measures of the People’s Republic of China and their implementation rules.
Article 2 The pre-tax deduction vouchers referred to in these measures refer to various vouchers that prove the reasonable expenses actually incurred in connection with income generation when enterprises calculate taxable income for corporate income tax and are used for pre-tax deduction.
Article 3 The term “enterprise” in these measures refers to resident enterprises and non-resident enterprises as defined in the Corporate Income Tax Law and its implementation regulations.
Article 4 The management of pre-tax deduction vouchers should follow the principles of authenticity, legality, and relevance. Authenticity means that the economic activities reflected in the pre-tax deduction vouchers are real, and the expenses have actually occurred; legality means that the form and source of the pre-tax deduction vouchers comply with national laws and regulations; relevance means that the pre-tax deduction vouchers are related to the expenses they reflect and have evidential power.
Article 5 Enterprises must obtain pre-tax deduction vouchers when incurring expenses, which serve as the basis for deducting relevant expenses when calculating taxable income for corporate income tax.
Article 6 Enterprises must obtain pre-tax deduction vouchers before the end of the annual settlement period stipulated by the Corporate Income Tax Law.
Article 7 Enterprises must retain relevant materials related to pre-tax deduction vouchers, including contracts, expenditure bases, payment vouchers, etc., for verification to prove the authenticity of the pre-tax deduction vouchers.
Article 8 Pre-tax deduction vouchers are classified into internal and external vouchers based on their source. Internal vouchers refer to original accounting vouchers self-made by enterprises for accounting costs, expenses, losses, and other expenditures. The preparation and use of internal vouchers must comply with national accounting laws and regulations.
External vouchers refer to certificates obtained from other units or individuals when enterprises engage in business activities and other matters to prove that their expenditures have occurred, including but not limited to invoices (including paper invoices and electronic invoices), fiscal tickets, tax payment certificates, payment vouchers, split bills, etc.
Article 9 For expenditures incurred domestically that belong to taxable items (hereinafter referred to as “taxable items”), if the counterparty is a taxpayer registered for value-added tax, the expenditure is supported by invoices (including those issued by tax authorities as stipulated); if the counterparty is a unit or individual that is legally exempt from tax registration, the expenditure is supported by invoices issued by tax authorities or payment vouchers and internal vouchers, with payment vouchers indicating the name of the receiving unit, individual name, ID number, expenditure item, payment amount, and other relevant information.
The judgment criterion for small and miscellaneous business is that the sales amount of individuals engaged in taxable business does not exceed the threshold stipulated by relevant value-added tax policies.
If the tax authorities have other regulations regarding invoicing for taxable items, the stipulated invoices or tickets shall be used as pre-tax deduction vouchers.
Article 10 For expenditures incurred domestically that do not belong to taxable items, if the counterparty is a unit, other external vouchers besides invoices issued by the counterparty shall be used as pre-tax deduction vouchers; if the counterparty is an individual, internal vouchers shall be used as pre-tax deduction vouchers.
Even if expenditures incurred domestically do not belong to taxable items, if invoices can be issued according to the regulations of the tax authorities, invoices can be used as pre-tax deduction vouchers.
Article 11 For expenditures incurred by enterprises from abroad for goods or services, invoices or payment vouchers with invoice nature issued by the counterparty shall be used as pre-tax deduction vouchers.
Article 12 Enterprises that obtain invoices that are privately printed, forged, altered, voided, illegally obtained by the invoice issuer, or issued without compliance with regulations (hereinafter referred to as “non-compliant invoices”) and other external vouchers that do not comply with national laws and regulations (hereinafter referred to as “non-compliant other external vouchers”) cannot use them as pre-tax deduction vouchers.
Article 13 If enterprises should have obtained but have not obtained invoices, other external vouchers, or have obtained non-compliant invoices or non-compliant other external vouchers, and if the expenditures are real and have actually occurred, they must request the counterparty to issue or replace the invoices or other external vouchers before the end of the annual settlement period. The invoices or other external vouchers issued or replaced thereafter, if they comply with regulations, can be used as pre-tax deduction vouchers.
