China Tax Center. China Tax & Investment Express. Tax circulars

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1 Issue No September 2016 China Tax Center 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 weblink that leads you to the full content of the announcement (in Chinese). Please feel free to contact your Ernst & Young client service professionals for further assistance if you find the announcements have an impact on your business operations. This 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 these previous issues of CTIE and China Tax & Investment News, please contact us. Tax circulars Notice regarding the improvement of income tax policies related to stock incentive plans and investments with technologies as capital contribution (Caishui [2016] No. 101) To further encourage entrepreneurship and innovation, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly released Caishui [2016] No. 101 ( Circular 101 ) on 20 September 2016 to detail the following income tax preferential policies on stock incentive plans and investments with technologies as capital contribution: Corporate Income Tax (CIT) According to Circular 101, for equity investments in domestic resident enterprises with technologies as capital contribution, corporate investors may choose to apply the prevailing preferential tax treatments (as prescribed in Caishui [2014] No.116 ( Circular 116, Notice regarding CIT policies for non-monetary assets investments) or a new CIT deferral treatment on technology contribution, i.e., the corporate investors may choose to pay CIT at the time when the relevant shares are transferred, instead of paying CIT at the time when such investment is made, provided that (please refer to CTIE for details of Circular 116): The consideration paid by the investee company is 100% stocks/equity; and The investors completed the record filings with their supervising tax authorities. Individual Income Tax (IIT) Circular 101 further extended the preferential IIT treatments related to stock incentive plans, i.e., IIT deferral treatment for qualifying income derived from stock options, equity options, restricted stocks and equity incentives of non-listed companies. Moreover, Circular 101 allows extended IIT filing deadlines for income derived from stock options, restricted stocks and equity incentives of public listed companies.

2 Circular 101 became effective on 1 September We have released a new issue of People Advisory Services Alert (in Chinese Only) to discuss Circular 101 in details. You can click this link to access the full content of Circular 101: You can click this link to access the full content of Circular 116: Notice regarding tax policies for national university science and technology parks (Caishui [2016] No. 98) On 5 September 2016, the MOF and SAT jointly released Caishui [2016] No. 98 ( Circular 98 ) to detail the following tax preferential policies for qualifying national university science and technology parks: Preferential tax policies During the period from 1 January 2016 to 31 December 2018, real estate and land used by qualifying national university science and technology parks or rented, provided for free to incubated enterprises shall be exempt from Real Estate Tax and Urban Land Usage Tax. During the period from 1 January 2016 to 30 April 2016, income derived by qualifying national university science and technology parks from leasing business premises to incubated enterprises and provision of incubation services shall be exempt from Business Tax (BT). From 1 May 2016, such income is exempt from Value-Added Tax (VAT) under the VAT reform. Income derived by national university science and technology parks with status of not-for-profit organizations shall enjoy CIT preferential treatments for not-for-profit organizations according to the prevailing CIT Law and its implementation rules. Qualifying national university science and technology parks To enjoy the abovementioned preferential tax policies, a qualifying national university science and technology park should meet all of the following conditions: The national university science and technology park meets the relevant criteria (as prescribed in Recognition and Administration Measures for National University Science and Technology Parks, hereinafter referred to as the Administration Measures, i.e., Guokefagao [2010] No. 628). The Ministry of Science and Technology (MOST) and Ministry of Education (MOE) under the State Council shall announce the list of qualifying national university science and technology parks. Income derived from leasing business premises to incubated enterprises and provision of incubation services 1 should be booked separately. Space provided to incubated enterprises (including public service areas 2 ) should account for 60% or above of the space available to the national university science and technology park, while the number of incubated enterprises should account for 75% or above of the total number of enterprises within the national university science and technology park. Incubated enterprises An incubated enterprise should meet all of the following conditions: The incubated enterprise is an enterprise that registers, operates and undertakes its major research and development (R&D) activities within a national university science and technology park. The incubated enterprise was newly established or established for no more than 3 years before entering into a national university science and technology park. 2

