On June 4, 2009, China’s State Administration of Taxation (SAT) issued the Reply to the Issue of the Pre-Enterprise Income Tax Deduction of Loan Interest Incurred by an Enterprise Due to Its Investors’ Failure to Inject Registered Capital.  

According to the Reply, if the shareholder of an enterprise fails to inject the registered capital as subscribed and the enterprise has to borrow money, the interest will not be considered a reasonable expense of the enterprise, and thus will not be deductible for enterprise income tax (EIT) purposes. The Reply further specifies that the shareholder, rather than the enterprise, is responsible for paying the interest.  

The Reply also provides for how to calculate the amount of non-deductible interest. In a given tax year, each period during which the difference between the paid-in registered capital and the amount of outstanding loans remains unchanged will be deemed a “calculation period.” In each calculation period, the amount of non-deductible interest will be calculated according to the following formula: the non-deductible interest for a specified calculation period = the total amount of interest for the period × the amount of overdue registered capital ÷ the total loan amount during the period.  

According to the Reply, the total amount of non-deductible interest in a specified tax year will equal the sum of the non-deductible interest in each calculation period within the year.