Interest Expenses Paid to Individuals Deductable from CIT in China

The State Administration of Taxation’s recently issued Circular Guoshuihan [2009] NO. 777 clarifies how interest expenses can be deducted from corporate income tax (CIT) when related to loans borrowed by companies from individuals.

According to the circular, issued December 31, 2009, interest paid on loans from related party individuals in including shareholders (natural persons) can be deducted from CIT. In addition, interest expenses paid to non-related individuals (natural persons), including employees is deductible, provided that the loan from the natural person is authentic and not associated with any illegal financing or other activities that violate relevant laws or regulations, and a loan contract has been signed between the company and the natural person.

This clarification is important to small and medium sized companies that sometimes need to receive extra funding and do not have the assets to support applying for loans from a bank or financial institution and so must turn to individuals. Not being able to deduct interest expenses paid to individuals could create a barrier for funding and so the circular

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