Laws of the People's Republic of China

DETAILED RULES AND REGULATIONS FOR THE
IMPLEMENTATION OF THE INCOME TAX LAW OF THE
PEOPLE'S REPUBLIC OF CHINA CONCERNING JOINT
VENTURES WITH CHINESE AND FOREIGN INVESTMENT

(Approved by the State Council on December 10,
1980, promulgated by the Ministry of
Finance on December 14, 1980.)

 

 

SUBJECT: TAXATION

ISSUING-DEPT: MINISTRY OF FINANCE

ISSUE-DATE: 12/10/1980

IMPLEMENT-DATE: 12/14/1980

LENGTH: 2380 words

TEXT:

[Article 1] The Detailed Rules and Regulations are formulated in accordance with the provisions of Article 17 of the Income Tax Law of the People's Republic of China Concerning Joint Ventures with Chinese and Foreign Investment (hereinafter call Tax Law for short).

[Article 2] Income derived from production, and business" mentioned in Article 1 of the Tax Law refers to income from the production and business operations in industry, mining, communications, transportation, agriculture, forestry, animal husbandry, fisheries, poultry farming, commerce, tourism, catering, service and other trades.

Income from other sources" mentioned in Article 1 of the Tax Law covers dividends, bonuses, interest and income from lease or transfer of property, patent technical know-how, trade-mark interests, copyright and other items.

[Article 3] "A local surtax of 10 per cent of the assessed income tax" as mentioned in Article 3 of the Tax Law refers to a surtax to be computed and levied on the basis of the actual amount of the income tax paid by joint ventures.

Reduction or exemption of the local surtax on account of special circumstances shall be decided by the people's government of the province, municipality or autonomous region in which the joint venture is located.

[Article 4] A foreign participant in a joint venture, who wants to remit its share of profits from China, shall report to the local tax authorities; the remitting agency shall withhold an income tax of 10 per cent on the remitted amount. No tax shall be levied on that part of its share of profits which is not remitted from China.

[Article 5] "The first profit-making year" as mentioned in Article 5 of the Tax Law refers to the year in which a joint venture has begun making profit after the losses, if any, in the initial stage of its operation have been made up in accordance with the provisions of Article 7 of the Tax Law.

[Article 6] A participant in a joint venture, who reinvests its share of profit in this enterprise or in other joint ventures with Chinese and foreign investment for a period of not less than five years in succession, may receive a refund of 40 per cent of the income tax already paid on the reinvested amount by presenting the certificate of the enterprise accepting such investment for examination and approval of the tax authorities to which the tax was paid.

[Article 7] The tax year for joint ventures starts from January 1, and ends on December 31 of the Gregorian Calendar.

[Article 8] The taxable income shall be calculated in accordance with the following formulae:

(1) Industry:

a.0 Production costs of the year - Direct materials used up in production of the year + direct wages + manufacturing expenses.

b.0 Cost of the product of the year = Inventory of products semi-finished and in the process of production at the beginning of the year + production costs of the year - inventory of products semi-finished and in process of production at the end of the year.

c.0 Cost of the sales of the product = Cost of the product of the year + inventory of the product at beginning of the year - inventory of the product at the end of the year.

d.0 Net sales of the product = Gross sales of the product - (sales return + sales allowance).

e.0 Profit from sales of the product = Net sales of the product - tax on sales - cost of sales - (selling expenses + administrative expenses).

f.0 Taxable income = Profit from sales of the product + profit from other operations + non-business income - non-business expenditure.

(2) Commerce:

a.0 Net sales = Gross sales - (sales return + sales allowance).

b.0 Cost of sales = Inventory of merchandise at the beginning of the year + [purchases of the year - (purchase returned + purchase discount) + purchase expenses] - inventory of merchandise at the end of the year.

c.0 Profit of sales = Net sales - tax on sales - cost of sales - (selling expenses + overhead expenses).

d.0 Taxable income = Profit of sales + profit from other operations + non-business income - non-business expenditure.

