Chapter I

General Provisions

Article 1 The enterprises and other organizations that are located within the People’s Republic of China and earn income (hereinafter generally referred to as enterprises) are payers of enterprise income tax, which shall be paid in accordance with the provisions of this Law.

This Law is not applicable to individual proprietorship enterprises and partnerships.

Article 2 Enterprises are divided into resident enterprises and non-resident enterprises.

For the purposes of this Law, resident enterprises are enterprises which are set up in China in accordance with law, or which are set up in accordance with the law of a foreign country (region) but which are actually under the administration of institutions in China.

For the purposes of this Law, non-resident enterprises are enterprises which are set up in accordance with the law of a foreign country (region) and whose actual administrative institution is not in China, but which have institutions or establishments in China, or which have no such institutions or establishments but have income generated from inside China.

Article 3 A resident enterprise shall pay enterprise tax on its income generated from both inside and outside China.

A non-resident enterprise that has set up institutions or establishments in China shall pay tax on the income earned by its institutions or establishments from inside China and the income which is generated from outside China but which is actually relevant to the said institutions or establishments set up in China.

Where a non-resident enterprise has not set up any institutions or establishments in China, or it has done so but the income it earns is not actually relevant to the said institutions or establishments, it shall pay tax on the portion of its income generated from inside China.

Article 4 The rate of enterprise income tax shall be 25 per cent.

On the income earned by non-resident enterprises, as specified in the third paragraph of Article 3 of this Law, the applicable tax rate shall be 20 per cent.

Chapter II

The Amount of Income Taxable

Article 5 The amount of the income of an enterprise taxable in each tax year shall be the remainder of its gross income after the untaxed amount, the amount exempted from taxation, other deductions and the amount allowed to be used to make up the losses of the previous year are deducted.

Article 6 The income earned by an enterprise from various sources in monetary and non-monetary terms constitutes the gross income, which includes:

(1) income from sale of goods;

(2 )income from provision of labor services;

(3) income from transfer of property;

(4) benefits from equity investment, such as dividends and bonuses;

(5) interest income;

(6) rental income;

(7) income from royalties;

(8) income from donations; and

(9) income from other sources.

Article 7 The following of the gross income are untaxed income:

(1) government appropriations;

(2) administrative fees and government funds collected in accordance with law and placed under government control; and

(3) other untaxed income prescribed by the State Council.

Article 8 When calculating the amount of its income taxable, an enterprise may deduct its reasonable expenses which are actually incurred in relation to its income earned, including, among other items, the costs, fees, tax payments, and losses.

Article 9 When calculating the amount of its income taxable, an enterprise may deduct its expenses incurred due to donation for public welfare, provided that the portion involved is not more than 12 percent of the total amount of its annual profits.

Article 10 When calculating the amount of taxable income, the following expenses may not be deducted:

(1) monies from equity investment paid to investors, such as dividends and bonuses;

(2) payment of enterprise income tax;

(3) fines for delaying tax payment;

(4) losses caused by penalties, fines, and property confiscation;

(5) expenses due to donations other than what is specified in Article 9 of this Law;

(6) sponsorship expenses;

(7) non-verified reserves; and

(8) other expenses irrelevant to the income earned.

Article 11 When calculating the amount of its income taxable, an enterprise may deduct its depreciation of fixed assets which are calculated in accordance with relevant regulations.

When calculating depreciations for deduction, none of the following fixed assets may be induced:

(1) fixed assets other than the houses and structures that are not put to use;

(2) fixed assets leased from another person to sublet for profits;

(3) fixed assets rent to another person by way of financial leasing;

(4) fixed assets that have been depreciated in full but are still in use;

(5) fixed assets that are irrelevant to business activities;

(6) land which is separately evaluated and entered into an account book as fixed assets; and

(7) other fixed assets the depreciation of which may not be calculated for deduction.

Article 12 When calculating the amount of its income taxable, an enterprise may deduct the amortized expenses for the intangible assets calculated in accordance with relevant regulations.

When calculating the amortized expenses for deduction, none of the following intangible assets may be included:

(1) intangible assets the expenses for the independent development of which are deducted at the time when the amount of the taxable income is calculated;

(2) self-created reputation;

(3) intangible assets that are irrelevant to business activities; and

(4) other intangible assets the amortized expenses for which may not be calculated for deduction.

Article 13 When calculating the amount of its income taxable, an enterprise may deduct the following expenses to be incurred as anticipated long-term amortized expenses and to be amortized in accordance with relevant regulations:

(1) expenses for reconstruction of the fixed assets that are depreciated in full;

(2) expenses for reconstruction of the fixed assets leased from another person;

(3) expenses for major repairs of the fixed assets; and

(4) other expenses to be used as anticipated long-term amortized expenses.

Article 14 During the period when an enterprise invests outside, the cost of the investment in the form of assets may not be deducted when it calculates the amount of its income taxable.

Article 15 When calculating the amount of its income taxable, an enterprise may deduct the cost of the inventory to be used or sold, which is calculated in accordance with relevant regulations.

Article 16 Where an enterprise transfers its assets, it may deduct the net value of the said assets when calculating the amount of its income taxable.

Article 17 When an enterprise calculates its income tax on a basis, it may not offset the losses of its business institutions outside China by the profits of the business institutions inside China.

Article 18 An enterprise may carry over the losses it incurs in a tax year to the succeeding years, namely, it may have the losses made up by the income of the succeeding years, but the number of years for carrying over such losses may not exceed five years.

Article 19 With respect to the income earned as prescribed in the third paragraph of Article 3 of this Law, a non-resident enterprise shall calculate the amount of its income taxable according to the following methods:

(1) For income derived from equity investment such as dividends and bonuses, and from interest, rent and income from royalties, the total amount of such income shall be the amount of income taxable;

(2) For income derived from property transfer, the remainder of the total amount of the income minus the net value of the property shall be the amount of income taxable; and

(3) For other sources of income, the amount of the income taxable shall be calculated mutatis mutandis according to the methods specified in the preceding two Subparagraphs.

Article 20 The income, the specific scope and criteria for deduction and the methods for handling taxation affairs in respect of assets, as specified in this Chapter, shall be formulated by the departments in charge of finance and taxation under the State Council.

Article 21 Where in calculating the amount of income taxable, where financial and accounting methods of an enterprise are inconsistent with the provisions of the laws and administrative regulations governing taxation, the said amount shall be calculated in accordance with the provisions of such laws and administrative regulations.