Does Your Business Qualify for China’s Reduced 15% CIT Rate? Defining “Substantial Operations”
To encourage business development and investment in key industries in China, several areas have implemented a preferential corporate income tax (CIT) rate for eligible companies. This preferential policy, which reduces the CIT burden from 25 percent to 15 percent, is available to companies operating in certain sectors in various development zones in China.
The Lingang New Area of the Shanghai Free Trade Zone in Shanghai (Lingang New Area);
The Fujian Pingtan Comprehensive Pilot Zone in Fuzhou, Fujian (Fujian Pingtan);
The Hengqin-Guangdong-Macao In-Depth Cooperation Zone in Zhuhai, Guangdong (Hengqin Cooperation Zone);
The Guangzhou Nansha Economic and Technological Development Zone in Guangzhou, Guangdong (Nansha Development Zone);
The Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in Shenzhen, Guangdong (Qianhai Cooperation Zone);
The Hainan Free Trade Port in Hainan (Hainan FTP); and
China’s Western regions, which include Inner Mongolia, Guangxi, Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang (the “Western regions”). In addition, Xiangxi Tujia and Miao Autonomous Prefecture in Hunan Province, Enshi Tujia and Miao Autonomous Prefecture in Hubei Province, Yanbian Korean Autonomous Prefecture in Jilin Province, and Ganzhou City in Jiangxi Province can also adopt the preferential CIT policy implemented in the Western regions.
The reduced CIT rate is only applicable to companies that operate within certain encouraged industries, which are specified by each local authority. In addition, the local governments also require companies to have made a certain level of commitment to the area in order to be able to enjoy the policy, which in many means proving that they have “substantial operations” within the respective areas. Over the past few months, more jurisdictions have clarified the scope of what constitutes substantial operations, facilitating the implementation of the preferential policy.
Which industries are eligible for China’s 15 percent CIT rate?
The development zones that currently implement the reduced 15 percent CIT rate only provide this preferential policy to companies that operate within certain encouraged industries in each region.
The different development zones manage the eligible industries through the implementation of local and national encouraged industry lists, which are ostensibly updated periodically.
In addition, the different development zones have slightly different requirements for the type of operations that must be carried out in order for the company to be eligible.
These generally include deriving at least 60 percent of their main business income from one of the industries in the respective encouraged lists and having substantial operations within the area.
The table below summarizes the eligibility requirements for companies to enjoy the reduced 15 percent CIT rate in each of the five development zones.
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