On 16 March 2007, the 10th National People's Congress approved the new PRC Enterprise Income Tax Law (the EIT Law). Starting from 1 January 2008 the preferential tax treatment afforded to foreign-invested enterprises (FIEs) will be dismantled progressively and a unified corporate income tax rate of 25% will be applicable to most companies.
Once the EIT Law comes into effect in January 2008, no distinction will be made between companies based on the origin of their capital. The EIT Law introduces the concept of tax residency whereby companies will either be considered as 'China tax residents' or 'non-China tax residents'. A company will be deemed to be 'China tax resident' if the effective management of the company is located in China. A company which is deemed to be 'China tax resident' will be taxed on its worldwide income, while a 'non-China tax resident company will only be taxed in China on its China-related income.
The EIT Law also states that branches of domestic enterprises will no longer be allowed to file taxes directly in their local bureau. Instead, as from the end of the fiscal year 2007, their taxes must be paid directly by their head office.
Many areas require further clarification, such as the withholding tax rates applicable to dividends and other income paid to shareholders of FIEs, the definition of 'effective management' for tax residency purposes, or the criteria used to select privileged hi-tech companies or thin-profit companies. The implementing rules which are due to be published later this year are expected to shed some light, but until then, the precise impact of the EIT Law will remain substantially conjectural.
