China Clarifies Tax Calculations Related to Equity Investment Losses

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Dec. 6 – Enterprises can have their annual equity investment losses deducted from corporate taxable income, according to the clarification in the “Announcement of the State Administration of Taxation on Issues Concerning the Handling of Income Tax Related to Losses of Equity Investment of Enterprises” (guoshuifa [2010] No.6) issued on July 28, 2010.

The announcement clarifies that equity investment losses that happened in the past one year can be deducted from corporate taxable income, if the national tax authorities validate such losses. The new method of calculation is effective from January 1, 2010 and enterprises may report all the unsettled equity investment losses that happened before the release of Announcement No.6 to be subtracted from 2010’s taxable income.

Gains and losses are determined by taking the balance between the gross revenue enterprises make by withdrawing, transferring or settling equity investments, and the cost of such investments. The new announcement changes regulations issued in a previous circular (guoshuifa [2000] No.118) by the State Administration of Taxation in 2000. The previous circular imposed a limit on the annual amount of deductible equity investment losses and prohibited such deductible losses from exceeding the annual sum of enterprises’ equity investment profit and revenue from equity investment transfer.

Companies should notice that they are not allowed to deduct equity investment losses directly by themselves, but need to report the losses for the state tax authorities’ final validation; they also need to report all the losses that happened before the release of the new announcement for a one-time deduction at the end of 2010, otherwise from 2011 they will not be able to subtract losses that do not happen in the tax year.

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