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Print articleNew Enterprise Income Tax Law in the PRC
March, 2008 - Jonas Rogberg
Several major changes to the PRC’s Tax Law have come into effect since 1 January 2008. These include the unification of the income tax treatment of all enterprises (foreign and domestic as well as joint-venture companies), resumption of the previous 20 % withholding tax on outgoing dividends to be paid by foreign investment companies to their foreign parent companies, lower effective income tax rates and introduction of the concept of “resident enterprises”.
Obviously, the above mentioned changes should lead to some carefully considered decisions for companies intending to invest in China. For instance, under the new rules a newcomer to the Chinese market would gain a tax advantage if an investment was to be made through an existing foreign investment company rather than through starting up a new company as the transitional provisions mean lower taxes for the next five years for companies in existence on 1 January 2008.
Both newcomers and companies already active in the PRC should consider a corporate structure interposing a holding company based in Hong Kong between the Chinese investment company (be it a joint-venture company or wholly owned subsidiary) and the foreign-based parent company as this would reduce the withholding tax to five percent on outgoing dividends.
Furthermore, due to the introduction of the “resident enterprise” concept, special care should be taken to avoid having any management functions performed within Mainland China (the PRC excluding Hong Kong). Lastly, due care should be taken to ensure that inter-company transfer pricing is carried out correctly as the laws have become stricter on this particular point.
Obviously, the above mentioned changes should lead to some carefully considered decisions for companies intending to invest in China. For instance, under the new rules a newcomer to the Chinese market would gain a tax advantage if an investment was to be made through an existing foreign investment company rather than through starting up a new company as the transitional provisions mean lower taxes for the next five years for companies in existence on 1 January 2008.
Both newcomers and companies already active in the PRC should consider a corporate structure interposing a holding company based in Hong Kong between the Chinese investment company (be it a joint-venture company or wholly owned subsidiary) and the foreign-based parent company as this would reduce the withholding tax to five percent on outgoing dividends.
Furthermore, due to the introduction of the “resident enterprise” concept, special care should be taken to avoid having any management functions performed within Mainland China (the PRC excluding Hong Kong). Lastly, due care should be taken to ensure that inter-company transfer pricing is carried out correctly as the laws have become stricter on this particular point.