Article 14 If enterprises cannot obtain invoices or other external vouchers due to special reasons such as the counterparty being canceled, dissolved, or identified as non-compliant by tax authorities, they may provide the following materials to prove the authenticity of the expenditures, and the expenditures may be allowed for pre-tax deduction:
(1) Proof materials for reasons of inability to issue or replace invoices or other external vouchers (including proof materials for business cancellation, organization dissolution, being listed as non-compliant, bankruptcy announcements, etc.);
(2) Contracts or agreements related to the business activities;
(3) Payment vouchers for payments made in non-cash methods;
(4) Proof materials for the transportation of goods;
(5) Internal vouchers for goods entering and leaving storage;
(6) Enterprise accounting records and other materials.
The first three items above are mandatory materials.
Article 15 After the annual settlement period, if tax authorities discover that enterprises should have obtained but have not obtained invoices or other external vouchers or have obtained non-compliant invoices or non-compliant other external vouchers and inform the enterprises, the enterprises must supplement or replace the compliant invoices or other external vouchers within 60 days from the date of notification. If the counterparty cannot issue or replace compliant invoices or other external vouchers due to special reasons, the enterprises must provide relevant materials to prove the authenticity of their expenditures within 60 days from the date of notification.
Article 16 If enterprises fail to supplement or replace compliant invoices or other external vouchers within the specified period and fail to provide relevant materials to prove the authenticity of their expenditures as per Article 14, the corresponding expenditures cannot be deducted before tax in the year of occurrence.
Article 17 Except for the circumstances specified in Article 15, if enterprises should have obtained invoices or other external vouchers in previous years but did not obtain them, and the corresponding expenditures were not deducted before tax in that year, they can be supplemented for pre-tax deduction in subsequent years when compliant invoices or other external vouchers are obtained or relevant materials proving the authenticity of their expenditures are provided according to Article 14, but the supplement period cannot exceed five years.
Article 18 If enterprises share taxable services (hereinafter referred to as “taxable services”) with other enterprises (including affiliated enterprises) or individuals within the territory, they should allocate costs based on the principle of independent transactions, and enterprises can use invoices and split bills as pre-tax deduction vouchers, while other enterprises jointly receiving taxable services can use the split bills issued by the enterprises as pre-tax deduction vouchers.
If enterprises share non-taxable services with other enterprises or individuals within the territory, they can use external vouchers other than invoices and split bills as pre-tax deduction vouchers, while other enterprises jointly receiving non-taxable services can use the split bills issued by the enterprises as pre-tax deduction vouchers.
Article 19 For expenses incurred by enterprises renting (including enterprises renting as a single tenant) office, production facilities, and other assets such as water, electricity, gas, air conditioning, heating, communication lines, cable TV, internet, etc., if the landlord issues invoices as taxable items, enterprises can use the invoices as pre-tax deduction vouchers; if the landlord adopts a shared method, enterprises can use other external vouchers issued by the landlord as pre-tax deduction vouchers.
Article 20 These measures shall take effect from July 1, 2018.
Related Policy Interpretation
Interpretation of the Announcement on the Release of the “Management Measures for Pre-Tax Deduction Vouchers for Corporate Income Tax” by the State Administration of Taxation
June 13, 2018
Recently, the State Administration of Taxation released the “Management Measures for Pre-Tax Deduction Vouchers for Corporate Income Tax” (hereinafter referred to as “Measures”). The interpretation is as follows:
1. Background of Issuance
In 2008, the Corporate Income Tax Law of the People’s Republic of China (hereinafter referred to as “Corporate Income Tax Law”) and its implementation regulations unified and standardized the scope and standards for pre-tax deductions, but did not systematically stipulate and specifically explain pre-tax deduction vouchers. In tax administration practice, the implementation mainly relied on the Tax Collection and Administration Law of the People’s Republic of China and its implementation rules, as well as the Invoice Management Measures of the People’s Republic of China and their implementation rules, resulting in relatively scattered management regulations and differences in understanding between tax authorities and taxpayers. To strengthen the management of pre-tax deduction vouchers for corporate income tax (hereinafter referred to as “pre-tax deduction vouchers”), standardize tax law enforcement, and optimize the business environment, the State Administration of Taxation formulated the “Measures”.
