The new PRC Enterprise Income Tax Law (“EIT law”) came into effect on January 1, 2008 and consolidated the enterprise income tax regimes for domestic enterprises and foreign-invested enterprises and ended the system of dual income tax regimes. The new EIT law unified the tax rates and tax incentive policies for both domestic enterprises and foreign-invested enterprises so that more equitable market conditions are created.
For those enterprises previously enjoying favorable tax incentives under the former tax regimes, the new EIT law provides a 5-year transitional period. For example, enterprises that enjoyed fixed term tax exemptions and reductions may continue to enjoy them until the end of the original term. Enterprises that used to enjoy a 15% tax rate will gradually shift from the lower rate to the 25% as required by the new EIT law. The transitional tax incentive policies are provided in many different tax regulations. The following is an introduction of some of the transitional tax policies:
1. Transitional tax incentives to enterprises previously enjoying lower tax rates.
As of January 1, 2008, enterprises which enjoyed lower tax rates will be gradually transition to the new tax rate within 5 years after the implementation of the EIT law. Among them, the enterprises which previously enjoyed enterprise income tax rates of 15% shall be transition to tax rate of 18% in 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012. Enterprises which enjoyed the tax rate of 24% previously shall be subject to the tax rate of 25% immediately in 2008.
2. Transitional tax incentives to enterprises previously enjoying fixed term tax exemptions and reductions.
As of January 1, 2008, enterprises which previously enjoyed fixed term enterprise income tax reductions or exemptions may continue to enjoy the same rate for the stated fixed pre-implementation term after the new EIT law takes affect. However, if an enterprise has not yet started to enjoy its period of exemption and reduction because of its failure to make profits to date, its period of exemption and reduction begins in 2008, whether or not it has a cumulative profit.
These transitional policies apply to foreign invested enterprises which were incorporated and registered before March 16, 2007.
If a foreign-invested enterprise enjoyed a fixed term tax exemption and reduction, but changes its business scope after 2008 and as a result, no longer satisfies the conditions as prescribed in previous tax laws and regulations to qualify for the tax holiday, it will then be required to repay the exempted and reduced taxes (including during the transitional period) based on the previous law.
3. Transitional tax incentives to enterprises previously enjoying low tax rates as well as fixed term tax exemptions and reductions
All enterprises that qualified for the enterprise income tax rate of 15% and simultaneously enjoy a 50% reduction for a fixed term may continue to enjoy this arrangement as follows: 50% reduction of 18% for the year 2008 (for a rate of 9%); 10% for the year 2009; 12% for the year 2011 and 12.5% in 2012 .
All enterprises that were previously under enterprise income tax rates of 24% or 33% but enjoying a 50% deduction for a fixed term may pay income tax based on a 50% deduction of the new tax rate of 25% tax rate in and after 2008.
4． Transitional tax incentives to High and New Technology Enterprises (“HNTEs”) established in special economic zones or in the Shanghai Pudong New Development Zone.
All HNTEs which are specially supported by the government, incorporated and registered on and after January 1, 2008 within the special economic zones or in Shanghai Pudong New Development Zone, will enjoy a two year tax exemption for the first two years, and a 50% deduction of the statutory tax rate of 25% for the third to fifth year, calculated from the financial year when the enterprise starts making its first business income within the special economic zone and Shanghai Pudong New Development Zone.
5. Tax incentives for Development in Western China
The special income tax policies for enterprises engaging in Western China development as provided in the “Notice on the Tax Favorable Policies for Western Development” will continue in force after the implementation of EIT.