Three Special Areas Designated for Preferential Corporate Income Tax Rates
In recent years, the China State Council approved three special areas to promote economic cooperation between the Chinese Mainland and Hong Kong, Macau, and Taiwan. These areas are Hengqin New Area, Qianhai Shenzhen-Hong Kong Services Industry Cooperation Zone, and Pingtan Comprehensive Experimental Zone. Qualified enterprises established in the three areas may enjoy a 15 percent corporate income tax ("CIT") rate, compared to the normal 25 percent CIT rate. The Ministry of Finance and State Administration of Taxation jointly issued Cai Shui  No. 26 on March 27, which clarified the policies for the CIT incentive. Three CIT incentive catalogues were issued, each for one of the three special areas. The catalogues list industry sectors that are eligible for the tax incentives. To be eligible for the 15 percent CIT rate, the main business of the enterprise must falls within the industry sectors listed in the relevant catalogue, which means that more than 70 percent of the total revenue of the enterprise must be derived from one or more listed sectors. Furthermore, if an enterprise has establishments located both inside and outside the special areas, only income derived by the establishments from within the special areas is eligible for the reduced CIT rate. The tax notice is effective for the period from January 1, 2014 to December 31, 2020.
SAT Clarifies Certain Filings for Special Reorganization Tax Treatment by Nonresident Enterprises
The State Administration of Taxation ("SAT") issued the Public Announcement on Certain Issues Concerning Special Tax Treatment on Equity Transfers by Nonresident Enterprises("Announcement 72") on December 12, 2013 to clarify certain filing and pre-transfer dividend issues concerning special reorganization tax treatment to equity transfers by nonresident enterprises.
Certain reorganizations qualify for special reorganization tax treatment where no gain or loss will be recognized at the time of reorganization. One of these qualifying transactions is the transfer by a nonresident enterprise of its equity interest in a PRC entity to its wholly owned subsidiary (another nonresident enterprise), provided that there is reasonable business purpose, the equity interest transfer is at least 75 percent of total equity in the PRC entity, the consideration in equity is at least 85 percent of total consideration, the withholding tax rate applicable to the gain on the future disposal of such equity interest is not reduced, and the nonresident transferor makes a written promise to the tax authorities that it will not dispose of its interest in the nonresident transferee within three years of the re-organization. Announcement 72 contains the following clarifications:
- An equity transfer of a PRC entity resulting from an offshore merger or de-merger of its nonresident enterprise shareholders should fall within the scope of this type of transfer.
- The transferor should make a filing within 30 days of the effectiveness of the equity transfer agreement and the completion of business registration with respect to the equity transfer. Previously, the filing was due only upon the filing of the PRC company's annual corporate income tax return, the deadline of which typically is on May 31 following the fiscal year.
- Where the special reorganization tax treatment has been elected, if the applicable withholding tax rate on dividends under the tax treaty between China and the transferee's country (region) is lower than that between China and the transferor's country, the retained earnings of the PRC entity accumulated prior to the transfer will not be entitled to any reduction in the dividend withholding tax rate.
The filing deadline provided in Announcement 71 also applies to a transfer by a nonresident enterprise of its shareholdings in a PRC entity to its 100 percent owned PRC subsidiary (PRC tax resident). If the special reorganization tax treatment is elected, the transferee should file with the tax authority within 30 days of the effectiveness of the equity transfer agreement and the completion of business registration with respect to the equity transfer.