3 The incubated enterprise has been nurtured in a national university science and technology park for no more than 48 months. For incubated enterprises set up by overseas high-level talents or incubated enterprises engaging in specific areas, such as biological medicine, or integrated circuit design, the nurturing period can be extended to no more than 60 months. The incubated enterprise falls into standards of small/micro-scale enterprises as prescribed in Regulations Regarding Standards for Small and Medium Enterprises (hereinafter referred to as Standards ). An individual incubated enterprise should not occupy premises of more than 1,000 square meters. An incubated enterprise engaging in specific fields such as aviation and modern agriculture should not occupy premises for more than 3,000 square meters. Goods produced or services provided by an incubated enterprise should be within the scope of Catalogue of Key High-New Technological Territories Supported by the State (hereinafter referred to as the Catalogue, announced through Guokefahuo [2016] No. 32). (Please refer to China Tax & Investment News Issue No for details of the Catalogue ). Application of the status of qualifying national university science and technology parks The MOST and MOE shall be responsible for review and recognition whether a university science and technology park is qualified for the criteria listed in Circular 98. Upon recognition, the MOST and MOE shall release certifications to taxpayers with details of their real properties and lands used for nurturing and copy the information to the SAT. Taxpayers should complete the document filing with their supervising tax authorities to enjoy the abovementioned tax preferential treatments. Our observations It is worthy to note that the criteria for incubated enterprises as prescribed in Circular 98 cultivated by qualifying national university science and technology parks are slightly different from incubated enterprises cultivated by qualifying technology business incubators as prescribed in Caishui [2016] No. 89 ( Circular 89, i.e., Notice regarding tax policies for technology business incubators). For instance, Circular 98 prescribes that an incubated enterprise should be newly established or established for no more than 3 years before entering into a national university science and technology park, while according to Circular 89, an incubated enterprise should be newly established or established for no more than 2 years before entering into a technology business incubator. Relevant taxpayers should study Circular 98 carefully to enjoy the relevant tax preferential treatments. 1 Prior to the VAT pilot arrangements, incubation services refer to consultancy and technical services that were subject to BT under categories of agency services, rental services and other services provided to incubated enterprises. Upon the VAT pilot arrangements, the definition of incubation services refer to agency services, operating lease, R&D, information and technology services as well as attestation services, etc. 2 Public service areas refer to areas provided to incubated enterprises for non-profitable shared common activities, including canteens, meeting rooms, project rooms, show rooms, activity rooms, experimental rooms and libraries, etc. You can click this link to access the full content of Circular 98: You can click this link to access the full content of Circular 89: You can click this link to access the full content of Administration Measures: You can click this link to access the full content of the Standard: You can click this link to access the full content of the Catalog: 3

4 Opinions on the verification of identification for persons handling tax-related matters with tax authorities (Shuizongfa [2016] No. 111) On 19 July 2016, the SAT released Shuizongfa [2016] No. 111 ( Circular 111 ) regarding verification of identification for persons handling tax-related matters with tax authorities (including tax agents). According to Circular 111, it is proposed that persons handling tax-related matters shall be required to provide their identity cards to tax authorities for identification verification before their tax-related matters are processed. According to Circular 111, tax authorities at the local level are required to determine the scope of tax-related matters that would be required for identification verification of aforementioned persons and specifically list the scope of such persons. Among which, the identification verification requirements shall first be applied to high risk tax-related matters. In the meantime, Circular 111 emphasizes that tax authorities at the local level are not allowed to set out any approval/admittance requirements for persons handling tax-related matters, or, in any cases, to distinguish their professional skills on handling tax-related matters. Taxpayers should stay alert to further notifications/updated checklists to be announced by their supervising tax authorities. You can click this link to access the full content of Circular 111: State Administration of Taxation Annual Report (2015) Recently, the SAT announced the State Administration of Taxation Annual Report for year 2015 (hereinafter referred to as the 2015 Report ) in both Chinese and English via its official website. The 2015 Report consists of 10 chapters which documented SAT s performance and major achievements in the recent years, as well as first-hand information concerning the SAT strategic plans, organizational structure, policy round-up, revenue collection, service delivery, administration developments, technology leverage and global collaboration. We will release a new issue of China Tax & Investment News to discuss the 2015 Report in detail. Please stay tuned. You can click this link to access the full content of the 2015 Report (English version): You can click this link to access the full content of the 2015 Report (Chinese version): 4

