SAT Clarifies Implementation Issues for Corporate Income Tax

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Mar. 12 – On February 22, the State Administration of Taxation published Circular 79 in an effort to clarify certain technical issues for corporate income tax purposes including the timing of income recognition, tax treatments for certain expenses, and the determination of tax basis for fixed assets.

This clarification relates tax treatment for expenses including those related to tax-exempt income, start-up expenses and business entertainment expenses.

Expenses related to tax-exempt income

Article 28 of the CIT law’s implementation rules states that expenses created by non-taxable income are not deductible for CIT purposes, but the article does not address the deductibility of expenses related to tax-exempt income.

Circular 79 further clarifies that, unless otherwise prescribed by relevant rules, expenses related to tax-exempt incomes should be deductible.

Start-up expenses

Under the previous Circular 98 issued in March 2009, a company can elect either to take a one-off deduction in the year when it starts to operate, or to amortize start-up expenses as long-term assets. Once an election is made, it cannot be changed.

Circular 79 stipulates that start-up expenses shall not be accounted for as the current period’s losses; rather, it shall be treated according to Article 9 of Circular 98.

Business entertainment expenses

The CIT implantation rules provide that 60 percent of business entertainment expenses incurred can be deductible whereas the deductible amount shall not exceed 0.5 percent of total revenues of that particular year.

Circular 79 clarifies that for companies engaged in equity investment, dividends or profits distributed from investees, and gains derived from share transfer are eligible as the basis for calculating the deduction threshold for business entertainment expenses.

For more information on corporate income tax considerations in China, contact Sabrina Zhang, the national tax partner for Dezan Shira & Associates at