2. Main Significance
There are many types of pre-tax deduction vouchers, with broad sources and various situations. The “Measures” clarify relevant concepts, applicable scope, management principles, types, basic situations of tax processing, and special situations of tax processing for pre-tax deduction vouchers, starting from unified understanding, ease of judgment, and convenience of operation. At the same time, the “Measures” consistently embody the concept of “combining management and service optimization,” which will actively promote the in-depth implementation of the tax system’s reform spirit of “delegating power, improving regulation, and optimizing services.” First, the “Measures” clearly state that payment vouchers, internal vouchers, split bills, etc., can also serve as pre-tax deduction vouchers, which will reduce the tax burden on taxpayers. Second, the “Measures” provide detailed regulations regarding the types of pre-tax deduction vouchers, filling content, obtaining time, and requirements for supplementing and replacing vouchers, which will help enterprises strengthen their financial management and internal control, reducing tax risks. Third, regarding situations where enterprises have not obtained external vouchers or have obtained non-compliant external vouchers, the “Measures” stipulate remedial measures to protect the legitimate rights and interests of taxpayers.
3. Main Content
(1) Scope of Application
The taxpayers applicable to the “Measures” are resident enterprises and non-resident enterprises as stipulated in the Corporate Income Tax Law and its implementation regulations.
(2) Basic Principles
Due to the difficulty of listing pre-tax deduction vouchers one by one, clarifying management principles helps eliminate disputes and ensures that taxpayers and tax authorities jointly follow and standardize processing. The management of pre-tax deduction vouchers should adhere to the principles of authenticity, legality, and relevance. Authenticity is fundamental; if an enterprise’s economic activities and expenditures do not possess authenticity, naturally, the issue of pre-tax deductions does not arise. Legality and relevance are core; only when the form and source of pre-tax deduction vouchers comply with laws, regulations, and related provisions, and are associated with expenditures and have evidential power, can they serve as proof for pre-tax deductions of enterprise expenditures.
(3) Relationship Between Pre-Tax Deduction Vouchers and Pre-Tax Deductions
Pre-tax deduction vouchers are the basis for enterprises to deduct relevant expenditures when calculating taxable income for corporate income tax. The scope and standards for pre-tax deductions of enterprise expenditures should be implemented according to the Corporate Income Tax Law and its implementation regulations.
(4) Relationship Between Pre-Tax Deduction Vouchers and Related Materials
Enterprises often generate contracts, payment vouchers, and other related materials during business activities and economic exchanges, which may serve as expenditure proof in certain situations, such as court judgments ordering enterprises to pay penalties. The above materials do not constitute pre-tax deduction vouchers but are materials directly related to enterprise business activities that can prove the authenticity of pre-tax deduction vouchers, and enterprises should fulfill their responsibility to retain them according to laws and regulations for verification by relevant departments, agencies, or personnel, including tax authorities.
(5) Types of Pre-Tax Deduction Vouchers
Based on the source of acquisition, pre-tax deduction vouchers are classified into internal and external vouchers. Internal vouchers refer to original accounting vouchers that enterprises self-make for accounting expenditures, such as payroll for employees, where payroll records serve as internal vouchers. External vouchers refer to invoices, fiscal tickets, tax payment certificates, split bills, and other payment vouchers obtained by enterprises during business activities and other matters. Among them, invoices include both paper and electronic invoices, as well as invoices issued by tax authorities.
(6) Time Requirements for Obtaining Pre-Tax Deduction Vouchers
Enterprises should obtain compliant pre-tax deduction vouchers when expenses occur, but considering that enterprises may need to supplement or replace compliant pre-tax deduction vouchers in certain situations, the “Measures” stipulate that enterprises must obtain compliant pre-tax deduction vouchers before the end of the annual settlement period stipulated by the Corporate Income Tax Law.
(7) Tax Processing of External Vouchers
If enterprises obtain compliant invoices or other external vouchers within the specified period, the corresponding expenditures can be deducted before tax. If enterprises should have obtained but have not obtained invoices or other external vouchers or have obtained non-compliant invoices or non-compliant other external vouchers, they can be processed according to the following provisions:
1. Tax processing before the annual settlement period
(1) If compliant invoices or other external vouchers can be supplemented or replaced, the corresponding expenditures can be deducted before tax.
(2) If enterprises cannot supplement or replace compliant invoices or other external vouchers due to special reasons, such as the counterparty being canceled, dissolved, or identified as non-compliant by tax authorities, the corresponding expenditures may be deducted before tax after providing relevant materials to prove the authenticity of the expenditures.
