Interpretation of the taxation policy from the Ministry of Finance on foreign-funded enterprises

In the early days of reform and opening up, the taxation system implemented in China was relatively complicated. Generally speaking, it was two sets of taxation systems.

A foreign-related taxation system was adopted for foreign-funded enterprises, and a taxation system was also adopted for domestic-funded enterprises. In the early stage, domestic-funded enterprises were divided into different ownership systems, such as state-owned enterprises, collective enterprises, and individual industrial and commercial households, and different tax systems were applied. Later, we gradually reformed, and first unified the domestic tax policy, but foreign capital and domestic capital are still in parallel.

The tax reform in 1994 was an important watershed, and we began to gradually realize the unification of domestic and foreign tax policies. After the introduction of the new tax system in 1994, domestic and foreign investment in the turnover tax system, including value-added tax, are the same, but the income tax system is still in parallel. Until 2008, the implementation of the new “Enterprise Income Tax Law of the People’s Republic of China” merged the income tax laws of domestic and foreign capital into one tax law, unified application of the system, unified tax rate, and unified preferential treatment. An important node and symbol of the market economy system.

After unifying the tax law, domestic and foreign-funded enterprises shall apply all preferential policies stipulated in the tax law. After the implementation of the new tax law, we have successively revised the preferential policies for high-tech enterprises, expanded the scope of preferential policies for venture capital investment, and increased the preferential policies for small and profit-making enterprises. These preferential policies are no longer distinguished between domestic and foreign enterprises, and are all applied uniformly.

The three taxation policies stipulated in this document do not actually distinguish between domestic and foreign-funded enterprises, as long as they meet the conditions. But these three policies are precise and targeted.

Article 1. With regard to withholding income tax, foreign investors investing in China, according to the Chinese tax law, the profits distributed by enterprises are subject to withholding income tax of 10%, which is also stipulated in the tax laws of various countries. Even if the enterprise keeps this profit in China and continues to invest, it still has to withhold tax. According to the provisions of this document, if the distributed profits remain in China for further investment and meet certain conditions, they may be temporarily exempted from withholding income tax. This means that a 10% withholding tax is not required, which is a concession.

Secondly, the preferential policy of 15% income tax rate for technology-advanced service enterprises will be expanded from the current 31 model cities to the whole country. The service outsourcing policy has two core contents in the entire taxation system. One is that the eligible offshore service outsourcing business income is exempted from business tax, and now the zero-value-added tax rate is implemented; the second is the 15% tax rate applicable to income tax Compared with technical enterprise certification standards, the threshold is lower, which is an important policy to encourage the development of the service outsourcing industry. This time it will be expanded nationwide, and all eligible service outsourcing companies can apply it. Thirdly, the income obtained by Chinese enterprises investing abroad must be calculated and taxed in aggregate with domestic income. In this regard, we are also preparing to formulate further support policies.

All in all, this policy should encourage Chinese companies investing abroad to attract more overseas institutions back home. This is also a feature of our use of foreign capital in the new period. The initial policy of reform and opening up was mainly to attract foreign capital, introduce advanced technology, and learn from advanced management.

Today our policy is two-way. On the one hand, we must continue to encourage foreign direct investment in China. On the one hand, in terms of taxation policies, it is also necessary to encourage Chinese enterprises to go abroad. This is a two-way preferential policy. Although the policy points out that there is no distinction between domestic and foreign capital, it is accurate and adapts to the characteristics of using foreign capital in the new era.

Chongguang Fang – Shanghai Diacron CPA Co. Ltd