The PRC Enterprise Income Tax Law was passed by the PRC National People's Congress on March 16 2007 and will enter into effect on January 1 2008.
Under the new law, the general enterprise income tax rate of 25% will apply both to foreign-invested enterprises and to domestic enterprises. The same rate will apply to income attributable to establishments of foreign companies in the PRC. A lower tax rate of 20% will be available to "small and less profitable" enterprises.
A withholding tax of 20% will apply to dividends, royalties, rentals and capital gains sourced in the PRC. The law opens the door for exemptions and reductions in the withholding tax rate. The consensus seems to be that dividends from foreign-invested companies in China will continue to enjoy an exemption, but that remains unclear.
The only clearly defined preferential treatment is a 15% tax rate for technologically advanced enterprises in encouraged industries. However, investors await further clarification on the criteria that will be applied. Income from agricultural and infrastructure projects, as well as from environmentally friendly projects, also will be eligible for as yet unspecified preferential treatment.
Foreign investment enterprises will no longer enjoy a general two-year tax exemption, three-year 50% reduction, or any reinvestment tax rebates.
A five-year transition period is available to enterprises enjoying a preferential income tax rate and those enterprises established before the new law. Tax holidays will continue and/or begin after the law comes into effect and will remain valid during the five-year grandfather period, after which they will lapse, even if unused.