Analysis on tax incentives differences between software enterprises and high tech enterprises

Posted by on October 12, 2011 under High Tech Enterprises | Be the First to Comment

Software enterprises could apply software enterprises recognition together with high tech enterprises recognition for better tax planning.
I. The main tax incentives of software enterprises
i. Value-added tax refund. The refunded tax will be used for researching and developing software products for expanding reproduction, no need to pay tax.
ii. Newly established inbound software enterprises could be exempted from income tax in the first and second year since profit-making year, and pay half of income tax from the third year to fifth.
iii. Key software production enterprises in national planning areas could pay income tax at 10% if there is no other tax incentive being enjoyed in the same year.
iv. Training expenses of software enterprises could be deduced before tax at actual basis.
II. The relationship between software and high tech enterprises
In the new “national key support high tech fields”, software is the first item in the first category “electronic information technology”. The following 12 software are qualified field for high tech recognition, namely system software, support software, middleware software, embedded software, CAE management software, Chinese and Multilanguage processing software, graphic and image software, financial information software, geographic information software, electronic commerce software, electronic government software, and enterprises management software.
At the expiration of five year incentive period of “two year exemptions and three year 50%-Reductions”, the above 12 categories software enterprise could apply high tech recognition for 15% incentive tax rate.
Hence, newly established software enterprises could apply software enterprises recognition firstly, and apply high tech recognition at the expiration of five year incentive period.
III. The great significance of software recognition
i. Software recognition has no limit on one year operation period, which is different from high tech recognition.
ii. Tax incentives of software enterprise are better than high tech in 5 years since the establishment.
iii. The recognition criteria of software enterprises were set in 2000, which were easier than new high tech rules.
iv. The scope of software is obviously small, only some special software projects are qualified for both software and high tech recognition.
IV. The long-term effect of high tech enterprises.
Software is only a small part in the eight categories of the national support high tech fields. The scope of high tech is obviously wider than software. Hence, the amount of high tech enterprises is in the far excess of the software enterprises. In addition, seen from legal validity, the validity of high tech tax incentive is higher than that of software. The incentive of high tech is stipulated in enterprises income tax law, but the incentive of software is only a policy, not a law. Hence, there might be no great change on high tech incentives in short period, not like software incentives. Therefore, consider from long term profits, qualified enterprises should apply high tech as soon as possible for stable development.

Notice of SAT on Enterprise Income Tax Issues Concerning Companies Transferring Restricted Stocks of Listed Company

Posted by on August 24, 2011 under Latest Regulations, Transactional Taxes | Be the First to Comment

Notice of SAT, No. 39, 2011

 

According to Enterprise Income Tax Law of People’s Republic of China (hereafter referred to as EIT Law) and its implementation regulations, income tax issues concerning companies transferring restricted stocks of listed company (restricted stocks) are hereby notified as follows:

I. The Scope of Taxpayers                                                                 

According to Article 1 of EIT Law and Article 3 of its Implementation regulations, companies (including public institution, social organizations and private non-company organization, etc.) obtained incomes from transferring restricted stocks are taxpayers of EIT.

II. Tax Levy Issues of Company Transferring Restricted Stocks held for Individuals

The restricted stocks of company held for individuals caused by stock distribution reform, shall be dealt with according to follow rules:

1) Incomes gained by company from transferring said restricted stocks shall be levied as taxable incomes of the company.

Taxable transfer incomes refer to incomes gained from transferring said restricted stocks minus the original value of restricted stocks and reasonable taxes and fees. If the company can not provide complete and actual receipt of original value to calculate the value accurately, tax authority shall recognize 15% of the transfer incomes as the original value and reasonable taxes and fees.

Transfer of the remaining balance after tax paid according to THIS ARTICLE to the actual holder will not subscribe to taxes.

2) As per judicial judgment and decisions, company change the ownership of restricted stocks directly into the actual holder through stock depository and clearing corporations will not be considered as transfer of restricted stocks.

III. Restricted Stock Transfer Issues before Lifted

Company transfers owned restricted stocks to other company or individual (the assignee) before lifted, EIT issue should be dealt with according to follow:

1) The company should count its incomes derived from transferring and reducing the restricted stocks registered at stock depository and clearing corporations as taxable incomes of the year and pay due tax.

