Are FIEs entitled to tax holidays and incentives in China?

Are FIEs entitled to tax holidays and incentives in China?

FIEs are entitled to the following tax holidays and incentives:

• Production FIEs scheduled to operate for a period of more than 10 years will be entitled to two years' tax exemption and three years' 50% income tax rate reduction commencing from the first profit-making year.
• After the expiry the tax exemption and reduction period, a production FIE exporting 70% or more of the value of its production output in a year may pay income tax at a 50% reduction for that year subject to a minimum rate of 10%.
• After the expiry of the tax exemption and reduction period, a 'technologically advanced FIE' may pay income tax at 50% reduction for a further three years subject, again, to a minimum rate of 10%. The 'technologically advanced' status requires special certification from the local government.
• FIEs engaged in special projects, such as infrastructure projects with an operation period of 15 years or more, are entitled to five years' tax exemption following by five years' 50 per cent income tax rate reduction.
• FIEs located in SEZ and engaged in service industries with foreign investment of more than US$5 million and operation period of more than 10 years, with the approval of the SEZ tax bureau, may enjoy one year tax exemption followed by two years' 50% income tax reduction commencing from the first profit-making year.
• Financial institutions such as foreign bank branches and Sino-foreign joint venture banks established in SEZs and other areas approved by the State Council, with the registered capital from the foreign head office of over US$10 million and an operation period of longer than 10 years, may enjoy one year tax exemption followed by two years' 50% reduction commencing from the first profit-making year. This tax holiday does not apply to renminbi currency business.
• In order to induce reinvestment of profits by foreign investors, a 40% tax refund is granted to the foreign investor that reinvests its share of distributed profits in the same or a new FIE for a period of more than 5 years. Profits reinvested by the foreign investor in the same or in a new export-orientated enterprise or technologically advance enterprise for a period of more than five years may be granted a 100% tax refund.
• On repatriation of after-tax profits, no income tax is levied. In addition, dividend income received by FIEs in China is also tax exempt but any relevant loss or expenses incurred are non-deductible.
• For FIEs engaged in encouraged projects that purchase China-made equipment within the total investment of FIEs purchasing China-made equipment beyond the total investment but for the purpose of technological upgrading or for producing high-technology products. 40% of the costs of the domestic equipment may be used as a credit to offset the increment in the enterprise income tax liability in the year of equipment purchase as compared with that of the previous year.
• If the expenditure on technology development of an FIE increases by 10% or more over that of the previous year, the taxable income of that FIE for the current year, with the approval from the tax authority, will be offset by 50% of the actual amount of the spending on technology development.
• Newly established software production enterprises will be eligible for two years of exemption and three years of 50% reduction of Enterprise Income Tax (EIT) from the fist year they make profits.
• Key software enterprises that fall within the state's planned arrangement that are not eligible for preferential tax exemption in a given year will have EIT levied at the reduced rate of 10%.
• FIEs in the Central and Western areas and under the encouraged category of the Investment Guidelines will enjoy an extension of the normal tax holiday for three years. That is, on top of the normal tax holiday of two years' exemption and three years 50% reduction of EIT, the reduced EIT rate of 15% will be applicable for another three years after the five-year normal tax holiday. An extended 15% reduced EIT rate will be available provided that the projects fall within the key encouraged projects category and satisfy other conditions.
• Separate tax holidays will be available on the increased portion for FIEs engaged in encouraged projects for the increase of new registered capital of US$60 million or more, or increased by US$15 million which represents 50% or more of the registered capital of the original FIE, subject to certain conditions and approval from the relevant tax authorities

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