(3) Service trades:

a.0 Net business income = Gross business income - (tax on business + operating expenses + overhead expenses).

b.0 Taxable income = Net business income + non-business income - non-business expenditures.

(4) Other trades:

For other trades, refer to the above-mentioned formulae for calculation.

[Article 9] The following items shall not be counted as cost, expense or loss in calculating the taxable income;

(1) Expenditure on the purchase or construction of machinery, equipment, buildings, facilities and other fixed assets;

(2) Expenditure on the purchase of intangible assets;

(3) Interest on equity capital;

(4) Income tax payment and local surtax payment;

(5) Penalty for illegal operations and losses in the form of confiscated property;

(6) Overdue payment and tax penalty;

(7) Losses from windstorms, floods and fire covered by insurance indemnity;

(8) Donations and contributions other than those for public welfare and relief purposes;

(9) That part of the entertainment expenses for operating purposes above the quota of 3 thousandths (3%) of gross sales or above the quota of 10 thousandths (10%) of gross business income in the tax year and those entertainment expenses that are not relevant to production and operation.

[Article 10] Depreciation of fixed assets of joint ventures in use shall be calculated on an annual basis. The fixed assets cover houses, buildings, machinery and other mechanical apparatses, means of transport and other equipment for the purpose of production with useful life of more than one year.0 But articles with a per-unit value of less than 500 Yuan and shorter useful life, can be itemized as expenses according to the actual quantity in use.

[Article 11] Fixed assets shall be assessed according to the original value. For fixed assets counted as an investment, the original value shall be the price of the assets agreed upon by all participants at the time of investment.

For purchased fixed assets, the original value shall be the purchase price plus freight, installation expenses and other related expenses incurred before they are put into use.

For self-made and self-built fixed assets, the original value shall be the actual expenditure incurred in the course of manufacture or construction.

[Article 12] In calculating depreciation on fixed assets the residual value shall be assessed first and deducted from the original value, the principle being to making the residual value about 10 per cent of the original value; those assets to retain a lower or no residual value shall be submitted for approval to the local tax authorities.

Depreciation on fixed assets shall generally be computed on average under the straight-line method.

[Article 13] The depreciation period for various kinds of fixed assets is set as follows:

(1) The minimum depreciation period for houses and buildings is 20 years;

(2) The minimum depreciation period for trains, ships, machines and equipment and other apparatus for the purpose of production is 10 years;

(3) The minimum depreciation period for electronic equipment and means of transport other than trains and ships is 5 years.

For cases where the depreciation on fixed assets of joint ventures, owing to special reasons, need to be accelerated or to be computed under modified methods, applications shall be submitted by the said ventures to the local tax authorities for examination and then relayed level by level to the Ministry of Finance of the People's Republic of China for approval.

[Article 14] Expenditures arising from technical innovation and resulting in the increase of value of fixed assets in use, shall not be listed as expenses.

For the fixed assets remaining in use after the full depreciation period, no depreciation shall be allowed.

[Article 15] The balance of the proceeds that joint ventures receive from the disposal of fixed assets at the current price, after the net unamortized value or the residual value of the assets is deducted, shall be entered into the profit and loss account for the current year.

[Article 16] Intangible assets such as technical know-how, patents, trade-mark interests, copyright, right to use sites and other franchise counted as investment, shall be amortized on the basis of the assessed value as provided in the agreements or contracts from the year they come into use; as the intangible assets that are bought in at a price, the actual payment shall be assessed and amortized from the year they come into use.

The above-mentioned intangible assets with the provision of a time limit for use, shall be assessed and amortized according to the time limit; those without such a provision shall be assessed and amortized in a period of ten years.

[Article 17] Expenses arising during the period of preparation for a joint venture shall be amortized after it goes into production or business, the amount amortized each year not exceeding 20 per cent of the expenses.

