General Rules

There are two main categories of taxpayers for the payment of income tax by foreign-invested enterprises and foreign enterprises:  i) the Foreign-invested enterprise category includes Sino-foreign equity joint ventures, Sino-foreign cooperative  joint  ventures  and  wholly  foreign-owned enterprises.  Foreign-invested enterprises pay taxes on all income originating from their business in China and overseas if they have headquarters in the PRC. The income tax amount that a foreign- invested enterprise has paid for their income that has originated from their overseas business is allowed to be deducted from their dutiable taxation when paying tax on a consolidated basis; but the deduction is not allowed to exceed the dutiable taxation of their overseas  income which calculated in accordance with Chinese law.  ii) the Foreign enterprise category includes foreign companies, enterprises and other economic organizations with branches in China which are engaged in production and/or business, or have income that originates from their business in the PRC, even without establishing branches in the PRC. Foreign enterprises pay taxes only on the income originating from their business in China.

A proportional tax rate of 33% is adopted for income tax for foreign-invested enterprises and foreign enterprises, of which 3% is local level.  In terms of dividends, interest, rentals, royalties and other income originating from domestic sources gained  by  whether  the  foreign  enterprises  without organizations or branches in China or the foreign enterprises with  organizations  or  branches  in  China  but  the above-mentioned income without realistic connections with them, 20% of income tax should be paid.

Main Preferential Terms for Tax Deduction/Exemption(Enterprise Income Tax)

i)  The following enterprises have to pay business income tax with the reduction by the tax rate of 15%:
         (1)foreign-invested enterprises and foreign enterprises set up in special economic zone;
         (2)productive foreign-invested enterprises established in Pudong  new  area  and  economic  and  technological development zone in Shanghai;
         (3)high-tech enterprises set up in high-tech industrial development zone;
         (4)within the three years after the execution of current preferential tax policies expires, foreign-invested enterprises belonging to the state encouraged items established in the central and western areas of China;
         (5)foreign-invested enterprises belonging to the state encouraged items established in the western region before 2010;
         (6)productive foreign-invested enterprises set up in coastal or riparian open cities, 26 provincial capital cities and open   coastal   economic   areas,   are   engaged   in technology-intensive and knowledge-intensive projects, or the projects exceeding US$ 30 million with long-time payoff period of foreign investment.

ii)   Productive foreign-invested enterprises set up in the following areas have to pay business income tax with the reduction by the tax rate of 24% :
         (1)the old downtown area of the cities where special economic zone or economic and technological development zone is located;
         (2)open coastal economic areas;
         (3)open coastal cities;
         (4)open riparian cities;
         (5)open border-shore towns;
         (6)provincial capital cities;

iii)  Those foreign-invested manufacturing enterprises that have operated for ten years or more will be exempted from business income tax for two years from the profit-making year, for years three to five there is 50% reduction, however petroleum, natural gas, rare metal and precious metal resources exploration projects are an exception to this rule.

  For the advanced technological enterprises set up by foreign investment, after the expiration of reduction and exemption according to tax law, can be reduced by half of the enterprise income for another three years.  After 50% reduction, if the tax rate is below 10%, enterprise income tax can be paid by a rate of10%.

iv) If the foreign investors of foreign-invested enterprises use the profits earned by the enterprises to directly reinvest in the said enterprises, to increase the registered capital or use the said  profits  as  investment  capital  to  setup  other foreign-invested enterprises and have operated such an enterprise for no less than 5 years, they will receive a reimbursement amounting to 40% of their duly paid income tax.

v) The expense for technological development of foreign-invested enterprises, which has increased by or above 10% over that of the previous year, after tax authority's permission is allowed to be deducted from the taxable income of the current year, by 50% of actual basis for technological development again.