5 Business circulars Announcement regarding the public opinion consultation on the revised Catalogue of Priority Industries for Foreign Investments in the Central and Western Regions On 9 May 2013, the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly released the Catalogue of Priority Industries for Foreign Investments in the Central and Western Regions (2013 Revised) (hereinafter referred to as the 2013 Priority Catalogue ) under NDRC/MOFCOM Order [2013] No. 1. The 2013 Priority Catalogue covers 500 encouraged industrial items in 22 provinces/city of China. Foreign-invested projects covered in the 2013 Priority Catalogue are eligible to enjoy preferential tax treatments for encouraged foreign-invested projects. (Please refer to CTIE for details of the 2013 Priority Catalogue.) To encourage more foreign investments in the central and western regions, the NDRC and MOFCOM proposed amendments to the 2013 Priority Catalogue and announced a revised draft of the Catalogue of Priority Industries for Foreign Investments in the Central and Western Regions (hereinafter referred to as the draft Priority Catalogue ) for public opinion consultation on 14 September The consultation will be closed on 14 October Our observations The amendments proposed in the draft Priority Catalogue aim to attract more foreign investments in the central and western regions by expanding the scope of encouraged industrial items (644 encouraged items covered). The amendments will also facilitate adapting to new trends in foreign-funded industrial transfers, emphasize comparative advantages, optimize the structure for utilizing foreign investments and conform to the actual situation of these regions. The tax implications of the Priority Catalogue on foreign investment enterprises (FIEs) in the central and western regions are summarized as follows: Preferential tax policies Corporate Income Tax (CIT) Pursuant to Caishui [2011] No. 58 ( Circular 58, i.e., Notice regarding the implementation of tax policies for the development of the western regions), from 1 January 2011 to 31 December 2020, enterprises established in the western regions and engaging in encouraged industries are entitled to a reduced CIT rate of 15%, provided that these enterprises have their core businesses stipulated in the Catalogue of Encouraged Industries of Western Regions (hereinafter referred to as the Encouraged Catalogue ), and their income is derived from such core businesses accounting for more than 70% of their total income. (Please refer to CTIE for details of Circular 58.) Customs Duty (CD) Pursuant to Circular 58, self-used equipment imported within the total investment under projects of encouraged industries or priority industries in the western regions are exempt from CD. To respond to the implementation of the 2013 Priority Catalogue effective from 10 June 2013, the General Administration of Taxation (GAC) released GAC Announcement [2013] No. 50 ( Announcement 50, i.e., Notice regarding certain issues related to the implementation of the 2013 Priority Catalogue by Customs) specifying that, foreign-invested projects (including projects for capital increase) listed in the 2013 Priority Catalogue that have been approved on 10 June 2013 or afterwards are entitled to preferential import tax policies applicable to foreign-invested projects under the scope of encouraged investments. Importation of self-used equipment for the above projects and technology, parts and components annexed to the equipment shall be exempt from CD but still subject to VAT at the import level, according to Guofa [1997] No. 37 ( Circular 37, i.e., Notice regarding the adjustments of tax policies for importation of equipment) and GAC Announcement [2008] No. 103 ( Announcement 103, i.e., Notice regarding certain implementation issues related to the adjustments of certain preferential import tax policies). (Please refer to CTIE for details of Announcement 50.) 5

