China Corporate Income Tax Update for Six Items in 2021: Q&A


China’s tax administration recently clarified the assessment of corporate income tax applicable to six items, including expenses associated with COVID-19-related charitable donations, convertible bonds, and cross-border hybrid investments. Businesses should note that the new policy will close some existing corporate income tax loopholes.

On June 25, 2021, the State Tax Administration (STA) published the Corporate Income Tax Collection Policy Announcement (STA announcement [2021] n ° 17). The announcement, applicable to tax settlement and payment in tax year 2021 and subsequent years, clarified the following six-item corporation tax (CIT) treatment in China:

  • Pre-tax deduction of expenses associated with COVID-19 charitable donations;
  • Tax treatment of the conversion of convertible bonds into equity investments;
  • Tax treatment of cross-border hybrid investments;
  • Tax treatment of assets after the change from “levy on contribution” to “levy on account verification”;
  • Tax treatment of the company’s collection of cultural relics and works of art; and
  • When to recognize income after receiving government payments.

This article explains CIT processing for the six business benchmarks.

1. How do I deduct expenses associated with COVID-19 charitable donations?

During the pandemic, some companies have donated for help with COVID-19. To encourage such acts and help companies get through the year, the government has put in place accompanying measures (announcement MOF SAT [2020] No. 9), which allow cash and materials donated by companies to fight COVID-19 to be fully deducted before the corporation tax (CIT) is calculated.

However, when corporate taxpayers donate non-cash assets, some of them incur transportation costs, insurance costs, processing costs, labor costs and other costs. related.

For these costs, the STA announcement [2021] No. 17 specifies that:

  1. If the expense is included in the amount entered on the donation voucher issued by state bodies or public social assistance agencies, it can be deducted from income tax as a donation expense. public aid.
  2. If the aforementioned expenses are do not included in the said amount, it may be deducted before income tax for the related social expenditure.

Note, for general charitable donations, the deduction limit is less than 12% of the annual gross profit of the business, and the excess part can be carried over to the following three years. In principle, the same expense cannot be deducted repeatedly.

2. What is the tax treatment of the conversion of convertible bonds into investments in shares?

A convertible bond is a fixed income corporate debt obligation that earns interest payments but can be converted into a predetermined number of common stock or equity shares.

The conversion of bonds into shares can be done at certain times during the life of the bond and is generally at the discretion of the bond holder. A vanilla convertible bond offers the investor the choice of holding the bond until maturity or converting it into shares.

STA announcement [2021] No. 17 clarifies the CIT treatment for the conversion of convertible bonds into equity investments:

CIT treatment for holders (buying companies) of convertible bonds

  1. If a bondholder obtains interest income at an agreed rate during the holding period, the bondholder must declare and pay the CIT in accordance with the law.
  2. If a bondholder converts the obligation into shares with accrued interest receivable, even accrued interest receivable is not recognized as income in the bondholder’s books of account, it should be recognized as interest income from the current period by the tax authorities and declared for tax purposes. purposes. After conversion, the purchase price of the bond, accrued interest receivable, and related taxes and charges paid together constitute the cost of the equity investment.

CIT processing for issuers (issuers) of convertible bonds

  1. If a bond issuer incurs interest charges on convertible bonds, the cost may be deducted before CIT.
  2. If the issuer of the bond converts the bond into shares with unpaid interest payable, the unpaid interest payable should be considered to have been paid to the investor and should be able to be deducted before CIT.

In short, for convertible bond issuers, interest charges, which are part of the cost of financing the business, are deductible before tax.

If the bond holder converts the convertible bonds as well as the accrued interest receivable (which is the unpaid interest payable for the bond issuers) into shares, the interest should be considered as received by the investor and therefore for the issuers. of bonds, they are allowed to discount on taxes.

3. What is the tax treatment of cross-border hybrid investments?

Hybrid investing refers to investments that have dual characteristics – equity and debt.

According to STA Announcement on IS Management Issues on Hybrid Business Investments (STA announcement [2013] No. 41), if a hybrid investment meets certain conditions, it can be treated as an investment in debt (instead of an investment in shares); thus, the issuing company can recognize interest expense and make a pre-tax deduction.

In order to close the tax loopholes omitted in the SAT announcement [2013] No.41, which was implemented from 2013, the SAT announcement [2021] No 17 added two restrictive conditions. The additional conditions prohibit the hybrid investment from being considered a leveraged investment in certain situations.

According to Announcement No.17, if a hybrid investment meets the following two conditions, the interest paid by the domestic issuing enterprise to the foreign investment enterprise should be considered as dividends (i.e. ‘they must be considered as an investment in shares instead of an investment debt), and cannot be deducted before the CIT:

  1. Foreign investment firms and recipient domestic firms are related parties; and
  2. The country (region) in which the foreign investment firm is located recognizes investment income as equity investment income and does not levy CIT on it.

4. What is the tax treatment of assets after the change from “valuation levy” to “audit levy”?

In China, there are two methods of collecting corporate tax:

  • Levy of corporate tax on the basis of the audit of accounts; or
  • Levy of corporate tax on the basis of the assessment.

Most corporate taxpayers are subject to corporate tax on the basis of the audit of accounts. However, for taxpayers, such as those who are exempt from bookkeeping or those whose accounts are confusing, the tax authorities will assess the percentage of their taxable income.

In some cases, taxpayers may potentially switch from income tax collected during valuation to income tax collected during account verification.

After the transformation, how to confirm the value of the assets of the business is important as it will affect the owner’s equity as well as depreciation charges, which in turn will affect the profits and losses of the business and its taxable income.

To avoid tax evasion, the STA announcement [2021] # 17 clarifies how to confirm the value of assets for tax collection purposes.

How to confirm the value of the asset

According to announcement # 17, if a business can provide an invoice for the purchase of assets, the tax should be calculated based on the amount shown on the invoice.

In the event that an invoice for the purchase of assets cannot be provided, the amount recorded in the asset purchase contract (agreement), proof of payment of funds, accounting documents and other documents can be used. as a basis for tax collection.

How to handle depreciation and amortization of the asset

For a good that has been put into service during the tax period, after the company switches to taxation on account verification, on the basis of the depreciation and amortization years provided for by the tax law, after deduction years of use of the asset, the amount of depreciation and amortization of the asset should continue to be calculated and deducted before tax for the remaining year.

5. What is the tax treatment of the collection by companies of cultural relics and works of art?

Based on STA announcement [2021] No.17, cultural relics and works of art purchased by the company and used for collection, display, preservation and appreciation should be treated as investment assets for tax purposes.

Therefore, during the period of detention of cultural relics and works of art, accumulated depreciation and amortization is not allowed for the pre-tax deduction.

6. When to recognize income after receiving government payments?

Revenue recognition on an accrual basis

In accordance with the STA announcement [2021] No.17, when an enterprise sells goods or provides labor services at market prices and is paid in whole or in part by the financial department of the government in accordance with a certain proportion of the quantity or the amount of goods sold or labor services provided by the business, income should be recognized on an accrual basis.

Revenue recognition on an actual basis

With the exception of the aforementioned circumstances, for all types of public financial funds obtained by businesses, such as financial grants, grants, tax breaks and offsets, income should be recognized on a cash basis – at the time. where the income is actually obtained.

China Briefing will keep you up to date with the most recent tax news. Our parent company, Dezan Shira & Associates, has an experienced team of tax accountants, lawyers and former tax officers who can assist your business in a wide range of tax service areas across all major industries. For more information and assistance, please email us at [email protected].

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