Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China (2019 Revision)

Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China (2019 Revision) Regulation on the Implementation of the Enterprise Income Tax Law of the People's Republic of China (Promulgated by Order No. 512 of the State Council of the People's Republic of China on December 6, 2007; and revised in accordance with the Decision of the State Council to Amend Some Administrative Regulations on April 23, 2019) Chapter I General Provisions Article 1 The present Regulation is formulated pursuant to the Enterprise Income Tax Law of the People's Republic of China (hereafter the “ EIT Law ”). Article 2 The terms “sole proprietorship” and “partnership” as used in Article 1 of the EIT Law shall be a sole proprietorship or partnership established under the laws and administrative regulations of China. Article 3 The term “enterprises lawfully established within China” as described inArticle 2 of the EIT Law shall include the enterprises, public institutions, social bodies and other organizations with income established within the territory of China under the laws and administrative regulations thereof. The term “enterprises established under the laws of any foreign country (region)” shall include the enterprises and other organizations with income established under the laws of any foreign country (region). Article 4 The term “actual management institution” as used in Article 2 of the EIT Law ” shall refer to an institution that conducts substantial and all-round management and control with respect to the production, operations, personnel, finance, property, etc. of the enterprise. Article 5 The term “institutions and establishments” as used in Article 2, Paragraph 3, of the EIT Law shall refer to the institutions and establishments that conduct production activities and business operations within the territory of China, including: (1) management institutions, operational institutions, and offices; (2) factories, farms, and places for the exploitation of natural resources; (3) establishments for the provision of labor services; (4) establishments for engineering operations with respect to construction, installation, assembling, repairing, and surveying, etc.; (5) other institutions and establishments where production activities and operations are carried out. Where a non-resident enterprise entrusts any agent to carry out production activities or business operations within the territory of China, including the entrustment of any entity or individual to sign contracts on its behalf to handle the warehousing or delivery of goods, etc., such agent shall be regarded as an institution or establishment of the nonresident created within China. Article 6 The term “income” as used in Article 3 of the EIT Law shall include the income from the sale of goods, income from the provision of labor services, income from the transfer of property, income from equity investment such as dividend and bonus, interest income, rental income, income from franchise royalties, income from accepting donations, and other income. Article 7 The term “income from sources within and without China” as used in Article 3 of the EIT Law shall be determined under the following principles: (1) Income from the sale of goods shall be determined according to the place where the transaction is carried out; (2) Income from the provision of labor services shall be determined according to the place where labor services are provided; (3) With regard to income from the transfer of property, the income from the transfer of real property shall be determined according to the place where such real property is situated, while the income from the transfer of personal property shall be determined according to the place where the enterprise or institution of establishment that transfers the property is located, and the income from the transfer of equity investment assets shall be determined according to the place where the invested enterprise is located; (4) Income from equity investment such as dividend and bonus, etc., shall be determined according to the place where the enterprise that distributes the income is located; (5) Interest income, rental income, and income from franchise royalties shall be determined according to the place where the enterprise, institution or establishment that pays the income is located or according to the place where the abode of the individual that pays the income is located; (6) Other income shall be determined by the competent department of treasury or taxation of the State Council. Article 8 The term “actual connection” as used in Article 3 of the EIT Law refers to the connection whereby the institution or establishment set up by a nonresident within the territory of China acquires its equity or credit, or owns, manages or controls its property, etc. Chapter II Taxable Amount Section I General Provisions Article 9 The calculation of the taxable amount of an enterprise shall be based on the principles of the accrual method of accounting. The current incomes and expenditures shall be treated as current incomes and expenditures notwithstanding whether they have been received or paid; incomes and expenditures that are not current shall not be treated as current incomes and expenditures even the payment in question has been currently made, unless