China, People's Republic of
The CIT law adopts the ‘Predominantly Industry-oriented, Limited Geography-based’ tax incentive policy. Key emphasis is placed on ‘industry-oriented’ incentives aiming at directing investments into those industry sectors and projects encouraged and supported by the state. The tax incentive policies mainly include the following and are applicable to both domestic and foreign investments.
Tax reduction and exemption
CIT may be reduced or exempted on income derived from the following projects:
|Projects/industries||CIT incentive||Valid period|
|Agriculture, forestry, animal-husbandry, and fishery projects||Exemption or 50% reduction||All years, as long as it is engaged in these projects|
|Specified basic infrastructure projects||3 + 3 years tax holiday (2)||Starting from the first income-generating year|
|Environment protection projects and energy/water conservative projects||3 + 3 years tax holiday (2)||Starting from the first income-generating year|
|Qualified new/high tech enterprises established in Shenzhen, Zhuhai, Shantou, Xiamen, Hainan, and Pudong New Area of Shanghai after 1 January 2008||2 + 3 years tax holiday (1)||Starting from the first income-generating year|
|Encouraged designated integrated circuit production enterprises or projects with a line-width less than 28 nm (inclusive), provided that its operation period exceeds 15 years||Exemption for 10 years||Starting from the first profit-making year for enterprises; Starting from the first income-generating year for projects
|Encouraged designated integrated circuits production enterprises or projects that produce integrated circuits with a line-width of less than 65nm (inclusive), provided that its operation period exceeds 15 years||5 + 5 years tax holiday (3)||Starting from the first profit-making year for enterprises; Starting from the first income-generating year for projects|
|Encouraged designated integrated circuits production enterprises or projects that produce integrated circuits with a line-width of less than 130nm (inclusive), provided that its operation period exceeds 10 years||2 + 3 years tax holiday (1)||Starting from the first profit-making year for enterprises; Starting from the first income-generating year for projects|
|Encouraged integrated circuits design/equipment/material/packaging/testing enterprises||2 + 3 years tax holiday (1)||Starting from the first profit-making year|
|Encouraged designated key integrated circuits design enterprises||Exemption for 5 years||Starting from the first profit-making year|
|Encouraged designated key software enterprises||Exemption for 5 years||Starting from the first profit-making year|
|Encouraged software enterprises (4)||2 + 3 years tax holiday (1)||Starting from the first profit-making year|
|Qualified energy-saving service enterprises||3 + 3 years tax holiday (2)||Starting from the first income-generating year|
|Projects involving a clean development mechanism (CDM)||3 + 3 years tax holiday
|Starting from the first year during which the first disposal of certified emission reduction units takes place|
- ‘2 + 3 years tax holiday’ refers to two years of exemption from CIT followed by three years of 50% reduction of CIT.
- ‘3 + 3 years tax holiday’ refers to three years of exemption plus three years of 50% reduction of CIT.
- ‘5 + 5 years tax holiday’ refers to five years of exemption plus five years of 50% reduction of CIT.
- Certified animation enterprises that produce self-developed animation products are eligible to enjoy the same CIT incentives as encouraged software enterprises.
For income derived from the transfer of qualified technology in a tax year, the portion that does not exceed CNY 5 million shall be exempted from CIT and the portion that exceeds CNY 5 million shall be allowed a 50% reduction of CIT.
A CIT exemption applies to the dividend derived by a TRE from the direct investment into another TRE, except where the dividend is from stocks publicly traded on the stock exchanges and the holding period is less than 12 months.
A CIT exemption also applies to the income derived by recognised non-profit-making organisations engaging in non-profit-making activities.
Reduced tax rate
The CIT rate may be reduced under certain conditions for different industries (see the Taxes on corporate income section for more information).
Reduction of revenue
Where an enterprise uses resources specified by the state as its major raw materials to produce non-restricted and non-prohibited products, only 90% of the income derived is taxable.
Offset of certain venture capital investment
For a venture capital enterprise that makes an equity investment in a non-listed small to medium-sized new/high tech enterprise or a start-up technology enterprise for more than two years, 70% of its investment amount may be used to offset against the taxable income of the venture capital enterprise in the year after the holding period has reached two years. Any portion that is not utilised in that year can be carried forward and deducted in the following years. A Chinese corporate partner of a venture capital in the form of a limited partnership is also eligible for such incentive.
Investment tax credit
Enterprises purchasing and using equipment specified by the state for environmental protection, energy and water conservation, or production safety purposes are eligible for a tax credit of 10% of the investment in such equipment. Any unutilised amount can be carried forward and creditable in the following five years.
There are also tax incentives in relation to the deduction of expenses and cost (e.g. 75% additional R&D deduction, shorter tax depreciation period, and accelerated depreciation). See the Deductions section for more information.
Foreign tax credit
A TRE is allowed to claim foreign tax credit in relation to foreign income tax already paid overseas in respect of income derived from sources outside China on a country-basket basis or under the comprehensive method. The creditable foreign tax also includes foreign income tax paid by qualified CFCs. However, the creditable amount may not exceed the amount of income tax otherwise payable in China in respect of the foreign-sourced income. In addition, there is a five-year carryforward period for any unutilised foreign tax.