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CIT taxpayers

The CIT Law categorizes enterprises into resident enterprises and non-resident enterprises, which are subject to different tax obligations.

Calculating CIT payable

CIT payable is calculated using the below formula:

CIT PAYABLE = CIT TAXABLE INCOME x CIT RATE - TAX EXEMPTIONS OR REDUCTIONS BASED ON TAX INCENTIVES

CIT Rates

  • A 25 percent standard CIT rate is applied to resident enterprises and non-resident enterprises with income-generating establishments in China.
  • A 10 percent withholding rate (temporarily reduced from 20 percent) is applied to China-sourced income not related to a non-resident enterprise’s establishments in China, or China income derived by non-resident enterprises without establishments in China.
  • Small and low-profit enterprises are entitled to a reduced CIT rate of 20 percent.
  • A reduced CIT rate of 15 percent applies to certain type of enterprise such as high-tech enterprises or enterprises registered in special zones such as enterprises engaging in encouraged sectors in Hainan.

CIT taxable income

CIT taxable income is calculated on an accrual basis, meaning that income items are recorded when they are earned and deductions are recorded when expenses are incurred. There are two ways of calculating taxable income: the direct method and the indirect method.

Direct method

The formula for calculating taxable income under the direct method is as follows:

CIT TAXABLE INCOME= GROSS INCOME - NON-TAXABLE INCOME - TAX EXEMPT INCOME - DEDUCTIONS - ALLOWABLE LOSSES CARRIED FROM PREVIOUS TAX YEAR

Gross income refers to income in currency and non-currency forms received by the enterprise from various sources, including income from the sales of goods; provision of services; transfer of property; equity investments, such as dividends and profit distribution; as well as interests, rents, and royalties.

Non-taxable income includes fiscal appropriations (e.g., government subsidies to enterprises), governmental administration charges and government funds lawfully collected and brought under relevant laws, as well as other non-taxable income stipulated by the State Council.

Tax-exempt income includes:

  • Income from interest on government bonds;
  • Dividends, bonuses, and other income from equity investment between qualified resident enterprises;
  • Dividends, bonuses, and other income from equity investment received from a resident enterprise by a non-resident enterprise with an establishment or premises in China, with which the income has an actual connection; and
  • Income of qualified non-profit organizations.

Deductions from gross income include reasonable expenditure incurred in relation to income received by an enterprise, such as costs, expenses, taxes (except CIT and VAT) and losses; charitable donations and gifts within 12 percent of the gross annual profit; reasonable depreciation of fixed assets; amortization of intangible assets; amortization of long-term prepaid expenses; inventory cost; net value of an asset transferred; and other deductions stipulated by laws and regulations.

Caps apply when deducting certain expenses from taxable income, such as follows:

Deduction Cap for Certain Expenses

Expenses

Deduction cap

Employee welfare

≤14% of the total amount of employee salaries and wages

Labor union funds

≤2% of the total amount of employee salaries and wages

Employee education

≤8% of the total amount of employee salaries and wages (the

excess can be carried forward to future years for deduction) *

100% deduction for enterprises in software and integrated circuit industries

Business entertainment relating to production and business operations

≤ 60% of the actual incurred amount; and

≤ 0.5% of the sales revenue of the current year.

Advertising and publicity **

≤15% of the sales revenue of the current year (the excess can be carried forward to future years for deduction)

*Originally, the 8% deduction cap was only available for advanced technology service enterprises. However, starting from January 1, 2018, it was extended to cover all enterprises unless it is stipulated otherwise.

** From January 1, 2021 to before December 31, 2025, for enterprises manufacturing or selling cosmetics, enterprises manufacturing pharmaceuticals, and enterprises manufacturing beverages (excluding alcohol), the deduction cap of advertising fee is 30% of the sales revenue of the current year (the excess can be carried forward to future years for deduction). Advertising fees paid by the tobacco enterprises are not deductible.

Non-deductible expenditures include:

  • Dividends, bonuses, and other income from equity investment paid to investors;
  • Fines for delayed tax payment;
  • Penalties, fines, and confiscated property;
  • Sponsorship expenditures other than charitable donations within 12 percent of the gross annual profit;
  • Non-verified reserves; and
  • Other expenditures unrelated to income.

Indirect method

In practice, the indirect method below is more frequently adopted in the annual declaration of CIT:

CIT TAXABLE INCOME = GROSS PROFIT AS SHOWN IN THE ACCOUNTING BOOK ± ADJUSTMENTS FOR TAX PURPOSE ± INCOME/PROFITS TO MAKE UP FOR THE LOSS INCURRED IN THE PREVIOUS YEAR

The “adjustments for tax purpose” refers to the discrepancies between applying China’s Accounting Standards for Business Enterprises (ASBEs) and the CIT Law.

CIT incentives

CIT incentives are available in China to support and encourage the development of businesses of certain types, businesses in certain area, and businesses engaging in certain sectors, including:

  • CIT incentives for small and low-profit enterprises
  • CIT incentives for high-tech enterprises
  • CIT incentives for advanced technology service enterprises
  • CIT deductions on R&D expenditures
  • CIT incentives for hiring disabled employees
  • CIT incentives for hiring retired soldiers
  • Tax reduction for enterprises investing in west China
  • Tax incentives for enterprises engaging in pollution control
  • CIT incentives for enterprises making investments in or operating of public infrastructure projects specially supported by the state
  • CIT incentive for eligible technology transfers
  • CIT incentive for income derived from eligible environmental protection, energy saving, or water conservation projects
  • CIT reduction for enterprises investing in seed-stage or start-up technology enterprises
  • CIT incentive for software enterprises
  • CIT incentives for integrated circuit enterprises
  • CIT reduction for enterprises established in certain development zones

Key Preferential CIT Incentives Checklist

CIT incentives for small and low profit enterprises

CIT incentives for high-tech enterprises

CIT deductions on R&D expenditures

CIT incentives for advanced technology service enterprises (ATSE)

CIT incentives for qualified enterprises making investment to encouraged industries in the west China region

Tax incentives for enterprises engaging in pollution control

CIT incentives for enterprises making investments in or operating of public infrastructure projects specially supported by the state

CIT incentives for enterprises that are established in development zones, such as Hengqin area and Qianhai area in Guangdong Free Trade Zone (FTZ), and Pingtan area in Fujian FTZ, and are engaged in encouraged industries

Tax reduction for enterprises investing in seed-stage or start-up technology enterprises

Tax incentives for software enterprises and integrated circuit enterprises

Income derived from eligible technology transfers

 

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