6 Relationship between the Encouraged Catalogue and the Priority Catalogue The NDRC announced the Encouraged Catalogue under NDRC Order [2014] No. 15 which was effective on 1 October The Encouraged Catalogue contains the following two parts: Encouraged industries in existing national industrial catalogues, which include: Encouraged industries listed in the Guiding Catalogue of Industrial Structure Adjustment (2011 Version) (Revised) released under NDRC Order [2013] No. 21 ( Order 21 ) (please refer to CTIE for details of this catalogue.) Encouraged industries listed in the Foreign Investment Industrial Guidance Catalog (2011 Revised) released under NDRC/MOFCOM Order [2011] No. 12. The aforementioned catalogue has been replaced by the Foreign Investment Industrial Guidance Catalog (2015 Revised) released under NDRC/MOFCOM Order [2015] No. 22 ( Order 22 ) (please refer to CTIE for details of this new catalogue.) Industries (in the western regions) covered in the 2013 Priority Catalogue If the above catalogues were revised, the revised versions shall apply. Newly added encouraged industries for the 12 provinces, autonomous regions and the municipality directly under the Central Government that are located in the western regions In principle, the Encouraged Catalogue shall be applicable to various enterprises engaging in production and business operations in the western regions. Among these, the Foreign Investment Industrial Guidance Catalog and the Priority Catalogue shall be applicable to FIEs. In summary, the Priority Catalogue is a constituent of the Encouraged Catalogue and is applicable to FIEs in the central and western regions. Tax impact on FIEs in the central and western regions brought about by the amendments to the Priority Catalogue As the Priority Catalogue is a constituent of the Encouraged Catalogue, the amendments to the Priority Catalogue may have an impact on the eligibility of FIEs (in the western regions) for preferential CIT treatments. In addition, whether the entitlement to CD exemption on importation of self-used equipment for foreign-invested projects (in the central and western regions) may be affected by the amendments to the Priority Catalogue. The NDRC is open to receiving public opinions on the draft Priority Catalogue by 14 October Interested investors and enterprises already established or contemplating investing in the central and western regions should look at the proposed encouraged industries of the draft Priority Catalogue and provide their opinions to the NDRC before the due date of the consultation. This would be a good opportunity for taxpayers to get involved in the tax legislation earlier and express their opinions on the draft Priority Catalogue by submitting their comments through the website ( In any case, we will stay alert and keep you posted about any changes. You can click this link to access the full content of the draft Priority Catalogue: You can click this link to access the full content of the 2013 Priority Catalogue: You can click this link to access the full content of Circular 58: You can click this link to access the full content of the Encouraged Catalogue: You can click this link to access the full content of Announcement 50: You can click this link to access the full content of Circular 37: You can click this link to access the full content of Announcement 103: 6

7 You can click this link to access the full content of Order 21: You can click this link to access the full content of Order 22: Notice regarding certain opinions on promoting a healthy development of the venture capital industry (Guofa [2016] No. 53) On 16 September 2016, the State Council released Guofa [2016] No. 53 ( Circular 53 ) which aims to develop venture capital investments into a framework which would coordinate and encourage entrepreneurship, innovation plus venture capital investments, and build a group of valuable Chinese brands with global competitive strengths. Circular 53 lays out several measures regarding the development of diversified investors for venture capital investments, expansion of channels for venture capital, government guidance and supporting policies, and further improvement of laws and regulations relating to venture capital investments, etc. Among these, Circular 53 provides clear definitions for venture capital investments and angel investments. According to Circular 53, venture capital investments refer to equity investments to establish or reestablish private enterprises that are deemed to have high growth potential, except for stock investments or security investments. On the other hand, according to Circular 53, angel investments refer to venture capital investments made by individuals with their own funds (except for employees of the invested company, or their family members/direct relatives). In addition, Circular 53 calls for the establishment of joint-action mechanisms for equities and creditor s rights, development of specialized acquisition funds, as well as further loosening restrictions for foreign investments. It is anticipated that the relevant government authorities shall stipulate and release detailed measures and regulations to respond to Circular 53. Please stay tuned and we will bring you more updates in this regard. You can click this link to access full content of Circular 53: Customs circulars Notice regarding the adjustment of most-favorite-nation (MFN) tariff rates for certain imported information technology (IT) products (Shuiweihui [2016] No. 24) Announcement regarding matters related to the implementation of adjusted MFN tariff rates for certain imported IT products (GAC Announcement [2016] No. 50) On 9 September 2016, the Customs Tariff Commission of the State Council released Shuiweihui [2016] No. 24 ( Circular 24 ) announcing that the Amendment to a Tariff Concession Schedule of China s World Trade Organization Accession Protocol (hereinafter referred to as the Amendment ) has been reviewed by the State Council and further approved at the 22 nd Session of the Standing Committee of the 12 th National People s Congress on 3 September Pursuant to the Amendment, tariffs on IT products listed in its Appendix shall be eliminated gradually (import tariffs on the majority of listed products will be reduced to zero in the following three or five years; while the tariffs on small numbers of listed products will be reduced to zero in the following seven years). Circular 24 announces that the MFN tariff rates for the IT products listed in the Appendix of the Amendment shall be reduced for the first time from 15 September The listed products and their reduced tariff rates are detailed in the Appendix of Circular 24. 7