(3) If enterprises fail to supplement or replace compliant invoices or other external vouchers and cannot provide relevant materials to prove the authenticity of the expenditures, the corresponding expenditures cannot be deducted before tax in the year of occurrence.
2. Tax processing after the annual settlement period
(1) For various reasons (such as purchase and sales contracts, engineering project disputes, etc.), if enterprises have failed to obtain compliant invoices or other external vouchers within the specified period or have obtained non-compliant invoices or non-compliant other external vouchers, and the enterprises voluntarily did not deduct before tax, when compliant invoices or other external vouchers are obtained in subsequent years, the corresponding expenditures may be supplemented for pre-tax deduction in the year of occurrence, but the supplement period cannot exceed five years. If the counterparty cannot issue or replace compliant invoices or other external vouchers due to special reasons, the enterprises may also supplement the expenditures for pre-tax deduction in the year of occurrence in subsequent years, but the supplement period cannot exceed five years.
(2) If tax authorities discover that enterprises should have obtained but have not obtained invoices or other external vouchers or have obtained non-compliant invoices or non-compliant other external vouchers, the enterprises must supplement or replace compliant invoices or other external vouchers or provide relevant materials to prove the authenticity of the expenditures within 60 days from the date of notification. Otherwise, the expenditures cannot be deducted before tax in the year of occurrence, nor can they be supplemented for deduction in subsequent years.
(8) Special Provisions
1. For invoices issued for taxable items, if the tax authorities have other regulations, the stipulated invoices or tickets should be used as pre-tax deduction vouchers, such as the Announcement No. 76 of the State Administration of Taxation regarding the use of railway transportation and postal service business tax invoices and tax control systems.
2. For expenditures incurred domestically that do not belong to taxable items, if invoices can be issued according to the regulations of the tax authorities, invoices can be used as pre-tax deduction vouchers.
9. Effective Date
The “Measures” shall take effect from July 1, 2018.
10. Loss Compensation
Losses referred to in Article 5 of the Corporate Income Tax Law are defined as the amounts that are less than zero after deducting non-taxable income, exempt income, and various deductions from the total income of each taxable year according to the provisions of the Corporate Income Tax Law and its implementation regulations.
(Excerpt from Article 10 of the Implementation Regulations of the Corporate Income Tax Law of the People’s Republic of China)
Losses incurred by enterprises in the current taxable year are allowed to be carried forward to subsequent years for compensation, but the carryforward period cannot exceed five years.
(Excerpt from Article 18 of the Corporate Income Tax Law of the People’s Republic of China)
Enterprises must calculate their income and losses starting from the year they commence production and business activities. Expenses incurred during the preparatory period prior to engaging in production and business activities cannot be calculated as current losses.
(Excerpt from Circular No. 98 of 2009 regarding several tax matters related to corporate income tax)
Partners of partnerships that are legal persons or other organizations cannot use partnership losses to offset their own profits when calculating corporate income tax.
(Excerpt from Circular No. 159 of 2008 regarding income tax issues for partners of partnerships)
1. According to Article 5 of the Corporate Income Tax Law, when tax authorities inspect the taxable situation of enterprises in previous years and increase the taxable income, if the enterprise had losses in previous years that are allowed to be compensated according to the Corporate Income Tax Law, the increased taxable income should be allowed to compensate for those losses. If there is still a balance after compensating for the losses, the corporate income tax should be calculated and paid according to the provisions of the Corporate Income Tax Law.
2. This regulation shall take effect from December 1, 2010. Matters not handled before (including before 2008) shall be executed according to this regulation.
(Excerpt from Announcement No. 20 of 2010 by the State Administration of Taxation regarding the handling of previously incurred losses in taxable income)
2. The tax authority in the location of the secondary branch shall cooperate with the tax authority in the location of the head office to conduct tax inspections on its secondary branches, or may conduct tax inspections on the secondary branches independently.
When the tax authority in the location of the secondary branch conducts tax inspections independently, it may calculate the taxable income and tax payable based on the Corporate Income Tax Law for verified items.
When calculating the taxable income, the losses allowed to be compensated from previous years by consolidated taxpayers must be deducted; for pre-tax deduction items that need to be calculated uniformly by the head office, they cannot be adjusted by the branch.
