Corporate Tax Considerations

Corporate tax considerations are an important part of any companies' annual tax reconciliation and year-end account closings. Here we take a brief look at some important expenses and deductions enterprises can file for as well as some of the regulations for branch office CIT filing. 

Advertising expense and business promotional expenses

Qualified advertising expense and business promotion expenses are allowed to be deductible of up to 15 percent of the sales (business) income of that year unless otherwise prescribed by the in-charge finance and tax departments of the State Council. Any excess amount is allowed to be carried forward and deductible in the following year.

Business entertainment expenses

For business entertainment expenses which is incurred by an enterprise and related to its production and business operation activities, only 60 percent of the incurred amount should be deductible but the maximum deduction amount shall not exceed 0.5 percent of the sales (business) income of the year.

Donation

Charitable donations incurred by an enterprise are allowed to be deductible up to 12 percent of the total annual accounting profit. 

Commercial insurance expenses

Premiums for commercial insurance policies paid by the enterprise for its investors or employee are not deductible except for premiums for personal safety insurance paid by an enterprise pursuant to the state's relevant regulations for its workers conducting special types of production work and premiums paid for other commercial insurance policies that may be deductible pursuant to the rules prescribed by the in-charge finance and tax departments of the State Council.

Sponsorship expenses

Sponsorship expenses are not deductible if they are of a non-advertising nature and not relevant to business operation.

Staff education expenses

Expenditures for staff education that is incurred by an enterprise are allowed to be deducted up to 2.5 percent of total wages and salaries. Any excess amount is allowed to be carried forward to future years.

Provisions

Provisions are generally not deductible.

Reserve fund

These are deductible for special funds that are appropriate for use in protecting environment, pursuant to the relevant laws and administrative regulations. Once usage of the aforesaid special funds changes, it shall not be deductible.

Management fees

Management fees paid between enterprises, rental and royalty fees paid between business units, and interest paid between business unites of a non-bank enterprise are not deductible. 

Interest expense of debt from related party

There are two articles in new CIT law that relate to interest expenses deduction for debt from related parties. They are summarized as follows:

1) Interest expenses on borrowing from non-financial enterprises by a non-financial enterprise, the excess part above the amount calculated by reference to the interest rate of similar loan with the same term as provided by financial institutions shall not be deductible

2) Interest expenses which exceed certain debt/equity ratio shall not be deducted while calculating taxable income. The ratio is 5:1 for financial enterprises; and 2:1 for other enterprise (Circular Caishui 2008 No. 121 defines the ratio)

According to Circular No. 121:

         If supporting documents for related party transaction are not available or the effective CIT rate is above the tax rate of related party within territory of China, only the interest fulfilling the above mentioned criteria shall be deductible

         If the supporting documents for related party transaction are available or the effective CIT rate is not above the tax rate of related party within territory of China, then interest expenses can be deductible despite the ratio limitation

Fixed assets

Fixed asset qualification

More than 12 month usage period, however no minimum value requirement compared to the previous tax law

Residual value

There is more flexibility on residual value as it can be determined based on the nature of the assets and conditions.

New change of depreciation years

Transportation facilities except aircraft, trains and vessels: four years; electronic equipment: three years.

Accelerated depreciation

If assets need to be updated frequently due to technology improvement, the depreciation period can be shorter (limited to 60 percent of the statutory minimum depreciation period).

To read the full version of this article, please purchase the January/February 2010 issue of China Briefing, which can be found in the Asia Briefing Bookstore. Companies requiring assistance may contact any Dezan Shira & Associates' nine national offices at china@dezshira.com for advice or visit www.dezshira.com.