3. TAXATION IN THE MAINLAND CHINA
3.3 NEW TREND OF THE NEW COMPANY INCOME TAX ("CIT") LAW DEVELOPMENT
3.31 CHANGES ON TAX RATES AND THE DEDUCTIBILITY OF EXPENSES ITEMS:
Compared with the old CIT law, the new CIT law which is effective from 1 January 2008, include the following changes as follows:
3.32 IMPOSITION OF THE WITHHOLDING TAX ON DIVIDENDS, INTEREST AND ROYALTY PAYMENTS
- The new tax rate becomes a flat rate of 25% on the taxable income after tax adjustments and a lower tax rate is enacted to impose on qualified small and thin- profit companies (20%) and qualified high/new technological enterprise (15%) without the geographical limitations;
- The effective rates start from 1 January 2008; and the changes in the expenses hit in the income statement include;
- The allowable amount of charitable donations raise up to the ceiling of 12% of annual accounting profit;
- The salaries are allowed to be fully deductible on the condition that they are reasonably incurred in the course of the ordinary business;
- The advertising and promotion expenses are deductible up to the ceiling of 15% of the total sales; and
- The employee education expenses are deductible up to the ceiling of 2.5% of the total salaries.
Before the repatriation of profits from the FIE in PRC to the holding companies in the home countries, the withholding tax will be imposed on the following payments such as dividends, interests and royalty payments effective from 1 January 2007. Accordingly, a sophisticated planning in selecting the country in which the immediate holding company is incorporated is essential to mitigate the tax burden.
3.33 ELIMINATION OF THE PREVIOUS PREFERENTIAL TREATMENTS
Under the new CIT law system, the old tax holidays will be eliminated or started to be utilized by certain enterprises:
- Manufacturing enterprise;
- Double intensive enterprise;
- Export-oriented enterprise;
- High-New-Technology enterprise in High-Tech Zone.
So Existing enterprise previously entitled to the higher (such as 33%) CIT rate will be entitled to the new rate (25%);
If the existing enterprise which previously entitled to, but not yet start to utilize the tax holiday due to the continuing losses, the tax holiday will be regarded to commence from the year when the new CIT law takes effect until the end of the tax holiday period.
New enterprise established before 16 March 2007 (then day when the announcement of the new CIT law); so we called the "old enterprise", can still enjoy the same grandfather treatments as the existing enterprise;
Once the new enterprise established after 16 March 2007, (then day when the announcement of the new CIT law); so we called the "new enterprise", no longer enjoy any grandfather treatments, new rule is applicable from 1 January 2008.