it is otherwise provided for by the present Regulation or the competent department of treasury or taxation of the State Council. Article 10 The term “losses” as used in Article 5 of the EIT Law refers to the amount which is less than zero resulting from the total amount of income of a certain taxable year less the tax-exempt incomes, tax-free incomes, and other various deductions. Article 11 The term “liquidation income” as used inArticle 55 of the EIT Law refers to the amount of total cashable values or transaction price less the net value of assets, liquidation expenses, and other relevant taxes and expenditures, etc. The residual assets that an investor obtains from the liquidated enterprise to which the part that should be distributed but has failed to be distributed from the accumulated undistributed profits and accumulation funds of the liquidated enterprise shall be determined as income from dividend; the part of remaining assets that is greater or smaller than the investment cost after subtracting the aforesaid dividend income shall be determined as income or loss from the transfer of investment assets. Section II Income Article 12 The “monetary forms whereby an enterprise obtains income” as used in Article 6 of the EIT Law include cash, bank deposits, receivable accounts, receivable instruments, bond investment to be held until maturity, and relief of obligation, etc. The “non-monetary forms whereby an enterprise obtains income” as used in Article 6 of the EIT Law include fixed assets, biological assets, intangible assets, equity investments, inventories, bond investments not to be held until maturity, labor services, and other relevant rights and interests, etc. Article 13 The term “income an enterprise obtains in non-monetary forms” as used in Article 6 of the EIT Law shall be determined according to the arm's length value. The “arm's length value” as used in the preceding paragraph refers to the value determined according to the market value. Article 14 The term “income from the sale of goods” as used in Article 6 (1) of the EIT Law shall refer to the income an enterprise obtains from the sale of commodities, products, raw materials, packaging materials, low-value perishables, and other inventories, etc. Article 15 The term “income from the provision of labor services” as used in Article 6 (2) of the EIT Law shall refer to the income an enterprise obtains from the construction, installation, reparation, fixing, transportation and traffic, warehousing and lease, finance and insurance, post and telecommunications, consultation and brokerage, cultural and sports activities, scientific research, technical services, educational trainings, catering and lodging, intermediary services, health and medical services, residential community services, travel, entertainment, processing, and other labor services, etc. Article 16 The term “income from the transfer of property” as used in Article 6 (3) of the EIT Law refers to the income an enterprise obtains from the transfer of fixed assets, biological assets, intangible assets, equity, credits, etc. Article 17 The term “income from equity investment such as dividend and bonus, etc.” as used in Article 6 (4) of the EIT Law refers to the income an enterprise obtains from the invested party due to equity investment. The income from equity investment such as dividend and bonus, etc. shall be realized out of the income of the date when the invested party makes the decision of profit distribution, unless it is otherwise provided for by the competent treasury or taxation department of the State Council. Article 18 The term “income from interest” as used in Article 6 (5) of the EIT Law refers to the income obtained by an enterprise by providing capital to any other person for use without constituting equity investment or income arising from any other person's use of the enterprise's capital, including interest of bank deposits, loan interest, debenture interest, arrearage interest, etc. Interest income shall be realized out of the income on the date as stipulated by contract for the debtor to pay interest. Article 19 The term “rental income” as used in Article 6 (6) of the EIT Law refers to the income obtained by an enterprise from the right to use its fixed assets, packaging materials or any other tangible properties. Rental income shall be realized out of the income of the date as stipulated by contract for the tenant to pay rent. Article 20 The term “franchise royalties” as used in Article 6 (7) of the EIT Law refers to the income from obtained by an enterprise by providing the right to use its patents, know-how, trademarks, copyrights, or any other franchised rights. Income from franchise royalties shall be realized out of the income of the date as stipulated by contract for the user of franchised right to pay franchise royalties. Article 21 The term “income from donations” as used in Article 6 (8) of the EIT Law refers to the monetary assets and non-monetary assets an enterprise receives gratuitously donated by any other enterprise, organization or individual. Income from donations shall be realized out of the income of the day when the donated asset is actually received. Article 22 The term “other income” as used in Article 6 (9) ofthe EIT Law refers to the income other than those as described in Article 6 (1) through (8) of