(Excerpt from Announcement No. 57 of 2012 by the State Administration of Taxation regarding the management of corporate income tax for consolidated taxpayers operating across regions)
3. Enterprises that meet the conditions specified in this notice regarding corporate restructuring may conduct special tax treatments for the equity payment portion of transactions:
(4) In the case of corporate mergers, if shareholders of the merged enterprise obtain equity payment amounts that are no less than 85% of the total transaction payment at the time of the merger, and if the merger occurs under the same control without the need for consideration, they may choose to process according to the following provisions:
3. The limit of the losses of the merged enterprise that can be compensated by the merging enterprise = the fair value of the net assets of the merged enterprise × the longest-term government bond interest rate issued by the state at the end of the year when the merger occurs.
(5) In the case of corporate splits, if all shareholders of the split enterprise obtain equity in the split enterprise according to their original shareholding ratio, and if both the split enterprise and the merged enterprise do not change their original substantive business activities, and if the equity payment amount obtained by shareholders of the split enterprise at the time of the split is no less than 85% of the total transaction payment, they may choose to process according to the following provisions:
3. The amount of losses that have not exceeded the statutory compensation period can be allocated according to the proportion of split assets to total assets and continued to be compensated by the split enterprise.
(Excerpt from Circular No. 59 of 2009 regarding several issues related to corporate restructuring tax treatments)
2. Starting from January 1, 2018, enterprises that qualify as high-tech enterprises or technology-based small and medium-sized enterprises (hereinafter referred to as “qualifying enterprises”) may carry forward the losses incurred in the five years prior to the year they qualify, and the maximum carryforward period is extended from five years to ten years.
3. The term “high-tech enterprise” refers to enterprises identified as high-tech enterprises according to the provisions of the “Management Measures for the Identification of High-Tech Enterprises” (Guo Ke Fa Huo [2016] No. 32) issued by the Ministry of Science and Technology, the Ministry of Finance, and the State Administration of Taxation; the term “technology-based small and medium-sized enterprise” refers to enterprises that have obtained registration numbers for technology-based small and medium-sized enterprises according to the provisions of the “Evaluation Measures for Technology-Based Small and Medium-Sized Enterprises” (Guo Ke Fa Zheng [2017] No. 115).
4. This notice shall take effect from January 1, 2018.
(Excerpt from Circular No. 76 of 2018 regarding the extension of the loss carryforward period for high-tech enterprises and technology-based small and medium-sized enterprises)
To support the development of high-tech enterprises and technology-based small and medium-sized enterprises, according to the Corporate Income Tax Law and its implementation regulations, as well as the Circular of the Ministry of Finance and the State Administration of Taxation regarding the extension of the loss carryforward period for high-tech enterprises and technology-based small and medium-sized enterprises, this announcement clarifies the corporate income tax treatment issues related to the extension of the loss carryforward period:
1. The losses incurred in the five years prior to the year of qualification for enterprises that qualify as high-tech enterprises or technology-based small and medium-sized enterprises (hereinafter referred to as “qualifying enterprises”) are allowed to be carried forward to subsequent years for compensation, with the maximum carryforward period extended from five years to ten years.
2. The qualifying year for high-tech enterprises is determined according to the effective period stated in the high-tech enterprise certificate obtained by the enterprise.
3. For enterprises that have undergone corporate restructuring in accordance with special tax treatment provisions, the carryforward period for unclaimed losses shall be determined according to the provisions of the Circular of the Ministry of Finance and the State Administration of Taxation regarding several issues related to corporate restructuring business income tax treatments.
4. Enterprises that meet the conditions specified in this notice regarding the extension of the loss carryforward period may calculate the loss carryforward period themselves during corporate income tax prepayment and annual settlement.
