China Issues Measures on Income Tax for Enterprise Relocation

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Sept. 28 – China’s State Administration of Taxation (‘SAT’) released the “Administrative Measures on Income Tax for the Policy-Based Relocation of Enterprises (Announcement [2012] No.40, hereinafter referred to as ‘Measures’)” on August 10, aiming to regulate the administration of levying income tax on enterprises undergoing policy-based relocation. Key provisions of the Measures can be found below.

For the purpose of the Measures, the policy-related relocation of enterprises refers to the relocation of all or part of an enterprise initiated by the government based on the needs of social public interest, such as relocation due to the needs of national defense, diplomacy or social welfare housing projects.

Independent accounting

Enterprises shall conduct separate taxation administration and accounting for relocation income, relocation expenses, the taxation treatment of relocated assets, and the administrative affairs regarding the collection of income tax on relocation income, according to the requirements of the Measures.

For enterprises failing to conduct the separate taxation administration and accounting, the income tax treatment thereof shall be carried out by regarding such relocation as non-policy-related relocation (e.g. self-initiated relocation or commercial relocation) and the provisions of the Measures shall not apply.

Taxation treatment for the relocation of assets

  • Where an asset involved in the relocation of an enterprise may continue to be used immediately after simple installation or without installation, the depreciation or amortization for the net value thereof shall continue to be calculated based on the remaining years of depreciation or amortization of the asset as prescribed by the Enterprise Income Tax Law and its implementing regulations after the asset is put into use again.
  • Where an asset involved in the relocation of an enterprise can only be re-used after an overhaul, the net value thereof and the expenses incurred during the overhaul process shall be regarded as a taxable cost of the asset. The depreciation or amortization of the asset shall be calculated based on the remaining useful life of the asset after the asset is put into service again.
  • For the land expropriated during the relocation process which adopts the land substitution method, the taxable cost of the land received from the substitution shall be the net value of the land expropriated and all fees and expenses incurred before the substituting land is put into use. Such costs shall be amortized over the years prescribed by the Enterprise Income Tax Law and its implementing regulations after the substituting land is put into use.

Moreover, the expenses incurred by the enterprise from the procurement of assets shall not be deducted from the relocation income.

Taxable income

The relocation income and relocation expenses of enterprises 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 in the year in which the relocation is completed. The Measures provide a maximum of five years for the relocation, and enterprises meeting the following conditions shall be regarded as having completed the relocation:

  • The relocation planning has been basically completed; and
  • The production and operation income of the current year accounts for more than 50 percent of the production and operation income of the year before the relocation.

The Measures are scheduled to take effect on October 1, 2012, with the “Notice of the State Administration of Taxation on Relevant Issues concerning the Enterprise Income Tax on Income from Policy-Related Relocation or Disposal (guoshuihan[2009] No.118)” simultaneously repealed.

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