Unified tax law and property law passed

The National People's Congress, China's top legislature, passed the Enterprise Income Tax Law (EIT Law) and the Property Law on 16 March 2007. These two laws will change China's investment landscape. The phasing-out of certain tax preferences is the most obvious change introduced by the EIT Law. The Property Law introduces certain significant changes, consolidates various existing laws and creates a number of new possibilities.

Unified tax law

The EIT Law provides a unified tax regime for foreign investment enterprises (FIEs) and wholly Chinese-invested enterprises (domestic companies). In doing so, it aims to promote fair competition and apply international practices to China's taxation regime. The EIT Law also reinforces China's recent policy shift away from low-technology manufacturing toward high-technology and environmentally friendly projects.

The EIT Law will come into effect on 1 January 2008. It will not apply to either sole proprietors or partnerships.

Tax preferences phased out

FIEs in China have enjoyed preferential tax treatment since China began opening its economy to foreign investment. Such income tax preferences, however, will now be phased out over a five-year transitional period, starting 1 January 2008.

The transitional period applies to FIEs which are in two different situations:

  • FIEs enjoying income tax rates of between 15% and 24% under the existing regime - these FIEs will be subject to a gradually increasing tax rate over the five-year transitional period; and
  • FIEs enjoying tax holidays - these FIEs may continue to enjoy the remaining tax holiday; however, if the tax holiday has not started due to the absence of profits, it will be deemed to have started in 2008 with the commencement of the EIT Law.

Unified tax rate

The new standard tax rate for both FIEs and domestic companies alike will be 25%.

This will provide some relief for domestic companies, which are currently subject to income tax at 33%. It will also provide relief to a number of FIEs, including consulting FIEs and holding companies, which do not currently benefit from tax preferences and which are also taxed at 33%.

Most affected by this new rate will be manufacturing FIEs and FIEs set up in special zones that offer tax rates of between 15% and 24%.

Non-resident enterprises will be subject to withholding tax at the rate of 20% for income arising within China. However, dividends that non-resident enterprises obtain from entities they establish in China will be tax-free.

Unifying tax preferences

The EIT Law sets out various new preferences that will be available to both FIEs and domestic companies. These preferences include:

  • Small low-profit enterprises taxed at 20%
  • High-tech companies taxed at 15%
  • Certain tax reductions or exemptions for agriculture and forestry projects, as well as environmental protection and infrastructure projects which meet specific requirements
  • Certain tax reductions for venture capital enterprises which invest in key and encouraged industries
  • Continued tax preferences for other encouraged enterprises (such as encouraged enterprises set up in Central and Western China)

Eligibility criteria for the various tax preferences will be set out in the forthcoming implementing rules.

Notably absent from the list of tax preferences are the current income tax reductions for manufacturing and export-oriented FIEs. These preferences have been a driver of foreign investment for many years.

Implementing rules expected

The State Council will formulate detailed implementing rules. The implementing rules are expected to clarify how the existing tax preferences are to be phased out during the five-year transitional period and to set out eligibility criteria for the new tax preferences.

Property law

The Property Law, effective 1 October 2007, has been passed to regulate property relationships, with its key concerns being state-owned property, collectively-owned property and private property. (For the purpose of the law "property" includes both land and other forms of property.) The new law represents an important political and economic development.

An evolving socialist market economy

The clear recognition of the importance of private property marks an important step in the evolution of China's socialist market economy. The intention of the Property Law is to encourage the development of the private sector by reinforcing legal protections for private property. However, it is also the intention of the Property Law that the public ownership of property should remain dominant within China's evolving socialist market economy.

Consolidating existing law

The Property Law consolidates various property-related provisions from existing laws, such as the Land Administration Law, the General Principles of Civil Law and the Security Law. It also introduces some new provisions (some of which are set out below).

Renewal of land use rights

One new provision under the Property Law is that the term of residential land use rights will be automatically renewed upon expiry. This will come as a welcome relief to those owning residential properties in China. It will also ensure that financing remains available for residential property approaching expiration of its land use right term.

Non-residential land use right terms are not granted automatic renewal under the Property Law. Rather, renewal will be subject to other laws and regulations. The new law does, however, provide that the ownership of non-residential buildings can be governed by contract. This provides some relief from current regulations which state that, upon expiration of the relevant land use right term, buildings will go to the State without compensation (although some land grant contracts do provide for compensation).


The Property Law also includes new provisions on the creation of easements, which have previously been unrecognised by Chinese law. These new provisions are likely to be particular importance for infrastructure projects that involve the construction of pipelines or other networks requiring access to land over which the project owner does not hold the land use rights.


The Property Law's chapter on security contains some innovative provisions such as mortgages over future equipment, raw materials and semi-finished products. Moreover, the new law expressly permits unit funds and receivables to be pledged. These new provisions will create additional financing opportunities that have previously been difficult.