8 To accurately implement the Amendment, the GAC released GAC Announcement [2016] No. 50 ( Announcement 50 ) on 14 September 2016 adjusting the HS codes and the Standard Declaration Catalogue for certain IT products. In addition, Announcement 50 simplifies the customs clearance process, i.e., recipients of imported goods are not required to submit the declaration form for the usage of certain imported goods subject to the information technology agreement (ITA) 3 rates ( 进口部分适用 ITA 税率的商品用途申报表 ) and Customs will no longer issue the certification for recognition of the usage of certain imported goods subject to the ITA rates ( 进口部分适用 ITA 税率的商品用途认定证明 ). Taxpayers importing IT products should be aware of the products covered in the Amendment, their reduced tariff rates, adjusted HS codes and simplified customs declaration requirements. 3 The ITA was concluded by 29 participants at the Singapore Ministerial Conference in December Since then, the number of participants has grown to 82, representing about 97% of world trade in IT products. The participants are committed to completely eliminating tariffs on IT products covered by the Agreement. At the Nairobi Ministerial Conference in December 2015, over 50 members concluded the expansion of the Agreement, which now covers an additional 201 products valued at over $1.3 trillion per year. You can click this link to access the full content of Circular 24: You can click this link to access the full content of Announcement 50: Other business, customs and tax related circulars recently announced by central government authorities: Notice regarding the extension of VAT exemption for domestic anti-hiv drugs (Caishui [2016] No. 97) Reply to issues on tax-related administrative licensing items (Shuizonghan [2016] No. 477) Notice regarding overall plan for building Beijing into a national science and technology innovation center (Guofa [2016] No. 52) Announcement regarding regulations on filling in the declaration form for import and export goods under the preferential trade agreement (GAC Announcement [2016] No. 51) Announcement regarding documents proving the place of origin of import goods transited via Hong Kong/Macao under the preferential trade agreement (GAC Announcement [2016] No. 52) 8

9 Contact us For more information, please contact your usual EY contact or one of the following of EY s China tax leaders. Office Tax Leaders Martin Ngai (Beijing) martin.ngai@cn.ey.com Fisher Tian (Tianjin) fisher.tian@cn.ey.com Samuel Yan (Dalian/Shenyang) samuel.yan@cn.ey.com Lucy Wang (Qingdao) lucy-c.wang@cn.ey.com Joanne Su (Xi an) joanne.su@cn.ey.com Vickie Tan (Shanghai) vickie.tan@cn.ey.com Raymond Zhu (Wuhan) raymond.zhu@cn.ey.com Audrie Xia (Suzhou) audrie.xia@cn.ey.com Andrew Chen (Nanjing) andrew-jp.chen@cn.ey.com Patricia Xia (Hangzhou) patricia.xia@cn.ey.com Chuan Shi (Chengdu) chuan.shi@cn.ey.com Clement Yuen (Shenzhen) clement.yuen@cn.ey.com Rio Chan (Guangzhou/Changsha) rio.chan@cn.ey.com Jean Li (Xiamen) jean-n.li@cn.ey.com Tracy Ho (Hong Kong) tracy.ho@hk.ey.com Heidi Liu (Taipei) heidi.liu@tw.ey.com Service Line Tax Leaders Andrew Choy (International Tax & Transfer Pricing) andrew.choy@cn.ey.com Paul Wen (People Advisory Services) paul.wen@hk.ey.com Kenneth Leung (Indirect Tax) kenneth.leung@cn.ey.com Becky Lai (Tax Policy) becky.lai@hk.ey.com David Chan (Transaction Tax) david.chan@hk.ey.com Samuel Yan (Global Compliance & Reporting) samuel.yan@cn.ey.com Sector Leaders Henry Chan (Financial Services) henry.chan@cn.ey.com Alan Lan (Energy & Resources) alan.lan@cn.ey.com Martin Ngai (Technology, Media, Telecommunications) martin.ngai@cn.ey.com Vickie Tan (Life Science) vickie.tan@cn.ey.com Gary Chan (Real Estate) gary.chan@cn.ey.com Audrie Xia (Consumer Products) audrie.xia@cn.ey.com Walter Tong (Automotive & Transportation) walter.tong@cn.ey.com Raymond Zhu (Government& Public Sector) raymond.zhu@cn.ey.com Greater China Tax Leader Henry Chan henry.chan@cn.ey.com Author China Tax Center Jane Hui jane.hui@hk.ey.com 9

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