2) The company signs agreements with the assignee to transfer to him the restricted stocks, yet does not change register information or ownership, the incomes derived from transferring and reducing the restricted stocks are duly levied according to Item 1 of THIS ARTICLE, the remain balance shall not be levied upon transfer.

IV. THIS NOTICE shall take effect from July 1st, 2011. Tax matters not dealt with will follow stipulations of THIS NOTICE,  Tax matters already dealt with will not be further adjusted.

Notice of SAT on Some Issues Concerning Enterprise Income Tax

Posted by on under China Tax, Corporate Tax Planning, Latest Regulations | Be the First to Comment

Notice No. 34, 2011

I.  On Determination of Financial Company’s Similar Loaning Rate of the Same Period

According to Article 39 of the Implementation Rules, part of interests costs paid from non-financial company to non-financial company, if not exceed the amount calculated by financial company’s similar loaning rate of the same period, is allowed to be deducted before tax. In the light of specific situation of our country’s requirements toward financial company’s similar loaning rate, the company shall provide Statement of Financial Company’s Similar Loaning Rate of the Same Period to demonstrate the rationality of interests costs during first payment of interests according to the contract and conducting the pre-tax deduction.

Statement of Financial Company’s Similar Loaning Rate of the Same Period shall include the similar loaning rate of the same period information of all financial companies around the province. The financial company should be company available to do loaning business approved by the government, including bank, financial corporation, trust company and other financial organization. Similar loaning rate of the same period means the loaning rate of financial company at similar condition of loaning period, loaning amount, loaning warrant and company credit, etc. this rate could be the similar loaning rate of the same period publicized by financial company, or the actual loaning rate when providing loans to some companies.

II.  On Cost Deduction of Company’s Costume Fee

Based on the working characters and features, costume fee occurred when the company manufacture uniformly and require uniform dressings of employees shall be deducted as reasonable expenses.

III.  On Air Training Fee Deduction of Airplane Company

Actual disbursed pilot cultivation fee, flying training fee, flight training fee, air security training fee and other air training fee shall be deducted before tax as transportation expenses of the airplane company.

IV.  On Tax Dealt of Reconstruction of Fixed Assets as Housing and Buildings

For reconstruction of fixed assets as housing and buildings before fully depreciated, if it’s reconstruction upon removal, the net value of the assets after depreciated shall be calculated into the costs (including tax) of reset assets, and be appreciated from the next month of usage according to stipulated depreciation year of tax law; if it’s enhancing the function or increasing the area, the enhancing and broadening costs should be calculated into the tax base of the fixed assets, and be re-appreciated from the next month of usage after project completion according to (or actual usage year if lower than) stipulated depreciation year of tax law.

V.  On Tax Dealt of Investment Withdrawal or Reduction

For investing company withdrawing or reducing its investment in the invested company, part of the capital it gained equivalent to the original investment shall be determined as investment recovery, part equivalent to the invested company’s accumulated undistributed profit and accumulated surplus reserves calculated by the reduced actual received capital, shall be recognized as dividend incomes, other shall be determined as transfer incomes of investment capital.

The loss of the invested company shall be carried over and covered according to rules by the invested company, the investing company shall not reduce its investment costs or recognize as investment loss.

VI. On Time of Providing Effective Receipt

The actually occurred costs and fees of the year if effective receipts are not acquired due to various reasons, company can account quarterly pre-paid enterprise income tax according to the book amount; but shall supplement effective receipt of the costs and fees at final settlement.

VII. This Notice shall take effect from July 1, 2011. Before implementation of this Notice, if relevant matters have already been dealt with according to this Notice, there will not be further adjustments. If the dealt was inconsistency with this Notice, and concerns adjustments of reducing the taxable incomes accordingly, company’s taxable incomes of annual 2011 shall be duly reduced after implementation of this Notice.

