Non-profit Organizations in China: How to Apply for Tax Exempt Status

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By I-Ting Shelly Lin

On February 7, 2018, the Chinese Ministry of Finance (MOF) and the State Administration of Taxation (SAT) released a notice clarifying key concerns about the tax exempt status of non-profit organizations (NPOs) (Cai Shui [2018] No.13).

The notice amends the tax exempt qualification standards set out in Cai Shui [2014] No.13, and provides guidance for application procedures. This new notice does not relate to foreign NGOs unless they set up a domestic NPO.

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According to this announcement, an NPO must meet the following eight requirements to be eligible for tax exempt status:

  1. The NPO must be legally established or registered as a public institution, a social organization, a foundation, a social service organization, a place for religious activities, a religious institution, or other non-profit organization recognized by the MOF or SAT;
  2. The NPO must be involved in public welfare or non-profit activities;
  3. Other than the payment of reasonable organization-related expenses, all income must be used for the public welfare or not-for-profit purposes and approved by the registration authority or the NPO’s Articles of Association;
  4. Assets and fruits are not to be distributed, except for expenditure of reasonable wages and salaries;
  5. Upon de-registration, with approval from the registration authority or the NPO’s articles of association, the remaining assets must be used for public service or not-for-profit purposes, or donated to other similar organizations by the registration authority;
  6. Aside from government and administrative units, individuals, legal entities, and other organizations that have contributed property to the NPO will not be allowed to retain or enjoy any right to those properties;
  7. Expenditures for wages and employee benefits must comply with the prescribed ratio, with no further distribution of organization property. Specifically, average wages should not exceed two times of the average salary of similar organizations in the same industry in the city (or above the level of the city) in which the organization is registered; and
  8. Costs, expenses, and losses related to taxable and non-taxable incomes must be accounted for separately.

To apply for tax-exempt status, an NPO shall prepare and file all relevant required documents, including:

  • The application form;
  • The Articles of Association or management system;
  • A certified copy of registration;
  • Documents that state the sources and uses of funds for the preceding year and the details of public welfare and non-profit activities;
  • The Salary Report for the preceding year;
  • Proven financial statements and audit reports from a qualified intermediary;
  • Materials issued by the registration authority stating that the NPO’s development or non-profit activities for the preceding year complies with related regulations and national policies; and
  • Other requested files.

According to the 2018 notice, an NPO’s tax exempt status is valid for five years.

An NPO should submit an application for re-examination within six months, compared to the previously stated three months, after the expiration of its tax exempt status. If an NPO fails to submit its application for re-examination or fails the re-examination, it will automatically lose its tax exempt status.

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Major changes introduced in Cai Shui [2018] No.13 include:

  • Allowing social service organizations and religious institutions to apply for and be granted tax exemption;
  • Abolishing the requirement of qualifying annual inspections when applying for tax exemption and replacing them into “materials issued by the registration authority stating that the NPO’s development or non-profit activities for the preceding year accord with relevant regulations and national policies”;
  • Replacing “average wages shall not exceed two times of ‘the preceding year’s average salary where the NPO is registered” with “average wages shall not exceed two times of the average salary in ‘similar organizations in the same industry in the city (or above the level of the city) in which the organization is registered” (item 7);
  • Requiring newly established NPOs applying for tax exempt status to submit additional verification documents: A special report on wages and salaries for the preceding year, including the remuneration system, average employee wages, proportion of wages and benefits to total expenditure, and information about wages and salaries of important personnel (including at least the top 10 highest paid personnel);
  • Extending the re-examination term from three months to six months;
  • Adding a regulation that states: During daily management processes, if an NPO enjoying tax exemption is found to not meet the tax exempt requirements of this notice, the government unit which has granted the NPO tax exempt status should review its qualifications. For NPOs that fail the qualification review, their tax exempt status will not be cancelled, but they will not be allowed to enjoy preferential policies in the corresponding year.
  • Canceling an NPO’s tax exempt status and prohibiting it from filing a re-examination application for at least one year, if it is found to have violated related laws and policies, was discredited by the civil affairs department, engaged in illegal political activities, or received a Class C or D rating in taxation credit;
  • Barring organizations that engage in illegal political activities from tax exempt status in the future; and
  • Adding regulations that state: When an NPO’s tax exempt status is cancelled, it should pay taxes according to the law. Once the NPO fails to pay taxes according to the law, taxation authorities should collect tax payments starting from the year since the NPO lost its tax exempt status.

Professional-Service_CB-icons-2017 Audit and Financial Review Services from Dezan Shira & Associates

Hannah Feng, Senior Manager of Corporate Accounting Services at Dezan Shira & Associates commented, “The conditions for NPOs’ tax exemption have become more flexible. Measures are also keeping pace with the times.” Feng noted, “Narrowing down average wage comparisons to the same industry of the NPO is more suitable for the actual development of the industry, making it more conducive to attract talents.”

According to Feng, NPOs with higher average wages in the industry will have a higher possibility to qualify for tax exemption. She said, “The average wage level of NPOs in some industries is low. Tax exemption will encourage these organizations to strengthen industry synergy and to progress together. The incentive effects of this new notice will continue in the future.”

Regarding conditions that may lead to cancellation of tax-exempt status, the government has also loosened restrictions. Compared with previous measures that canceled an NPO’s tax exemption when it is found to have failed the annual inspection or have received minor penalties, the current notice indicates that only those who have seriously violated the law and have been recorded as seriously dishonest will be canceled tax- exempt status. This means that as long as an NPO who has previously received light punishment has corrected its behaviors, the NPO can still enjoy tax exemption.

Feng concluded, “The changes are closely linked to the reform of social organization’s registration management system, and are closely linked to credit management of the tax sector, making the document highly enforceable and forward-looking.”

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