Tax basics for FIEs

As the owner of a European business, I'm thinking about establishing a more permanent presence in China. I'm not familiar with what tax incentives there are, as this may really assist in my decision to open up on the Mainland.

What are the basic tax privileges for foreign-invested enterprises?

The domestic perspective

Generally speaking, foreign-invested enterprises (FIEs) established after January 1 2008 are no longer granted super-national tax privileges, which reduce or exempt their income tax in China. Moreover, except in certain industries, FIEs established after January 1 2009 could no longer have their self-use imported equipment exempted from the import Value-added Tax (Vat). As a result, most super-national tax privileges that FIEs used to enjoy have either been excluded or cancelled by now.

As such, currently in mainland China, foreign investors may find that besides certain tax privileges for foreign individuals, they are subject to the same tax incentive policies and treatments for their FIEs as domestic enterprises. Governing both domestic and foreign invested enterprises, the current tax laws and regulations, especially the new PRC Enterprise Income Tax Law (中华人民共和国企业所得税) and its implementation rules, grant mostly industry-oriented privileges on top of geographic-oriented incentives, focus on both direct and indirect tax incentives instead of providing direct tax reduction or exemption, and provide project-base tax preferential treatments to replace most company-base tax preferential treatments. For example, newly-established high and new technology enterprises in the Special Economic Zones and Pudong New Area are exempted from corporate income tax during the first two years from the year of collecting their first operating revenues, followed by a 50% annual reduction during the subsequent 3 years. Enterprises of encouraged industries set up in western China may enjoy a reduced corporate income tax rate of 15%, and software and integrated circuit companies are granted prolonged tax incentives, etc. In practice, FIEs that are engaged in various locally-encouraged industries may also seek certain financial support from local governments upon negotiation.