A Review of China’s Tax Law From a Pillar Two Perspective
SummaryIn this analysis we look at the key features of China's tax law that would need to be taken into account by MNEs with Chinese subsidiaries for the purposes of the Pillar Two global minimum tax.
Key issues addressed include:
- Corporate tax rates
- Timing differences
- Tax incentives including tax allowances, tax exemptions and tax holidays
- Differences between China's domestic tax law and the GloBE Rules
- Tax credits
- CFC Rules
- Withholding taxes
Corporate Tax Rates
Article 4 of the Enterprise Income Tax Law provides that the standard rate of corporate income tax is 25%. However, China offers a number of reduced rates, including:
Article 28 of the Enterprise Income Tax Law provides for a 15% corporate income tax rate to Hi-Tech Companies that the State needs to support.
Under Article 4 of Cai Shui  No. 27, a 10% corporate income tax rate applies to key software enterprises and integrated circuit design enterprises. In order to qualify, a company would need to meet one of the following conditions:
Have software product development and sales income of not less than 200 million yuan, have taxable income of not less than 10 million yuan, and the proportion of R&D personnel must be more than 25%.
In key software fields stipulated by the State, the annual software product development and sales income must be not less than 50 million yuan, taxable income must not be less than 2.5 million yuan, the proportion of research and development personnel must be more than 25%, and the proportion of research and development expenses incurred by the enterprise within China must be more than 70% of the total research and development expenses.
The total annual software export income must be more than 8 million US dollars, the total software export income must account for not less than 50% of the enterprise’s total annual revenue, and the proportion of research and development personnel must not be less than 25% of the total employees.
Article 1 of Cai Shui  No. 79 provides for a 15% corporate income tax rate for certified technologically advanced service enterprises that meet certain conditions, including:
They must be Chinese registered companies;
They must engage in one or more technologically advanced service businesses using advanced technology or having strong research and development capabilities;
Employees with a college degree or above must account for more than 50% of the total number of employees of the enterprise;
The income obtained from engaging in the technologically advanced service business must account for more than 50% of the total income of the enterprise in the current year;
The income obtained from offshore service outsourcing business must be more than 35% of the total income of the enterprise in the current year.
In addition, China offers reduced rates for certain area, including:
Cai Shui  No. 29 provides that corporate income tax is levied at a reduced rate of 15% for eligible enterprises located in the Pingtan Comprehensive Experimental Zone.
Cai Shui  No. 31 provides for a 15% corporate income tax rate for enterprises in the Hainan Free Trade Port.
Cai Shui  No. 38 establishes a 15% corporate income tax rate for enterprises in the Lingang New Area of the China (Shanghai) Pilot Free Trade Zone.
Therefore, whilst the main corporate income tax rate is relatively high, entities that benefit from a 15% (or lower) rate could easily see a GloBE ETR of below 15%, particularly if financial accounting/GloBE income differs significantly from taxable income (see below).
Lee is a qualified Chartered Accountant and Chartered Tax Adviser.
A former Senior Tax Analyst at Bloomberg Tax, Lee began his career in
Ernst & Young's Entrepreneurial Services department and has 20 years of international tax planning experience.
Lee's books have been recommended by The Times, The Guardian and The Telegraph.
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