5. This announcement shall take effect from January 1, 2018.
(Excerpt from Announcement No. 45 of 2018 regarding the extension of the loss carryforward period for high-tech enterprises and technology-based small and medium-sized enterprises)
Interpretation of the Announcement on the Extension of the Loss Carryforward Period for High-Tech Enterprises and Technology-Based Small and Medium-Sized Enterprises
According to the Circular of the Ministry of Finance and the State Administration of Taxation regarding the extension of the loss carryforward period for high-tech enterprises and technology-based small and medium-sized enterprises, the State Administration of Taxation has issued the Announcement on the Extension of the Loss Carryforward Period for High-Tech Enterprises and Technology-Based Small and Medium-Sized Enterprises. The interpretation is as follows:
1. Background of Issuance
To implement the innovation-driven development strategy, the Ministry of Finance and the State Administration of Taxation have introduced a series of corporate income tax policies to support technological innovation and entrepreneurship, such as expanding the scope of small-scale micro-profit enterprises to be taxed at half rate, improving the policy for accelerated depreciation of fixed assets, and expanding the scope of additional deductions for R&D expenses. These tax reduction measures have lowered the entrepreneurial and innovative costs for enterprises, stimulated enterprises to increase their technological investments, and enhanced market vitality and social creativity, positively impacting China’s innovation capability and efficiency. To better support the development of high-tech enterprises and technology-based small and medium-sized enterprises, the State Council decided to extend the loss carryforward period for these two types of enterprises from five years to ten years on April 25, 2018. To ensure the effective implementation of these preferential policies, the State Administration of Taxation has issued the Announcement to clarify the specific execution standards and tax management operational matters related to these policies.
2. Main Content of the Announcement
(1) Clarification of the loss carryforward period for unclaimed losses incurred in the five years prior to the qualifying year.
(2) Specification of the method for determining the qualifying year for high-tech enterprises and technology-based small and medium-sized enterprises.
(3) Clarification of the tax management matters regarding the extension of the loss carryforward period.
(4) Specification of the execution time of the Announcement.
The Announcement shall take effect from January 1, 2018.
3. Tax Credits for Foreign Taxes
Enterprises that have paid income tax on the following income abroad may deduct the amount of income tax paid from their current taxable amount, with the limit being the amount of taxable income calculated according to this law; any excess may be carried forward to the next five tax years:
1. Taxable income from abroad for resident enterprises;
2. Taxable income for non-resident enterprises established in China that is generated abroad but has actual connections with the establishment.
(Excerpt from Article 23 of the Corporate Income Tax Law of the People’s Republic of China)
According to the Corporate Income Tax Law, the term “income tax paid abroad” refers to the income tax that enterprises should pay and have actually paid according to foreign tax laws and regulations on income sourced from abroad.
(Excerpt from Article 77 of the Implementation Regulations of the Corporate Income Tax Law)
The term “deduction limit” refers to the taxable amount calculated according to the Corporate Income Tax Law and its regulations on income sourced from abroad.
Unless otherwise specified by the Ministry of Finance and tax authorities, the deduction limit should be calculated based on countries (regions) without itemization, according to the following formula:
Deduction Limit = Total Taxable Amount for Domestic and Foreign Income according to the Corporate Income Tax Law × Taxable Income from a Specific Country (Region) ÷ Total Taxable Income from Domestic and Foreign Sources
(Excerpt from Article 78 of the Implementation Regulations of the Corporate Income Tax Law)
The term “five tax years” refers to the five consecutive tax years starting from the year after the year when the income tax amount paid abroad exceeds the deduction limit for income sourced from abroad.
(Excerpt from Article 79 of the Implementation Regulations of the Corporate Income Tax Law)
Dividends, bonuses, and other equity investment income obtained by resident enterprises from foreign enterprises under their direct or indirect control, and the portion of income tax that has been paid abroad on such income may be credited against the income tax payable in accordance with the deduction limit stipulated in Article 23 of this law.
(Excerpt from Article 24 of the Corporate Income Tax Law)
The term “direct control” refers to a resident enterprise directly holding more than 20% of the shares of a foreign enterprise.
The term “indirect control” refers to a resident enterprise holding more than 20% of the shares of a foreign enterprise through indirect shareholding, with specific identification methods to be formulated by the Ministry of Finance and tax authorities.
(Excerpt from Article 80 of the Implementation Regulations of the Corporate Income Tax Law)
When enterprises claim deductions for foreign income tax according to Articles 23 and 24 of the Corporate Income Tax Law, they must provide tax payment certificates from foreign tax authorities for the relevant tax years.
(Excerpt from Article 81 of the Implementation Regulations of the Corporate Income Tax Law)
Notice from the Ministry of Finance and the State Administration of Taxation regarding issues related to foreign income tax credits
Tax Circular [2009] No. 125
To the Finance Departments (Bureaus) and State Taxation Administrations of provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan:
According to the Corporate Income Tax Law and its Implementation Regulations, the following notice addresses the issues related to foreign income tax credits when enterprises pay corporate income tax:
1. Resident enterprises and non-resident enterprises established in China (hereinafter referred to as “enterprises”) that are entitled to deduct the income tax paid abroad from their taxable amount according to Articles 23 and 24 of the Corporate Income Tax Law shall comply with this notice.
