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Newsletter | Articles A Significant Milestone in China’s Tax History The issuance of a tax law, which will unify two different tax systems, is a significant milestone in China’s tax history since the last tax reform in 1994. The long-awaited PRC Enterprise Income Tax Law has been adopted by the National People’s Congress of the People’s Republic of China (China). It came into effect on 1 January 2008. The newly issued Enterprise Income Tax Law will unify both foreign invested enterprises and domestic enterprises as they will be subject to the law, with the same corporate tax rates, unified tax deduction standards and preferential policies. Unified Tax Rates for Foreign Invested Enterprises and Domestic Enterprises The new Enterprise Income Tax rate is 25 per cent. However, the law provides for reduced tax rates of 15 per cent to qualified high-tech enterprises and 20 per cent to small scale enterprises earning small profits. These unified tax rates reduce the tax burdens of domestic enterprises, which used to be subject to a 33 per cent tax rate, and to a certain extent increase the tax burden of foreign invested enterprises. However, the new Enterprise Income Tax rate is lower than those of neighbouring countries and will thus try to maintain China’s attractiveness to foreign investors. Another major change is the Enterprise Income Tax Law also provides for various “industry-oriented” tax preferential policies rather than the existing “geography based” incentives. In addition to the reduced tax rates for small scale enterprises and qualified high-tech enterprises, different degrees of preferential treatments will be granted to start-up enterprises and enterprises investing into technology development, labour and welfare services, environmental protection, energy conservation, production safety, and continued investment in farming, forestry, husbandry, fishery and infrastructure development. More importantly, the Enterprise Income Tax Law will revoke the existing five-year tax holiday (i.e. two-year exemption and subsequent three-year half reduction of applicable tax rate) for production oriented foreign invested enterprises, as well as extensions of such tax holidays. In Summary Undoubtedly, the Enterprise Income Tax Law will increase the tax burden for many foreign invested enterprises, particularly those currently enjoying preferential tax policies. Certain issues remain, which may be solved once the State Council has issued detailed implementation regulations, which are expected in the next few months. These include: how to determine the “cut-off-date” for those foreign invested enterprises established before the promulgation of the Enterprise Income Tax Law the standards to determine “small scaled enterprises earning small profits” and “qualified high-tech enterprises in need of the State support” how the lower Enterprise Income Tax rates of existing foreign invested enterprises will gradually increase to the standard rate of 25 per cent how to determine the place of effective management of an enterprise how to enact the anti-avoidance rules Foreign investors need to review their existing tax planning schemes and take into consideration the potential impact of the changes to the Enterprise Income Tax Law on their future investments and M&A transactions in China. For more information please contact Ivan Cheung, director of ILS China.