1 China Tax & Investment Express China Tax Center China Tax & Investment Express China Tax & Investment Express (CTIE)* brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a link that leads you to the full content of the announcement (in Chinese). Please feel free to contact your EY client service professionals for further assistance if you find the announcements have an impact on your business operations. CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in- depth analyses of tax and business developments in China. *If you wish to access the previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars ► Public notice (PN) regarding the Corporate Income Tax (CIT) policy for perpetual bonds (MOF/STA PN [2019] No. 64) Synopsis According to the CIT Law and its implementation regulations, the Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released MOF/STA PN [2019] No. 64 (hereinafter referred to as “PN 64”) on 16 April 2019, to further clarify certain CIT treatments of perpetual bonds. Key features of PN 64 are as follow: CIT treatments Enterprises that issue perpetual bonds may choose to adopt one of the following CIT treatments: ► The CIT policy on dividends may apply to the perpetual bonds issued by enterprises, that is, where the bond issuer (“issuer”) and the bond investor (“investor”) are both resident enterprises, the dividend income derived by the investor from perpetual bonds shall be exempt from CIT. However, the bond interest expense incurred by the issuer is not deductible for CIT purposes; Issue No. 2019017 30 April 2019
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1China Tax & Investment Express
China Tax CenterChina Tax & Investment Express
China Tax & Investment Express (CTIE)* brings you the latest tax and business announcements on a weekly basis. CTIE provides a synopsis of each announcement including a link that leads you to the full content of the announcement (in Chinese). Please feel free to contact your EY client service professionals for further assistance if you find the announcements have an impact on your business operations.
CTIE does not replace our China Tax & Investment News* which will continue to be prepared and distributed to provide more in-depth analyses of tax and business developments in China.*If you wish to access the previous issues of CTIE and China Tax & Investment News, please contact us.
Tax circulars
► Public notice (PN) regarding the Corporate Income Tax (CIT) policy for perpetual bonds (MOF/STA PN [2019] No. 64)
Synopsis
According to the CIT Law and its implementation regulations, the Ministry of Finance (MOF) and State Taxation Administration (STA) jointly released MOF/STA PN [2019] No. 64 (hereinafter referred to as “PN 64”) on 16 April 2019, to further clarify certain CIT treatments of perpetual bonds.
Key features of PN 64 are as follow:
CIT treatments
Enterprises that issue perpetual bonds may choose to adopt one of the following CIT treatments:
► The CIT policy on dividends may apply to the perpetual bonds issued by enterprises, that is, where the bond issuer (“issuer”) and the bond investor (“investor”) are both resident enterprises, the dividend income derived by the investor from perpetual bonds shall be exempt from CIT. However, the bond interest expense incurred by the issuer is not deductible for CIT purposes;
Issue No. 201901730 April 2019
2China Tax & Investment Express
► The CIT policy on bond interest may apply to the perpetual bonds that meet at least five of the following conditions, that is, the bond interest expense of the issuer is deductible for CIT purposes. However, interest income derived by the investor from the perpetual bonds shall be subject to CIT according to law;
► The issuer has the obligation to repay the capital for the investment;
► Rates and payment frequencies are clearly specified;
► With a certain investment period;
► The investor does not have the ownership of the net assets of the investee enterprise;
► The investor does not participate in the daily production and operation activities of the investee enterprise;
► The investee enterprise may redeem the bonds anytime or when certain conditions are met;
► The investee enterprise books the investment into its liabilities;
► The investor does not bear the same business risk as the shareholders of the investee enterprise due to this investment;
► The liquidation order of the investment is prior to the shares held by the shareholders of the investee enterprise.
Miscellaneous provisions
► The issuer shall disclose the applied tax treatment method in the issuance documents of the stock exchange, inter-bank bond market or other issuing markets.
► The issuers shall not change the tax treatment for each perpetual bond product once it is adopted. Where the tax treatment method is inconsistent with the accounting method, the issuer and the investor shall make corresponding tax adjustments.
► The term “perpetual bonds” as mentioned in PN 64 refers to renewable corporate bonds, renewable company bonds, perpetual debt financing instruments (including perpetual notes), and non-fixed-term capital bonds approved by the relevant government authorities and issued according to the relevant legal procedures.
PN 64 became effective on 1 January 2019.
