Mar. 21 – China’s State Administration of Taxation (SAT) released the “Announcement on Issues Concerning Income Tax for the Policy-Based Relocation of Enterprises (Announcement  No.11, hereinafter referred to as the ‘Announcement’) on March 20, 2013, which aims to address any issues that crop up during the implementation of the “Administrative Measures on Income Tax for the Policy-Based Relocation of Enterprises.”
On August 10, 2012, China’s SAT released the “Administrative Measures on Income Tax for the Policy-Based Relocation of Enterprises (Announcement  No.40, hereinafter referred to as the ‘Measures’),” which took effect on October 1, 2012. The Measures offer preferential tax treatment for enterprises involved in policy-based relocation. Furthermore, such enterprises are entitled to relocation compensation from the government and other related entities. Detailed information can be found below.
The “relocation income” of an enterprise generally includes relocation compensation and asset disposal income.
Specifically, relocation compensation covers the monetary and non-monetary compensation income received by the enterprise due to relocation, including:
- Compensation for the value of the expropriated assets
- Compensation offered for relocation and settlement
- Compensation offered for the loss caused by the suspension of production and operations
- Insurance claims received for damages incurred during the asset relocation process
- Other compensation income
“Relocation expenses” are composed of relocation fees and asset disposal expenses.
One major change introduced by the Measure is that the expenses incurred by the enterprise from the procurement of assets will no longer be regarded as relocation expenses which can be deducted from the relocation income before taxation.
Preferential Tax Treatment
Deferral of tax payments
The relocation income and relocation expenses of an enterprise incurred during the relocation period may not be included in the taxable income of the current period and can be settled on a consolidated basis during the year in which the relocation is completed. The Measures provide a maximum of five years for the relocation.
- Enterprise’s net relocation income = Relocation income – relocation expenses
During the year in which the relocation is completed, the enterprise shall include the net relocation income in the taxable income of that year for purposes of tax calculation.
Deduction of relocation losses
The negative balance after deducting relocation expenses from relocation income of an enterprise shall be deemed as relocation losses. Any of the following methods may be chosen for the tax treatment of relocation losses:
- Deducting the relocation losses on a one-off basis in the year in which the relocation is completed
- Deducting the relocation losses before tax for three years in equal amount from the year in which the relocation is completed
Loss carry-over period
China allows a loss carry-over period for losses incurred in a tax year by taxpayers. An enterprise may carry over the losses incurred in a tax year to the succeeding years; namely, it may have the losses cancelled out by the income of the succeeding years. However, the carry-over period in such cases may not exceed five years.
In case of any remaining losses not yet made up before the relocation, the relocation period of the enterprise may be subtracted from the loss carry-over period.
Furthermore, the Measures require enterprises to conduct separate taxation administration and accounting for relocation income, relocation expenses, and the taxation treatment of relocated assets. For enterprises failing to observe this requirement, the income tax treatment thereof shall be carried out by regarding such relocation as non-policy-related relocation.
The Announcement clarifies that, where the relocation agreement of a policy-based enterprise relocation project has been signed prior to the effective date of the Measures (October 1, 2012), but the relocation liquidation thereof fails to be completed before such date, the assets purchased during the reconstruction or production resumption process of the enterprise may be deducted from the relocation income as relocation expenses.
The taxable basis for assets purchased by the above-mentioned enterprise shall not include the relocation compensation, and for relocation agreements of policy-based enterprise relocation projects signed after October 1, 2012, they shall be carried out according to the Measures.
In addition, for assets expropriated during the relocation process which adopt the asset substitution method, the taxable cost of the asset received from the substitution shall be the net value of the asset expropriated plus all taxes and charges incurred.
The Announcement is retroactively effective from October 1, 2012.
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Relocating or Expanding your China Business
This issue deals with mergers of companies that subsequently result in all or part of their operations having to be relocated within China. It also covers the establishment of branch and other offices, in addition to the liquidation issues that can occur when restructuring a business in China.