2. Enterprises must accurately calculate the items related to the current period concerning the deduction of foreign income tax after following the provisions of the Corporate Income Tax Law, its Implementation Regulations, tax treaties, and this notice, and determine the actual deductible foreign income tax amount by country (region) and the deduction limit:
(1) Taxable income from domestic sources (hereinafter referred to as “domestic taxable income”) and taxable income from foreign sources (hereinafter referred to as “foreign taxable income”) by country (region);
(2) The deductible foreign income tax amount by country (region);
(3) The deduction limit for foreign income tax by country (region).
If enterprises cannot accurately calculate the actual deductible foreign income tax amount by country (region), the tax paid in the respective country (region) cannot be deducted from the taxable amount in that period, nor can it be carried forward to subsequent years.
3. Enterprises must calculate the foreign taxable income according to the provisions of Article 7 of the Implementation Regulations of the Corporate Income Tax Law:
(1) For resident enterprises that establish branches abroad that do not have independent tax status, their income from abroad shall be calculated based on the total foreign income minus reasonable expenses related to obtaining that foreign income. All income and expenses shall be determined according to the provisions of the Corporate Income Tax Law and its Implementation Regulations.
All foreign income obtained by resident enterprises from branches abroad, regardless of whether it is repatriated to China, shall be included in the foreign taxable income for the relevant tax year.
(2) Resident enterprises shall calculate their taxable income from dividends, bonuses, and other equity investment income, as well as interest, rent, royalties, and property transfer income sourced from abroad, by deducting the reasonable expenses related to obtaining such income according to the Corporate Income Tax Law and its Implementation Regulations. Income from dividends, bonuses, and other equity investment income sourced from abroad shall be recognized as realized on the date the foreign enterprise decides to distribute profits.
(3) For non-resident enterprises established in China, taxable income from activities occurring abroad but with actual connections to the establishment shall be calculated according to the provisions of the above paragraph.
(4) When calculating foreign taxable income, reasonable shared expenses incurred by enterprises to obtain both domestic and foreign income should be allocated proportionally based on the reasonable portion related to obtaining foreign taxable income.
(5) When aggregating foreign taxable income, losses calculated according to the Corporate Income Tax Law and its Implementation Regulations from branches established in the same foreign country (region) cannot offset the taxable income from domestic or other countries (regions), but can be compensated with other items or income in subsequent years according to regulations.
4. The deductible foreign income tax amount refers to the income tax that enterprises should pay and have actually paid according to foreign tax laws on income sourced from abroad. However, it does not include:
(1) Foreign income tax that is wrongfully paid or collected according to foreign income tax laws and regulations;
(2) Foreign income tax that should not be levied according to tax treaties;
(3) Interest, penalties, or fines added due to underpayment or late payment of foreign income tax;
(4) Foreign income tax returned or compensated by the foreign tax authority to the taxpayer or their related parties;
(5) Foreign income tax on income exempt from corporate income tax in China according to the Corporate Income Tax Law and its Implementation Regulations;
(6) Foreign income tax that has already been deducted from the enterprise’s taxable income abroad according to the regulations of the Ministry of Finance and tax authorities.
5. When resident enterprises claim tax credits for foreign income tax according to Article 24 of the Corporate Income Tax Law, the actual tax amount borne indirectly by the foreign enterprises from which they obtain foreign investment income is the portion of tax borne by the foreign enterprise for the dividends, bonuses, and other equity investment income obtained based on the direct or indirect control of more than 20% of shares.
6. Enterprises must calculate the foreign tax credit limit according to the provisions of the Corporate Income Tax Law and its Implementation Regulations by country (region).
The foreign income tax credit limit for a specific country (region) = Total Taxable Amount for Domestic and Foreign Income according to the Corporate Income Tax Law × Taxable Income from a Specific Country (Region) ÷ Total Taxable Income from Domestic and Foreign Sources.
7. If the total taxable income for the current period from domestic and foreign sources is less than zero, the current period’s taxable income from domestic and foreign sources shall be calculated as zero, and the foreign income tax credit limit for that period shall also be zero.