Our observations
The highlight of PN 64 is that it provides enterprises with a certain freedom of choice to apply to tax treatment of “bonds” or “stocks.” Under certain conditions, the perpetual bonds may be treated as “bonds” and the issuer may enjoy the interest expense deduction for CIT purposes according to the law; or the perpetual bonds may be treated as “stocks” and the issuer may enjoy the tax exemption of dividend income according to the law, regardless of the accounting treatments adopted by the enterprises.
In addition, in response to the Hybrid Mismatch Arrangements raised by the Base Erosion and Profit Shifting Project of the Organization for Economic Co-operation and Development, PN 64 stipulates that the tax treatments (either “bonds” or “stocks”) for perpetual bonds that are adopted by the issuer and the investor must be consistent and the issuer must disclose the applicable tax treatment method in the issuance documents. This reflects China’s positive attitude in responding to international anti-tax avoidance actions in its tax reform.
You can click this link to access the full content of PN 64:http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201904/t20190425_3234501.html
You can click this link to access the full content of the CIT Law and its implementation regulations:http://www.npc.gov.cn/npc/xinwen/2019-01/07/content_2070260.htmhttp://www.chinatax.gov.cn/n810341/n810765/n812176/n812748/c1193046/content.html
► PN regarding the CIT policy for third-party enterprises engaging in preventing and controlling pollution (MOF/STA/NDRC/MEE PN [2019] No. 60)
Synopsis
To encourage the development of pollution prevention and control, on 13 April 2019, the MOF, STA, National Development and Reform Commission (NDRC), and Ministry of Ecology and Environment (MEE) jointly released MOF/STA/NDRC/MEE PN [2019] No. 60 (“PN 60”) regarding the preferential CIT policy for third-party enterprises engaging in pollution prevention and control (hereinafter referred to as the “third-party enterprises”).
According to PN 60, third-party enterprises refer to qualifying third-party enterprises that are appointed by sewage enterprises or government authorities to be responsible for the operation and maintenance of environmental pollution control facilities (including continuously monitoring systems).
According to PN 60, from 1 January 2019 to 31 December 2021, qualifying third-party enterprises which meet all the following criteria shall be subject to CIT at a reduced rate of 15%:
► The enterprises should be resident enterprises legitimately registered within Mainland China.
► The enterprises should have at least one year of practical experience in continuous engagement in operating environmental pollution control facilities.
► Each enterprise should have at least five technical staffs with middle-level professional titles related to environmental protection, or at least two technical staffs with high-level professional titles related to environmental protection.
► Ratio of annual revenue derived from operation of environmental pollution control facilities should account for at least 60% of the gross revenue.
► The enterprises should have in-house laboratories and instruments to process routine inspections on contaminations.
► The enterprises should have capacity to ensure the proper operation of environmental pollution control facilities, and the discharged pollutants should be able to meet the national/local standards for the discharge of pollutants continuously and in a stable manner.
► The enterprises should have good tax credit ratings and not have been classified with ratings of C or D within the past three years.
A third-party enterprise should perform self-evaluation to determine whether it has met all the above-mentioned criteria to be eligible for the preferential CIT policy. If so, the enterprise may apply the preferential policy and keep the relevant supporting documents for further reference. The STA, NDRC and MEE shall further stipulate measures on the follow-up administration in this regard.
You can click this link to access the full content of PN 60:http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201904/t20190425_3234504.html
► PN regarding policies on Value-added Tax (VAT) exemption for goods donated for poverty alleviation (MOF/STA/PAD PN [2019] No. 55)
Synopsis
To support the work of alleviating poverty, the MOF, STA and State Council Leading Group Office of Poverty Alleviation and Development (PAD) jointly published MOF/STA/PAD PN [2019] No. 55 (“PN 55”) on 10 April 2019 regarding the VAT exemption of goods donated for poverty alleviation.
According to PN 55, from 1 January 2019 to 31 December 2022, the self-produced, entrusted processing or purchased goods donated by entities or self-employed industrial and commercial households to support entities and individuals in 832 targeted poverty-stricken areas directly or via qualifying charitable organizations or departments/organizations under peoples’ government at the country level or above are exempted from VAT. Moreover, donations made to targeted poverty-stricken areas that lifted people out of poverty during the above-mentioned period shall still be entitled to the above-mentioned preferential VAT treatment.
Qualifying goods donated during 1 January 2015 to 31 December 2018 for poverty alleviation shall also be entitled to the above-mentioned VAT exemption policy. Any VAT paid for qualifying donations that meet the VAT exemption requirements as prescribed in PN 55 before its promulgation shall be credited in following months’ VAT payments or applying for VAT refunds. For special VAT invoices that have already been issued (as the previous donations were treated as deemed sales), the taxpayers are required to retrieve the invoices before applying for VAT exemption.
