On March 23, 2009, the PRC Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued a circular to clarify, for the first time, the enterprise income tax (EIT) incentives available to projects that utilize a clean development mechanism (CDM). The circular, entitled the Circular on Enterprise Income Tax Policy Issues Regarding China’s CDM Fund and CDM Project Developers, applies retroactively to January 1, 2007.  

According to the Circular, the following types of income of the state-owned CDM Fund (the Fund), which operates under MOF’s supervision, will be exempted from EIT:  

  1. revenue derived from the transfer (Transfer Revenue) of greenhouse gas emission reduction credits, which are collected from CDM project developers and remitted to the Chinese government;  
  2. donations from international financial organizations;  
  3. interests earned from deposits or national treasury bonds; and  
  4. donations from domestic and foreign institutions, organizations and individuals.  

The Circular confirms that CDM project developers may deduct from their taxable income the portion of Transfer Revenue that is paid to the CDM Fund and contributed to the Chinese government as prescribed by the Administrative Measures for the Operation of CDM Projects. The contribution percentages under the CDM Measures are as follows: 65 percent for a hydrofluorocarbon (HFC) or perfluorocompound (PFC) project, 30 percent for a nitrous oxide (N2O) project, and 2 percent for projects in key fields (i.e., projects that improve energy efficiency, develop new or renewable energy, or recycle and reuse methane or coal bed gas) and forestation projects.  

The Circular also grants tax holidays to certain CDM projects. Specifically, for income derived from the implementation of an HFC, PFC or N2O CDM project, the CDM project developer may enjoy the preferential treatment of “100 percent exemption for the first three years and 50 percent exemption for the second three years” on its EIT from the first year it obtains any Transfer Revenue from this project. The Circular further defines “income derived from the implementation of a CDM project” as the net income that remains after subtracting the following items from the CDM project’s Transfer Revenue:  

  1. the portion of the Transfer Revenue remitted to the Chinese government, and
  2. the costs and expenses incurred by the CDM project developer for the implementation of the CDM project.  

In addition, the Circular requires that CDM project developers separately account for the income from a CDM project and reasonably allocate all relevant expenses, or else the income will not be eligible to receive the abovementioned preferential EIT treatments.  

The preferential EIT treatments laid out in the Circular are expected to benefit CDM project developers and their investors by helping increase CDM projects’ net return