[Article 18] Inventory of merchandise, raw materials, products in process of production, semi-finished products, finished products and by-products shall be valued according to the cost price.0 For the method of computation, the joint ventures may choose one out of the following: first-in first-out, shifting average and weighted average. In case a change in the method of computation is necessary, it shall be submitted to the local tax authorities for approval.

[Article 19] Income tax to be paid in quarterly installments as prescribed in Article 8 of the Tax Law may be computed as one-fourth of the planned annual profit for the current year or of the actual income in the preceding year.

[Article 20] Joint ventures shall file their income tax returns and final accounting statements with the local tax authorities within the prescribed period irrespective of making profit or loss in the tax year, and shall send in at the same time the audit certificate of the chartered public accountants registered in the People's Republic of China.

The accounting statements submitted by the branches of joint ventures within China to their head offices shall be submitted to the local tax authorities at the same time for reference.

[Article 21] Joint ventures shall file tax returns within the time limit set by the Tax Law. In case of failure to submit the tax returns within the prescribed time limit owing to special circumstances, application should be submitted to the local tax authorities within the said time limit, and the time limit may be appropriately extended upon the latter's approval.

The final day of the time limit for tax payment and filing tax returns may be extended if it falls upon an official holiday.

[Article 22] Income of joint ventures in foreign currencies shall be assessed according to the exchange rate quoted by the State General Administration of Exchange Control on the day when the tax payment certificates are made out, and shall be taxed in Renminbi.

[Article 23] The revenue and expenditure of joint ventures shall in principle be accounted on accrual basis. All accounting records shall be accurate and complete, and shall have lawful vouchers as the basis for entries.

[Article 24] The method of financial management and accounting of joint ventures shall be submitted to the local tax authorities for reference.

When the method of financial management and accounting of joint ventures contradicts the provisions of the Tax Law, the tax payments shall be assessed according to the provisions of the Tax Law.

[Article 25] Accounting vouchers, books, statements and reports adopted by joint ventures shall be made in the Chinese language or in both Chinese and foreign languages.

Accounting vouchers, books, statements and reports shall be kept for at least 15 years.

[Article 26] Forms of sales invoice and business receipt shall be submitted for approval to the local tax authorities before they are used.

[Article 27] Officials sent by tax authorities when investigating the financial, accounting and tax affairs of a joint venture shall produce identification cards and undertake to keep seeret.

[Article 28] Tax authorities may impose a penalty of 5,000 yuan or less on a joint venture which has violated the provisions of Articles 9, 11 and 12 of the Tax Law according to the seriousness of the case.

[Article 29] Tax authorities may impose a penalty of 5,000 yuan or less on a joint venture which has violated the provisions of the paragraph 2 of Article 25, and Article 26 of these Detailed Rules and Regulations.

[Article 30] Tax authorities shall serve notices on relevant parties for cases involving penalty in accordance with the relevant provisions of the Tax Law and the Detailed Rules and Regulations.

[Article 31] When a joint venture applies for reconsideration in accordance with the provisions of Article 15 of the Tax Law, the tax authorities concerned are required to make decisions within three months after the application is received.

[Article 32] Income tax paid to foreign authorities by a joint venture or its branches on their income received outside China may be credited against the amount of income tax to be paid by their head office upon presenting the foreign tax payment certificate. But the credit amount shall not exceed the tax payable on the income received abroad computed according to the tax rate prescribed by China's Tax Law.

[Article 33] Income Tax returns and tax payment certificates for joint ventures are to be printed by the General Taxation Bureau of the Ministry of Finance of the People's Republic of China.

[Article 34] The right of interpretation of the Detailed Rules and Regulations resides in the Ministry of Finance of the People's Republic of China.

[Article 35] The Detailed Rules and Regulations come into force on the same dates as the "Income Tax Law of the People's Republic of China Concerning Joint Ventures with Chinese and Foreign Investment".