Relevant taxpayers are encouraged to read PN 55 for details and act accordingly.
You can click this link to access the full content of the PN 55:http://www.chinatax.gov.cn/n810341/n810755/c4279803/content.html
► Notice regarding decision on revising eight laws including “the Construction Law of the People’s Republic of China (PRC)” (Chairman order [2019] No. 29)
Synopsis
On 23 April 2019, the Standing Committee of the National People’s Congress released Chairman order [2019] No. 29 (“Order 29”) announcing the amendments to eight selected laws. The laws revised by Order 29 came into effect on the promulgation date of Order 29 except for the Trademark Law of the PRC, which will become effective from 1 November 2019.
Among the eight laws, an amendment was made to the Law of the PRC on Vehicle and Vessel Tax as follows:
Under Article 3, one additional item, i.e., national integrated fire and rescue vehicles and vessels, was added as Item 4 of Article 3 which sets out the scope of vehicles and vessels that are exempt from Vehicle and Vessel Tax.
According to Order 29, amendments are also made to Construction Law of the PRC, Fire Protection Law of the PRC, Law of the PRC on Electronic Signature, Urban and Rural Planning Law of the PRC, the Trademark Law of the PRC, Law of the PRC on Anti-Unfair Competition and Law of the PRC on Administrative Licenses. Relevant enterprises are encouraged to become familiar with the amendments of the laws.
You can click this link to access the full content of Order 29:http://www.npc.gov.cn/npc/xinwen/2019-04/23/content_2086193.htm
► Notice regarding the Phase II of deepening the VAT reform in 2019 (Shuizonghan [2019] No. 108)www.gd-n-tax.gov.cn/gdsw/zcwj/2019-04/22/content_35c165869e364351acde43e54899da10.shtml
► Notice regarding the application for the 2019-2020 Key Cultural Export Companies & Projects (Shangbanfumaohan [2019] No. 128)http://sw.beijing.gov.cn/tzgg/201904/P020190422398777874074.pdf
► Notice regarding cancelling a batch of certification items (Jiaozhengfahan [2019] No. 12)http://www.moe.gov.cn/srcsite/A02/s7049/201904/t20190423_379235.html
Business circular
Other tax, business and customs related circulars recently announced by central government authorities:
► Overview of the Belt and Road Countries’ Foreign Exchange Administration Policies (2018 Edition)http://www.safe.gov.cn/safe/2019/0422/13030.html
► Administrative Measures for Patent Agency (SAMR Order [2019] No. 6)http://gkml.samr.gov.cn/nsjg/fgs/201904/t20190418_292969.html
► Notice regarding “the Work Plan for Payment Services for Reducing the Social Insurance Contribution Rates”http://www.chinatax.gov.cn/n810341/n810755/c4284464/content.html
► PN regarding the public consultation on the “Provisional Measures for Revoking the Enterprise Registration Made with Illegal Use of Other‘s Identity Information (Discussion Draft)”http://gkml.samr.gov.cn/nsjg/xyjgs/201904/t20190423_293096.html
► PN regarding the public consultation on the “Notice on the Establishment of Record-filing System for Law Firms Establishing Overseas Branches (Discussion Draft)”http://sft.shaanxi.gov.cn/sftww/zhxx/xydt/6105080.html
► Reply to the matter regarding the applicable tariff rate of domestic imported gearbox for Chang‘an MAZDA Motor Corporation (Shuiguanhan [2019] No. 70)http://gkml.customs.gov.cn/tabid/1033/ctl/InfoDetail/InfoID/34419/mid/445/Default.aspx?ContainerSrc=%5bG%5dContainers%2f_default%2fNo+Container
► PN regarding the “Format Standard of Electronically Converted or Scanned Files of Customs Declaration Documents” (GAC PN [2019] No. 66)http://www.customs.gov.cn/customs/302249/302266/302269/2385728/index.html
► PN regarding the “Specifications of the Setup of the Operation Sites under Customs Supervision” (GAC PN [2019] No. 68)http://www.customs.gov.cn/customs/302249/302266/302269/2390331/index.html
► PN regarding the arrangement on reciprocal recognition of Authorized Economic Operator (AEO) between the Customs of China and Japan (GAC PN [2019] No. 71)http://www.customs.gov.cn/customs/302249/302266/302269/2397512/index.html
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