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How do the Implementation Regulations determine the small profit-making and hi-tech enterprises?
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Article 28(1) of the PRC EIT Law provides that enterprises that satisfy the conditions
for small profit making shall be taxed at 20%. By reference to international practices and for the sake of easy administration, the Implementation Regulations specify that (1) in respect of production enterprises, the annual taxable income shall not exceed RMB300,000, total number of employees shall not exceed 100, and the total asset amount shall not exceed RMB 30 million; (2) In respect of non-production enterprises, the annual taxable income shall not exceed RMB300,000, the no. of employees shall not exceed 80, and the total amount of assets shall not exceed RMB 10 million. The scope of the tax concession is larger than that as given under the old tax law for domestically funded enterprises. [Translator’s note: the new concession shall apply to all types of enterprises in 2008].
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What specific provisions for revenue in the EIT Law are given by the Implementation Regulations?
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The EIT Law provides that the gross revenue of the enterprises comprises the incomethe enterprise receives in monetary terms or non-monetary terms. Monetary incomeincludes the receipt of cash, deposit, account receivables, bills receivable, securities heldto maturity and waiver of debt obligations; non-monetary income includes the receipt of fixed assets, biological assets, intangible assets, equity interest, inventory, securities not held to maturity, services and related interest. The fair value should be adopted as a measurement for non-monetary income. In addition, the accrual principle should be followed in the recognition of sales revenue.
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What specific provisions for revenue in the Enterprise Income Tax Law are given by the Implementation Regulations?
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The EIT Law provides that the gross revenue of the enterprises comprises the income the enterprise receives in monetary terms or non-monetary terms. Monetary income includes the receipt of cash, deposit, account receivables, bills receivable, securities held to maturity and waiver of debt obligations; non-monetary income includes the receipt of fixed assets, biological assets, intangible assets, equity interest, inventory, securities not held to maturity, services and related interest. The fair value should be adopted as a measurement for non-monetary income. In addition, the accrual principle should be followed in the recognition of sales revenue.
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What details are given in the Implementation Regulations about the taxpayers in the enterprise income tax (EIT) Law?
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The EIT Law provides that the taxpayers are the enterprises and other income earning organizations. To enhance operability of the EIT Law and define the scope for the income taxpayers, the Implementation Regulations provide that enterprises, institutions,community associations, and other income earning organizations are the payers of income tax.
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Is there any change to the new corporate income tax law that impose tax on dividend income?
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Yes, the dividend distributed by FIE will be subject to tax at 20%. If there is a tax treaty concluded between China and the country of which the investor is a tax resident, the tax rate will be reduced to 10% in most cases (Hong Kong company is only taxed at 5%).
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Can a foreign company be appointed as a director of a WFOE?
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A corporation cannot be appointed as the director of an FIE including the WFOE in China. However, there is an exception. In the case of a Sino-foreign cooperative joint venture enterprise (CJV), the parties to the CJV can appoint a third party to management all the business activities of the CJV, subject to the approval of the board of directors and the approval authority.
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I hear that Chinese courts are biased against foreign parties. Is it worth initiating court action against a Chinese party at all?
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I hear that Chinese courts are biased against foreign parties. Is it worth initiating court action against a Chinese party at all?
The short answer is that Chinese courts are not particularly biased towards foreign parties, and yes, it is worth going to court against a Chinese party if one feels that one has a case. Generally speaking, Chinese laws provide equal protection to both domestic parties and foreign parties. That being said, it is true that local protection (favoritism of local parties by the authorities) has not entirely been eradicated. The level of local protectionism often depends on where the suit is brought. The judges in most of the large Eastern cities, such as Beijing and Shanghai, are extremely well educated, informed, and fair.
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Some foreign companies invest in China using an offshore company. What are the advantages of structuring an investment in this way?
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There are various reasons why foreign investors use offshore companies to structure their investment in China. Offshore companies add an additional layer of limited liability, removing risk from its valuable parent company. Corporate law of offshore jurisdictions is often very flexible. Sale of the investment in China can be made by transferring the offshore entity, rather than the stake in the Chinese entity, which saves bureaucratic hassles in China.
Most importantly, offshore corporations can be used for tax planning purposes. By correctly arranging financial affairs, significant tax savings can be achieved -- but it should be noted that some schemes may constitute illegal tax evasion, rather than legal tax planning, so great care should be taken before setting up in one of these jurisdictions. Offshore jurisdictions are typically small islands in exotic locations. Examples are the Cayman Islands, British Virgin Islands, Samoa and Mauritius. Hong Kong is also a popular jurisdiction, due to its special status and proximity to the mainland.
It should be noted, however, that removing the administration of a company far from China causes practical difficulties, for instance when opening a bank account or when verifying documents.
All in all, offshore companies offer many advantages to investors, but there are many traps one could fall into. Therefore, sound legal advice should be sought before setting up an offshore company as an investment vehicle in China.
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What are the stages in the issuance of an invoice?
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What are the stages in the issuance of an invoice?
(a) An individual or enterprise that receives payment for the sale of goods, provision of service or other business activities should issue invoices to the payer. Under special circumstances, the payer will issue invoices to the payee.
(b) When enterprises and individuals engaged in production or other business operations purchase a good, receive a service or conduct a business activity, they should ask the payee for an invoice and must not change the description or amount shown on the invoice.
(c) Invoices should be issued in serial order within a specified period of time. Invoices in multiple copies should be issued at one time to accurately record the details of a transaction and stamped with the issuer's official seal or special invoice seal.
(d) No individual or enterprise should borrow, transfer or issue invoices on others' behalf. Unless approval is granted by the tax authority, the invoice books should not be detached for use. The scope of use for special invoices should not be extended randomly.
(e) Invoices which fail to meet the relevant requirements cannot be used as financial proof. Enterprises and individuals may refuse to accept such invoices
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What is the procedure for the purchase and collection of an invoice?
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(a) Purchase and collection procedure
An individual or enterprise that has completed tax registration as required by law will be issued a tax registration certificate, after which he or it can apply to the competent tax office for the purchase of invoice by submitting the following: identification document of the applicant, tax registration certificate or other proofs, official seal or special seal for invoices. Upon examination and approval by the tax office, an invoice collection book specifying the type and quantity of invoices to be purchased as well as the method of purchase will be issued. The applicant can then purchase the invoices from the competent tax office.
(b) Temporary purchase of invoice in other localities
An individual or enterprise in need of invoices on a temporary basis can apply directly to the local tax office. When an individual or enterprise conducts business activities in places other than the place of original tax office and needs invoices, an application can be made to the local tax office by submitting proofs from the original tax office. A guarantor is required in this case or a deposit of no more than Rmb10,000 is payable depending on the face value and quantity of invoices specified in the invoice collection book. This kind of invoices issued by the tax office where the business activities take place have to be used and cancelled within a specified period.
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