8. When calculating the actual deductible foreign income tax amount already paid and borne, if the foreign income tax amount paid in a specific country (region) is lower than the calculated deduction limit, that tax amount shall be used as the foreign income tax credit from the enterprise’s taxable total; if it exceeds the deduction limit, the deduction limit shall be used as the foreign income tax credit, and the excess can be carried forward for deduction in the next five consecutive tax years.
9. In cases where enterprises apply for tax credits, they must submit the relevant tax payment certificates issued by the foreign tax authority for the corresponding tax years.
10. This notice shall take effect from January 1, 2009.
Attachment: List of Foreign Countries (Regions) with Statutory Tax Rates Significantly Higher than China’s Income Tax Rate
State Administration of Taxation
December 25, 2009
Attachment:
List of Foreign Countries (Regions) with Statutory Tax Rates Significantly Higher than China’s Income Tax Rate
United States, Argentina, Burundi, Cameroon, Cuba, France, Japan, Morocco, Pakistan, Zambia, Kuwait, Bangladesh, Syria, Jordan, Laos.
Announcement from the State Administration of Taxation regarding the release of the “Operation Guidelines for Foreign Income Tax Credits”
State Administration of Taxation Announcement [2010] No. 1
According to the Corporate Income Tax Law and its Implementation Regulations, as well as the Notice from the Ministry of Finance and the State Administration of Taxation regarding foreign income tax credits, this announcement is made and shall take effect from January 1, 2010.
Enterprises that have not processed foreign tax credits for the years 2008 and 2009 may calculate the credits according to this announcement.
State Administration of Taxation
July 2, 2010
Note: Some provisions have been abolished. The provision regarding “enterprises may be considered as having paid taxes when confirmed by the competent tax authority” has been abolished. See: “Decision on the Announcement of Invalid and Abolished Tax Department Regulations and Tax Normative Documents” by the State Administration of Taxation.
Ministry of Finance and State Administration of Taxation on Foreign Enterprises Engaged in Oil (Gas) Resource Exploitation Tax Credits
Tax Circular [2011] No. 23
According to the Corporate Income Tax Law and its Implementation Regulations, and the Notice from the Ministry of Finance and the State Administration of Taxation regarding foreign income tax credits, this notice supplements the issues related to tax credits for foreign enterprises engaged in oil (gas) resource exploitation:
1. Oil enterprises may choose to calculate their taxable income from foreign sources on a country-by-country basis (i.e., “by country without itemization”) or not on a country-by-country basis (i.e., “not by country without itemization”) and shall calculate their deductible foreign income tax amount and deduction limit according to the tax rate stipulated in the Circular [2009] No. 125.
2. For oil enterprises, when calculating the income tax credits for foreign income tax, the tax amount that has been paid or borne in the foreign country shall be calculated based on the direct or indirect control of more than 20% of shares.
3. Other issues regarding foreign income tax credits for oil enterprises shall be executed according to the provisions of Circular [2009] No. 125.
4. This notice shall take effect from January 1, 2011.
State Administration of Taxation
May 26, 2011
Notice from the Ministry of Finance and the State Administration of Taxation on Improving Foreign Income Tax Credits
Tax Circular [2017] No. 84
To the Finance Departments (Bureaus) and State Taxation Administrations of provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan:
According to the Corporate Income Tax Law and its Implementation Regulations, as well as the Notice from the Ministry of Finance and the State Administration of Taxation regarding foreign income tax credits, this notice addresses the issues related to improving foreign income tax credits:
1. Enterprises may choose to calculate their taxable income from foreign sources on a country-by-country basis (i.e., “by country without itemization”) or not on a country-by-country basis (i.e., “not by country without itemization”) and shall calculate their deductible foreign income tax amount and deduction limit according to the tax rate stipulated in Circular [2009] No. 125. This method once chosen cannot be changed within five years.
2. For enterprises obtaining dividends from foreign sources, when calculating the foreign income tax amount and deduction limit, the foreign enterprises from which they hold more than 20% of shares must be determined according to the provisions of the Circular [2009] No. 125.
3. Other matters regarding foreign income tax credits for enterprises shall be executed according to the provisions of Circular [2009] No. 125.
4. This notice shall take effect from January 1, 2017.
State Administration of Taxation
December 28, 2017