New Chinese corporation tax regime

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New Chinese corporation tax regime: Circulars providing grandfathering and incentive treatments for existing Foreign Invested Companies and new High Tech Enterprises

The impact of the new corporation tax regime on existing foreign invested companies (registered on or before 16 March 2007) and new high tech enterprises (registered on or after 1 January 2008), has been softened by the introduction of two circulars released by the Sate Council of the PRC on 26 December 2007. A summary of the benefits offered by these circulars is detailed below.

Foreign invested companies (“FIE”) circular

The FIE circular provides the following benefits:

  • The new corporation tax (referred to as corporate income tax or “CIT”) rate of 25% will be phased in over 5 years for FIEs enjoying the lower rate of 15% under the old regime.
  • FIEs that had been subject to 24% or 33% CIT became subject to a flat rate of 25% CIT on 1 January 2008.
  • FIEs that commenced their tax holidays prior to 1 January 2008 may continue to use such unutilized tax holidays until their expiry.
  • Where an FIE is found to benefit from overlapping provisions under the old and new CIT regimes, the FIE may choose which regime they wish to adhere to. Once a choice of regime has been made, this will be applied exclusively to avoid duplicating benefits.

High tech enterprises (“HTE") circular

The second circular is restricted to HTEs located in certain specified economic zones in China being Shenzhen, Zhuhai, Shantou, Xiamen and Hainan, and the Pudong new area (the “Zones”), and provides a tax incentive for qualifying HTEs created on or after 1 January 2008. This tax incentive takes the form of a CIT holiday of 2 years, followed by a further three years of 50% CIT reduction.

Restrictions on the incentive include:

  • The tax holiday must commence in the first income-generating year, as opposed to the more generous first profit-making year provided under the old regime.
  • The 50% CIT reduction in years 3-5 applies only to the new statutory CIT rate of 25%, not the preferential 15% rate of the old regime.
  • Profits must be derived from activity within the Zones.
  • Those HTEs which do not qualify under the new regime became subject to a standard rate of 25% CIT from 1 January 2008.


The circulars provide advantageous CIT benefits to those enterprises falling within their scope. It is unfortunate that neither circular addresses possible grandfathering treatment of the tax incentives created under the Income Tax Law on Foreign Invested Enterprises and Foreign Enterprises (“FEIT”) regime, leaving a degree of uncertainty over the full scope and impact of the new CIT regime. However, it is anticipated that additional concessions and clarity will be provided through future circulars relating to the application of the CIT Law and DIRCIT in China.

Updates on future developments will be provided through Law-Now as and when they are released. For further information or advise on how the new CIT regime may effect your business, please contact: Jonathan Selvadoray

For further details on the new CIT regime created by the Corporate Income Tax Law (“CIT Law”) and the Detailed Implementation Rules (“DIRs”), please click here.