the EIT Law that an enterprise obtains, including income from the excess assets of the enterprise, income from the overdue deposits for packaging materials that fails to be refunded, the payable items that cannot be paid, the receivables that are received after being treated as bad debt, income from the restructuring of debts, income from subsidies, income from damages, income from foreign exchange rates, etc. Article 23 The income arising from the production activities and business operations of an enterprise as described below may be realized by installments: (1) In the sale of goods by installments, the income shall be realized on the date of payment as stipulated in the contract; (2) In the entrusted processing and making of large machines, equipment, vessels, aircrafts, or the provision of engineering services such as construction, installation, or assembling, etc. or the provision of any other labor services which lasts for 12 months or more, the income shall be realized according to the accomplished portion within the taxable year; Article 24 Where income is obtained by means of sharing products, income shall be realized on the date fixed for the enterprise to share products, and the amount of income shall be determined pursuant to the arm's length value of the products. Article 25 Where an enterprise exchanges any non-monetary asset, or uses any goods, asset or labor services for purposes of donation, clearance of debts, sponsoring, fund-raising, advertising, samples, employee welfare, or profit distribution, etc., it shall be regarded as a sale of goods, transfer of property, or provision of labor services, unless it is otherwise provided for by the competent department of treasury or taxation of the State Council. Article 26 The term “fiscal allotments” as used in Article 7 (1) of the EIT Law shall refer to fiscal capital allotted by the people's government at various levels to the organizations, such as public institutions and social bodies, that are included in the budgetary management unless it is otherwise provided for by the State Council or the competent department of treasury or taxation of the State Council. The term “administrative charges” as used in Article 7 (2) of the EIT Law refers to the fees charged to the specified persons and incorporated into fiscal management according to the relevant provisions of laws or regulations and upon the approval obtained by following the procedures of the State Council in the process of conducting social public management or providing specified public services to citizens, legal persons or other organizations. The term “governmental funds” as used in Article 7 (2) of the EIT Law refers to the fiscal capital that an enterprise collects on behalf of the government according to the relevant provisions of laws and regulations for the use of specified purposes. The term “other tax-free income as provided for by the State Council” as used in Article 7 (3) of the EIT Law refers to the fiscal capital an enterprise obtains upon the approval of the State Council to be used for the specified purposes as determined by the competent department of treasury or taxation of the State Council. Section III Deductions Article 27 The term “expenses” as used in Article 8 of the EIT Law shall refer to the expenses directly related to the obtainment of income. The term “reasonable expenses” as used in Article 8 of the EIT Law shall refer to the normal and necessary expenses that are in line with the rule of production and business operations and that shall be counted into the current profits and losses or relevant capital costs. Article 28 The expenses of an enterprise are classified into revenue-related expenses and capital-related expenses. Revenue-related expenses shall be deducted in the current accounts, while capital-related expenses shall be deducted by installments or included in the relevant capital costs and may not be directly deducted in the current accounts. The expenses or property arising from the use of the tax-free income of an enterprise shall not be deducted and may not be depreciated or amortized. Unless it is otherwise differently provided for in the EIT Law or the present Regulation, the costs, expenses, taxes paid, losses and other expenditures actually incurred by an enterprise may not be repeatedly deducted. Article 29 The term “cost” as used in Article 8 of the EIT Law refers to the sales costs, write-off costs, business expenditures and other expenditures incurred by an enterprise in its production activities and business operations. Article 30 The term “expenses” as used in Article 8 of the EIT Law refers to the sales expenses, management expenses and financial expenses incurred by an enterprise in its production activities and business operations with the exception of those that have already been included in the cost. Article 31 The term “taxes paid” as used in Article 8 of the EIT Law refers to the various taxes and surtaxes incurred by an enterprise other than the enterprise income taxes and value added taxes that are deductible. Article 32 The term “losses” as used in Article 8 of the EIT Law refers to the loss or destruction of fixed assets and inventories, loss arising from discarding anything as useless, loss from the transfer of property, loss from bad debt, loss from force majeure such as natural disaster, etc. and