China Today Special

Leveling the Playing Field

Taxation on Domestic and Foreign-funded Enterprises Unified

No longer capital starved as it was in its emerging early years, China revokes tax privileges for foreign investors, confident that fair competition and a mature market is appealing enough.

By staff reporter JIAO FENG

ON October 18, 2010, the State Council promulgated the Circular on Applying a Unified System for Urban Maintenance and Construction Tax and Education Surcharge to Both Domestic and Foreign-funded Enterprises and Chinese and Foreign Nationals. This is another important measure since China unified the corporate income tax for domestic and foreign-funded enterprises in 2008, and signals a total unification of taxation on domestic and foreign-funded enterprises.

 

 At the Third China International Private Equity Forum in Tianjin, fund companies attract visitors. China Foto Press

Preferential Treatment

    Since adopting the policy of reform and opening-up and in order to attract foreign investment, promote domestic employment and introduce advanced technologies and management expertise, the Chinese government conducted a series of reforms on the system of corporate taxation, giving various forms of preferential treatment to foreign-funded enterprises. China adopted the Income Tax Law Concerning Chinese-Foreign Equity Joint Ventures in 1980 and the Income Tax Law Concerning Foreign Enterprises in 1981. In 1991 the two laws were merged into the Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises.

    Under relevant articles of the law, foreign-funded enterprises enjoy a great many preferential policies. For instance, the profit derived by a foreign investor from an enterprise with foreign investment shall be exempted from income tax. Any enterprise with foreign investment of a production nature scheduled to operate for a period of no less than 10 years shall, from the year beginning to make profit, be exempted from income tax in the first and second years and allowed a 50 percent reduction in the third to fifth years. Those operating in Special Economic Zones and economic development parks enjoyed further incentives. In addition, to encourage foreign investment, various local governments have promulgated preferential policies regarding land use and local taxation.

    So for a long period the tax burden on foreign-funded enterprises has been much lighter than on domestic enter-prises. In 2005, for instance, the average tax rate for domestic enterprises was 24.53 percent, while the figure for foreign-funded enterprises was 14.89 percent. In 2008, the Chinese government promulgated the new corporate income tax law – the Corporate Income Tax Law of the People’s Republic of China, which unified the tax rate for both domestic and foreign-funded enterprises to 25 percent.

    The new tax law allows a five-year grace period, during which the old policy is still valid. And in fact, it still extends certain preferential treatment to foreign-funded enterprises. For instance, the preferential tax rate of 15 percent is levied on foreign-funded enterprises engaged in new and high technologies.

    Zheng Yibing, chief executive officer of Henan ADD Electric Power Equipment Co., Ltd., confirms their foreign-funded company is still within the grace period and enjoys preferential tax treatment. In 2008 and 2009 the enterprise was exempted from income tax, and from 2010 to 2012 its income tax rate is reduced by half. In addition, the local government also gives it preferential treatment in land use and return of local taxes.

    Chen Deming, Minister of Commerce, has reiterated that China pays attention to the important roles played by foreign-funded enterprises in promoting economic development and increasing employment. While encouraging domestic enterprises to expand investment abroad, China will continue to welcome foreign enterprises to invest in China, and is actively creating a good investment environment for foreign investors.

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