1. TAXPAYER
1.1 Foreign investment enterprise (FIE)
It has three forms, namely, equity joint ventures (EJV), contractual joint ventures
(CJE) and wholly foreign owned enterprises (WFOE). An FIE is subject to the
Foreign Enterprise Income Tax Law (FElT) on its worldwide income.
1.2 Foreign enterprise (FE)
It refers to non PRC-registered enterprises and has two forms, with or without establishments or places of operation in PRC.
For any FE with establishments or places of operation in PRC, it is subject to the FElT on its income attributable to its establishment or place of operation in PRC.
Any FE without establishments or places of operation in PRC is subject to the FElT only on its PRC-source income.
Establishments or places refer to locations of management, administration and business operation, factories and the exploitation of natural resources, contractual construction, installation, assembly and exploration, places for labor service, and the activities, in general, last for more than 6 months in a year. Effectively, both forms of FE are subject to the FElT only on its PRC-sourced income.
(¡®i A consultancy company established outside the PRC provides consulting services to a domestic company in the PRC, the consultancy fee is RMB 1,500,000. Contract stated: consultancy fee RMB 450,000 is for consulting services provided inside the PRC; consultancy fee RMB 1,050,000 is for consulting services provided outside the PRC, calculate the income tax for the enterprise if the deemed income rate is 10% and the tax rate is 33% (assuming that the foreign consulting company has constituted a permanent establishment in PRC by virtue of its consultancy services rendered in the
PRC).
According to the related laws and regulations, foreign enterprise provides consultancy service inside the PRC should be subject to its PRC-sourced income and the portion of income from China should not be lower than 60% of the total income.
Therefore the deemed income: 1,500,000 x 60% = RMB 900,000 and the tax payable =900,000 * 10% * 33%=29,700
1.3 Withholding agent
Any FE which has no establishment in China or has establishment but whose China- source income is not connected with the establishment and derives profit, interest, rental, royalties or other income (e.g. income from the transfer of real property) - the so-called ¡°passive income¡± from sources in China, shall pay an income tax of 10% on such income.
Withholding income tax shall be exempted or reduced on the following income:
Dividend derived by a foreign investor from a FIE;
Income from interest on loans from international financial institute to the Chinese government and other approved organisations;
Income from interest on loans made by foreign banks to the Chinese State banks and other approved organizations.
Withholding tax reduction is available for FE from countries that have entered into the double taxation avoidance treaties with China.

2. BASIS OF ASSESSMENT
Taxable income = Total income - deductible items
The total income includes income from production and operation, income from transference of property, income from interest, leasing, royalties, dividends and other income that derived from inside and outside China. Avoiding double taxation, tax paid overseas can be used as a tax credit.
The total income includes the similar items as stated in the chapter of the Corporate Income Tax and the following are some differences:
Donation receipts in the form of non-monetary assets can be booked as assets with reasonable amount and is subject to income tax at the time of receipt. If the amount is comparatively large, upon approval by the tax authorities of an application filed by the taxpayer, the amount can be divided evenly and recorded as taxable income in no more than 5 years.
Donation receipts in the form of monetary assets should be recorded as taxable income in a lump sum at the time of receipt.
Exchange gains as a result of the reform of foreign exchange system effective from January 1, 1994 can be deferred to be taxable when the enterprises liquidate.
According to the civil laws, in the case that any creditor does not exercise his right within 2 years, the liability can be waived. Therefore, any liability that is not demanded for payment by creditors in 2 years shall be taxable.
For the non-operating net income obtained in the pre-operating period, the amount should be taxable in that period and the year can be not counted as tax profitable year for the purpose of the tax holiday.
The gain on disposal of the investment in shares is taxable.

3. TAX RATES
3.1 Any FIE or FE with establishments or places of operation in PRC is subject to the national FElT at 30% plus a local rate of 3% on its taxable income. (a lower rate is available in the Special Economic Zones and other special open areas for investment).
3.2 Any FE without establishment, or has an establishment but the China-source income is not connected with the establishment, is subject to FElT at 10% withholding tax. The most common forms of China-source (passive) income are interest, rent, royalty, etc.