other kinds of loss. The surplus of losses incurred to an enterprise after subtracting the compensations made by the person held to be liable and the compensations made by insurance shall be deducted under the provisions of the competent treasury and taxation departments of the State Council. Assets that have already been treated as loss shall be counted into the current income if they are recovered in full or in part during any subsequent taxable year. Article 33 The term “other expenditures” as used in Article 8 of the EIT Law refers to the reasonable and related expenditures incurred by an enterprise in its production activities and business operations other than the costs, expenses, taxes paid, and losses. Article 34 The expenses arising from the payment of reasonable salaries and wages shall be allowed for deduction. The term “salaries and wages” as used in the preceding paragraph refers to the remunerations for labor represented in monetary and non-monetary forms paid by an enterprise during a tax year to its staff members and employees, including basic salaries, bonuses, subsidies, allowances, year-end additional salaries, overwork wages, and any other expenses relating to the work or employment of its staff members. Article 35 The basic social insurance premiums and housing accumulation funds which an enterprise pays for its staff members according to the scope and rates as provided for by the relevant competent departments of the State Council or the provincial people's government, e.g., basic old-age insurance premiums, basic medical insurance premiums, unemployment insurance premiums, work-related injury insurance premiums, and birth insurance premiums, etc., are allowed to be deducted. The supplementary old-age insurance premiums and supplementary medical insurance premiums that an enterprise pays for investors or staff members may be deducted within the scope and according to the rates as set down by the competent departments of treasury and taxation of the State Council. Article 36 The commercial insurance premiums that an enterprise pays for its investors or staff members shall not be deducted except for the personal security insurance premiums an enterprise pays for its staff members engaging in special occupations under the relevant provisions of the state and other commercial insurance premiums that are deductible under the relevant provisions of the competent departments of treasury and taxation of the State Council. Article 37 The reasonable loan expenses incurred by an enterprise in its production activities and business operations that are not required to be capitalized are deductible. Where an enterprise borrows any loan for purposes of purchasing or creating fixed assets or intangible assets and inventories that cannot enter into the scheduled marketability state until 12 months later or more, the reasonable expenses arising from such loans in the process of purchasing or creating relevant assets shall be treated as capital expenditure and be incorporated into the cost of relevant capital, and shall be deductible under the present Regulation. Article 38 The interest expenses incurred by an enterprise in its production activities and business operations are deductible: (1) interest expenses for the loans borrowed by a non-financial enterprise from a financial enterprise, the interest expenses for the various deposits of financial enterprises, the interest expenses for inter-bank loans, and the expenses for the debentures issued by an enterprise upon approval; (2) the portion of interest expenses for the loans borrowed by a non-financial enterprise from another non-financial enterprise that do not exceed the amount calculated at the interest rates for an identical kind and identical term of a financial enterprise. Article 39 The foreign exchange losses incurred by enterprise in monetary exchanges from the conversion of any non-renminbi monetary assets or obligations into current renminbi at the term-end medium exchange rate are deductible except for the portion that has already been incorporated into the relevant capital costs and the portion that relates to the profit distribution to owners. Article 40 The employee welfare expenses incurred by an enterprise are deductible to the extent that it does not exceed 14% of the total amount of salaries and wages. Article 41 The labor union funds allocated by an enterprise are deductible to the extent that they do not exceed 2% of the total amount of salaries and wages. Article 42 The expenses for the education of staff members incurred by an enterprise are deductible to the extent that they do not exceed 2.5% of the total amount of salaries and wages unless it is otherwise different provided for by the State Council. The excess may be carried forward to future years for deduction. Article 43 The expenses for business entertainment incurred by an enterprise relating to its production activities and business operations shall be deducted to the extent of 60% of the actually incurred amount but not more than 5‰ of the sales revenue of the current year. Article 44 The qualified expenses for advertising and publicity incurred by an enterprise shall be deductible to the extent of not more than 15% of the sales revenue of the current year unless it is otherwise differently provided for by the competent d......