China Clarifies Favorable CIT Treatment to Infrastructure and “Green” Projects

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 China’s “Corporate Income Tax (CIT) Law (PRC Chairman Decree No. 63)” and its implementation details (State Council Decree No. 512) – both effective on January 1, 2008 – have granted six-year-long tax incentives to projects on key public infrastructure development and environmental protection. Based on those laws, a recent government document has clarified the implementation of such incentives on eligible projects that have already been recognized before 2008.

According to CIT laws, for an enterprise that engages in eligible public infrastructure, environmental protection, energy saving and water conservation projects (“eligible projects”), the corporate income derived from such projects is exempt from CIT during the first three years (the first year shall be the year when the enterprise’s first revenue arises from the production and operation of the eligible projects), and is subject to a 50 percent CIT reduction during the fourth to sixth year.

The recently released “Circular on Preferential CIT Policy Concerning Projects on Public Infrastructure, Environmental Protection, Energy Saving and Water Conservation (caishui [2012] No. 10)” clarifies that, if the enterprise’s eligible projects were approved before December 31, 2007, the six-year period mentioned in the CIT laws shall still be counted from the first year when the enterprise’s first revenue arose from those projects. The enterprise can enjoy the aforementioned CIT incentives starting on January 1, 2008, during the remaining years till the end of the six-year period.

Circular No. 10 also specifies that the “eligible projects” refer to those included in the “Catalog of Public Infrastructure Projects Eligible for Preferential CIT Treatment” and the “Catalog of Environmental Protection, Energy Saving and Water Conservation Projects Eligible for Preferential CIT Treatment.”

If the enterprise is eligible for enjoying the six-year CIT incentives stipulated in the CIT laws, but is also qualified for receiving the favorable CIT treatment listed in Article One of the “Circular on the Implementation of Preferential CIT Policies during the Transition Period (guofa [2007] No. 39),” the enterprise shall only follow one policy and may choose the most favorable one.

Article One of Circular No. 39 stipulates that:

  •  An enterprise that enjoyed a lower CIT rate of 15 percent before the implementation of the new CIT Law shall be subject to a CIT rate of 18 percent in 2008, 20 percent in 2009, 22 percent in 2010, 24 percent in 2011 and 25 percent in 2012
  • An enterprise that enjoyed a lower CIT rate of 24 percent before the implementation of the new CIT Law shall be subject to a CIT rate of 25 percent starting in 2008
  • An enterprise that enjoyed the five-year-long CIT incentives (two years of CIT exemption + three years of 50-percent CIT reduction) and the ten-year-long CIT incentives (five years of CIT exemption + five years of 50-percent CIT reduction) may continue enjoying the existing incentives during the remaining years after the implementation of the new CIT Law; if the enterprise previously failed to enjoy such CIT incentives due to a lack of profit, it shall count 2008 as the first year when those incentives started