Circular of Ministry of Finance, SAT on Enterprise Income Tax Issues Concerning Technology Transfer of Resident Companies

Posted by on February 15, 2011 under Corporate Tax Planning, Latest Regulations | Be the First to Comment

According to Relevant provisions of Enterprise Income Tax Law of the People’s Republic of China, Regulation on the Implementation of the Enterprise Income Tax Law of the People’s Republic of China (Order of the State Council No. 512, hereafter as Implementation Regulations), Relevant issues of enterprise income tax reduction and exemption for technology transfer met the requirements are hereby notified as follows:

I. Scope of technology transfer includes transfer by resident companies of patent technology, computer software, design right of integrated circuits layout, new variety of plants, new variety of biological medicine and other technology confirmed by Ministry of Finance and SAT.

And patent technology refers to invention, utility model, appearance design that is not a simple change of picture pattern of the product.

II. Technology Transfer in This Notice refer to resident companies transferring ownership or global exclusive license of right to use for above 5 years (including 5 years) of the technology stipulated in Article 1 of This Notice.

III. Technology transfer should be with assignation of technology transfer agreements. And domestic technology transfer should be determined and registered by the Science and Technology Department above (including) provincial level, transnational technology transfer should be determined and registered by the Commerce Department above (including) provincial level, transfer concerning technology produced under support of fiscal funds should be approved by the Science and Technology Department above (including) provincial level.

Technology export of resident companies should be approved by the authority according to List of China Forbidden and Restricted Export Technology, Order of Ministry of Commerce, Ministry of Science and Technology No. 12, 2008 issued by Ministry of Commerce and Ministry of Science and Technology. Incomes obtained by resident companies from forbidden and restricted Technology transfer shall not enjoy the tax beneficiary policy of enterprise income tax on technology transfer.

IV. Technology transfer incomes resident companies obtained from 100% related party whose stocks they hold directly or indirectly.

V. This Notice shall be put into effect from January 1, 2008.

Ministry of Finance, SAT

December 31, 2010

Notice of SAT on Enterprise Income Tax Issues Concerning Real Estate Development Companies before Cancellation

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I. After real estate development companies (hereafter as Companies) conducted land value added tax (land VAT) settlement of the development project, when applying for proceeding with tax registration cancellation, if there’s deficit of final calculation and payment in the year of cancellation, exceeded enterprise income taxes of past project development years before cancellation shall be calculated in follow ways and according taxes shall be refunded:

1. Land VAT on the company’s whole project should follow the project selling incomes of the project development annual’s proportion in selling incomes of the whole project, and be spread among all project development years, specifically per follow equation:

Annual spread due land VAT=whole land VAT *(selling incomes of the project development annual÷selling incomes of the whole project)

Selling incomes in This Notice include incomes of equal selling of real estate, but do not include selling of common standard living house on which the added value does not exceed 20% of deducting project.

2. Annual due spread land VAT of project development annual minus annual deducted land VAT before tax, the balance is due supplementary land VAT which should be deducted in current year; Companies should adjust the taxable incomes of the year, and calculate due refunded enterprise income tax accordingly; if prepaid enterprise income tax does not satisfy the refunding amount, the due refund should be considered as deficit and carried down to next years, and follow taxable incomes shall be adjusted.

3. In the year of company’s land VAT settlement, if the annual due tax amounts is a positive number by adjustment in usage of above methods, enterprise income tax shall be paid accordingly.

4. Estimated refund amount by above way shall not exceed actual paid enterprise income taxes in all project development years.

II. When applying for tax refund, companies should provide written documents to the tax authority to prove the calculation process of due refund amount of enterprise income taxes, including the whole amount of land VAT paid upon the entire project of the company, the whole selling income amount of the project, annual selling incomes of the project, Annual spread due land VAT and already deducted land VAT before tax, tax rate of the year, etc.

III. After companies’ settlement of land VAT on the development project accordingly, when applying for cancellation of tax registration with the tax authority, if there’ s deficit of final calculation and payment in the cancellation year, but no deficit of land VAT settlement, or though there’s deficit of land VAT settlement but already recovered in previous years before the cancellation year according to tax laws, This Notice shall not be implemented.

Tax authority shall determine whether not to implement This Notice referring to final calculation and payment status from the year of land VAT settlement to cancellation year, and shall confirm due refund enterprise income taxes.

IV. This Notice shall be put into effect from January 1, 2010. 

Hereby Noticed

SAT

December 24, 2010