(March 11, 1985)



ISSUE-DATE: 03/11/1985

IMPLEMENT-DATE: 03/11/1985


In accordance with the Income Tax Rules Concerning State Enterprises (draft) and other related provisions, the following interim provisions for the collection of income tax on state corporations contracting foreign projects (hereinafter referred to as corporations) are hereby formulated:

[Article 1] Defined as payers of income tax are corporations established with the approval by the State Council (including their branches, subsidiaries of an independent economic entity nature), whose income generated from operations and other income within and outside China shall be calculated separately, based on which state enterprise income tax shall be levied.

[Article 2] Should a foreign project be contracted jointly by a corporation, its branches and subsidiaries or other parties and the corporation in question be responsible for settling total accounts, income tax shall be levied on the corporation, other parties being exempt from income tax. In case a corporation undertakes a foreign project which is subcontracted by its branches and subsidiaries, and they settle their accounts individually, i.e. they divide their subcontracting income (managerial expenses or expenses related to project) among themselves, income tax shall be levied on the corporation and other subcontracting parties respectively depending on their taxable income.

[Article 3] The taxable income yielded by tax payers from their operations outside China shall be the remains of its gross income in a tax year deducting costs, expenses, losses and taxes, which are allowed to be included in the cost (including various taxes paid abroad).

The spending scope and standard of the cost expenses and the accounting verification method shall be in conformity with the Rules for the Cost Administration of the State Enterprises and provisions governing systems of financial management and accounting of state foreign project contracting enterprises formulated or approved by the Ministry of Finance.

[Article 4] The taxable income generated by tax payers from their operations and other income in China shall be levied pursuant to applicable domestic rates of state enterprise income tax.

The taxable income earned by tax payers from their operations and other income outside China shall be temporarily levied by a 20% reduction on the normal rates of the state enterprise income tax.

[Article 5] Starting from the next financial year after the corporation is established with approval by the State Council, income earned outside China shall be exempt from income tax within five years; afterwards, income tax shall be collected in accordance with rates required.

During the period in which the corporation is exempt from income tax, the tax-exemption treatment shall be extended to its branches and subsidiaries, provided they are exclusively engaged in contracting foreign projects. Income tax shall be imposed on branches and subsidiaries once the tax-exemption period for the corporation ends.

Should a corporation be unable to pay income tax pursuant to the rates required after the five year period of tax-exemption, it may be considered that a reduced income tax is levied on the corporation after the examination and consent from the local tax authority and the final approval by the Ministry of Finance.

[Article 6] As far as deferred payable income after the final settlement of accounts of the project contracted is concerned, tax payers shall submit their agreement on defer payment and other attesting documents to the local tax authority, which can postpone tax collection. Upon termination of the deferred period, tax payment in arrears shall be collected.

As to the amount of tax to be levied on defer payment, it shall be worked out by calculating the ratio between the amount of the defer payment contract and profit of the project (the proportion of profit to the amount of contract) as well as applicable rates.

Tax payers who incur heavy losses because of delayed payment or encounter other unexpected circumstances may be given a tax-reduction or tax-exemption treatment depending on circumstances with the examination and consent from the local tax authority and upon final approval by the Ministry of Finance.

[Article 7] Income tax shall be collected in such a way that tax payers advance their tax payment in the middle of a year and settle the final payment at a year end. As a general practice payers shall forward their payment to the state or local financial organs depending on their superior subordinate relationship, i.e. corporations vs. branches and subsidiaries.

Tax payers shall submit to the local tax authority for tax return within two months after the first half of the tax year, which shall be accompanied with the accounting report. During this period of time, should any tax payers find it difficult to pay the actual taxable amount, they can pay in advance one half of the planned annual profit in the first month of the latter half of the year, and shall submit their annual statements of final accounts to the local tax authority within five months after the end of the tax year. The final settlement shall be made within six months after the end of the tax year, with a refund for any overpayment or a supplemental payment for any deficiency.

[Article 8] Under no circumstances shall any tax payers pay their principals of borrowed money and dividends of shareholders from their taxable income.

[Article 9] Income tax to be levied on tax payers shall be administered by tax authorities in accordance with Income Tax Rules Concerning State Enterprises (draft) and the rules for the implementation thereof.

[Article 10] For income tax to be levied on local state foreign project contracting corporations established with the approval by the local government, the collection method shall be worked out by the people’s governments of provinces, autonomous regions and municipalities directly under the State Council in the light of these Interim Provisions.