Transcript Document

Edward Lehman
Practising Law Institute
810 Seventh Avenue, 20th Floor
New York, NY 10019
www.lehmanlaw.com
New Taxation
Regulations: Impact
on Investment
www.lehmanlaw.com
As the Saying Goes
人生难料，但一定会死亡，一定要纳税。
 Ren sheng nan liao, dan yi ding hui si
wang, yi ding yao na sui.

– Pin yin (Chinese Romanization)

There’s nothing certain in life except
death and taxes.
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Of Interest
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BizChina
Discussion of new tax law and
potential impacts on foreign
investment
– located at www.lehmanlaw.com under TV
& Media
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Policy Issues
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For over 20 years China has pursued
aggressive approach to development:
– “worship” of foreign investment
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New tax law marks a change in policy to a
more “harmonious society”
An equalization of tax treatment or
reversal of “reverse discrimination”
Signals increased confidence in Chinese
economy
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Planned to Market Economy

Movement from PLANNED to MARKET
economy
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New Bankruptcy Law
New Property Law
New Labor Contract Law
New Anti-monopoly Law
New M&A Regulations
All over approximately past year showing
quick movement by State
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China’s Tax Laws up Until Now
-Dual Enterprise Income Tax systems
 Interim Regulations on Income Tax of
PRC Enterprise
- 33% tax rate for domestic enterprises
 Law on Income Tax of Foreign investment
Enterprises and Foreign Enterprises (the
“FEIT” Law)
I. 15% t o 24% tax rate for FIEs;
II. “Two-plus-three” year tax holiday for FIE
manufacturers
III. Actual corporate income tax rate for FIEs may
be as low as 11%
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The New Tax Regime
- Unified Enterprise Income Tax
System
“Law of the People’s Republic of
China on Enterprise Income
Tax” (the “EIT Law”), to take
effect Jan. 1, 2008
 Unified Income Tax Rate
 Unified Tax Deduction
 Unified Tax Preference
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Common Investment Structures
China Company
Parent Company
FIE
ROUND
TRIP
Domestic Company
Special Purpose
Vehicle (Hong
Kong)
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Resident vs. Non-Resident
Enterprises
Resident Enterprises
 Enterprises incorporated in China or
incorporated in other jurisdictions but
having management organizations in
China
Global income shall be
subject to China taxation
Unified EIT rate of 25%
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Resident vs. NonResident Enterprises
Non-resident
Enterprises
Enterprises incorporated in
other jurisdictions and with
offices but no management
organizations in China
20% income tax rate for its
China-sourced income
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Unified Tax Deduction
 Current dual taxation systems
- Domestic enterprises are subject
to more stricter deduction standard
than FIE
 Unified Deduction Standard
and Method
- Reasonable costs and expenses
- Charity donation expense: within
12% of the total annual revenue
- Research & development activity
expense, etc.
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Unified Tax
Preference
Five years transitional period from
Jan 1, 2008 to existing FIEs, allowing
them to transfer current
preferential tax rate to unified tax
rate
Also transitional period for
enterprises registered in certain
special economic zones, but the policy
is to be made by the State Council
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Other Incentives
 More preferential treatment
for enterprises investing in
environmental protection and
energy conservation
 The law retains preferential
policy on investments in
agriculture, forestry, fisheries,
public infrastructure
construction, etc.
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Anti-Avoidance
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I.
“Special Taxable
Adjustments,” introduces
new anti-avoidance
measures:
“Controlled foreign corporate”
rule: If a foreign company
registered in a low tax
jurisdiction is controlled by
corporate taxpayers in China, the
undistributed profits made by
the foreign company may be
considered as the controlling
company’s taxable income
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Anti-Avoidance
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Stricter controls for transfer
pricing: requires report
indicating transactions with
affiliated companies
Affiliated transaction: If an
enterprise engages in transaction
against independent trade
principle and reduces taxable
income with an affiliated
company, tax authority can make
adjustments
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Case Study
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Not related specifically to new EIT law but
to new approach of tax bureau
Facts: Rep Office understated income for
chief representative. In order to close Rep
Office and must show various tax
documents.
Because of several documents (rent much
higher than salary), chief rep and Rep
Office under investigation.
In this instance, tax bureau can impose any
income amounts at their discretion,
including penalty
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Outstanding Questions
 What is the definition of
“Management organization”?
 What is “hi-tech” or “low-earning
and small scale” enterprises?
 Treatment of foreign investment
from Hong Kong, Macao, and
Taiwan?
 Transition of tax preference for
existing enterprises registered in
special economic zones? Etc.
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Implementation
 Like many Chinese laws,
the EIT Law requires
further implementation
rules for uncertain issues
 State Administration of
Taxation said regulations
will be promulgated within
this year
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Impact on Foreign Investment
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“Why do you rob banks?”
– Because that’s where the money is.
» Willie Sutton
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Very little impact on foreign investment
numbers
Market drives investment NOT taxes
Compared to other markets, China’s tax
rate comparable or lower
– Germany 39%, France 33%, India 30% to 40%,
Japan 30%
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THANK YOU
Address: 10-2 Liangmaqiao Diplomatic Compound, Beijing
Telephone: 86-10-8532-1919
Fax: 86-10-8532-1999
Email: [email protected]
Website: www.lehmanlaw.com
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