Provisions on Expenses Deductions Before
Enterprise Income Tax in China
An enterprise needs to pay enterprise income tax in advance on a quarterly basis for its business and need to declare and paid the yearly income tax within five months after the completion of a tax year and carry out "more refund and less paid", that is, the tax settlement and payment. This article summarizes the provisions for pre-tax deduction of each expense.
- Reasonable Wages and Salary Expenses
Wages and salaries refer to all cash forms or non-cash forms of labour remuneration paid by an enterprise to employees who are employed in the enterprise in each tax year, including basic wages, bonuses, allowances, subsidies, year-end salary increases, overtime wages, and other expenses related to the employee’s employment. Such expenses can be fully deducted before taxes.
- Employee Welfare Expenses
The part of the employee welfare expenses incurred by the enterprise that does not exceed 14% of the total wages and salaries shall be allowed to be deducted.
The employee welfare expenses including:
(1)
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Employee medical expenses
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(2)
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Employees?living hardship allowances refer to the regular subsidies and temporary subsidies actually paid to employees with living difficulties. Including living allowances for injuries or disabilities due to work or non-work
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(3)
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Death benefits for employees and their dependent immediate family members
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(4)
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Subsidies for collective welfare, including subsidies for the difference between expenditure and income of collective welfare facilities such as staff bathrooms, barber rooms, laundry rooms, nursing rooms, nurseries, nurseries, etc., as well as childcare allowances for unused nurseries and repair costs paid to employees.
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(5)
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Other welfare benefits mainly refer to welfare expenses in terms of transportation subsidies, family planning subsidies, hospital meals, etc.
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- Expenditure on the Education of Employees
(1)
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General Deduction Ratio
The part of the education expenses incurred by the enterprise that does not exceed 8% of the total wages and salaries shall be allowed to be deducted when calculating the taxable income. The excess part shall be allowed to be carried forward in the following tax year.
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(2)
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The Deduction Ratio of Enterprises in Specific Industries
- The training expenses of employees for integrated circuit design enterprises and qualified software enterprises shall be separately accounted and deducted when calculating taxable income according to the actual amount incurred.
- The identified animation enterprises that independently develop and produce animation products shall be separately accounted and deducted according to the actual amount of taxable income.
- The training expenses incurred by nuclear power generation enterprises for the training of nuclear power plant operators shall be separately accounted and deducted according to the actual amount of taxable income.
- Air training expenses such as pilot training fees, flight training fees, cabin crew training fees, and air security guard training fees actually incurred by aviation enterprises can be deducted as the transportation costs of aviation enterprises.
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- Trade Union Expenses
Trade union funds are a kind of fund that enterprises can calculate expenses according to the total salary according to the enterprise accounting system. Generally, 2% of the total salary is withdrawn, 40% is handed over to the superior trade union, and 60% is credited to the company’s account and used by the company for employee welfare.
The trade union funds allocated by the enterprise, which does not exceed 2% of the total wages and salaries, shall be allowed to be deducted.
- Supplementary Pension Insurance and Medical Insurance Expenses
The basic pension insurance and basic medical insurance paid by enterprises for employees in accordance with the relevant national policies and regulations can be deducted according to the actual amount.
Since January 1, 2008, the supplementary pension insurance premiums and supplementary medical insurance premiums paid by enterprises for all employees shall be deducted when calculating the taxable income for the part not exceeding 5% of the total wages of employees, respectively. The excess part cannot be deducted.
- Business Entertainment Expenses
Business entertainment expenses refer to the various expenses paid by enterprises for receiving entertainment in business activities, mainly including business negotiations, product promotion, external liaison, public relations exchanges, conference reception, guest reception and other expenses.
The business entertainment expenses incurred by the enterprise related to the generation of business activities shall be deducted according to 60% of the amount incurred, but the maximum shall not exceed 5 ?of the sales income of the current year.
- Advertising Expenses and Business Promotion Expenses
Advertising expenses refer to the fees paid by enterprises to advertising operators and publishers through certain media and forms to introduce the goods they are promoting or the services they provide. Business promotion expenses refer to the costs paid by enterprises to carry out business publicity activities in addition to advertising costs. Including the distribution of publicity materials, business publicity materials, exhibition expenditures, gifts printed with corporate logos, souvenirs, public relations design fees, as well as food and accommodation related to product promotion, material costs, labour costs, clothing costs, venue rental fees, etc.
(1)
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General deduction ratio
The proportion of eligible advertising expenses and business promotion expenses incurred by the enterprise, unless otherwise stipulated by the competent financial and taxation departments under the State Council, shall not exceed 15% of the sales (business) income of the current year, and the excess part shall be allowed to carry forward the deduction in the subsequent tax year.
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(2)
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Deduction ratio for special industries
- The part of the advertising expenses and business promotion expenses incurred by enterprises manufacturing or selling cosmetics, pharmaceutical manufacturing, and beverage manufacturing (excluding liquor manufacturing) shall not exceed 30% of the sales income of the current year, and the excess part shall be allowed to carry forward the deduction in the subsequent tax year.
- For affiliated enterprises that have signed an agreement on the apportionment of advertising expenses and business promotion expenses (hereinafter referred to as the apportionment agreement), the advertising expenses and business promotion expenses incurred by one of the parties not exceeding the pre-tax deduction limit of the sales income of the current year may be deducted from the enterprise, and some or all of them may be deducted from the other party in accordance with the apportionment agreement. When calculating the pre-tax deduction limit for enterprise income tax for advertising expenses and business promotion expenses of the enterprise, the other party may exclude the advertising expenses and business promotion expenses that are aggregated to the enterprise in accordance with the above methods.
- Tobacco advertising expenses and business promotion expenses of tobacco enterprises shall not be deducted when calculating taxable income.
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- Handling Fee and Commission Expenses
Handling fee is the corresponding remuneration paid by others to handle relevant matters on behalf of others. Commission refers to the remuneration paid by the enterprise to the intermediary when the sales business occurs, and the intermediary cannot be an employee of the enterprise.
(1)
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General deduction ratio
The handling fee and commission expenses related to production and operation incurred by an enterprise are calculated at 5% of the amount of revenue recognized in the service agreement or contract signed with an intermediary service agency or individual with legal business qualifications (excluding the parties to the transaction and their employees, agents, and representatives, etc.).
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(2)
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Deduction ration for enterprise engaged in real estate development and operation business
The deduction shall be granted if the enterprise entrusts an overseas institution to sell development products, and the portion of the sales expenses (including commissions or handling fees) paid by the overseas institution does not exceed 10% of the entrusted sales revenue.
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(3)
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Deduction ratio for the insurance industry
The part of the insurance enterprise that incurs handling fees and commission expenses related to its business activities, which does not exceed 18% (including the principal amount) of the balance of the total premium income of the current year after deducting the surrender fee, etc., shall be allowed to be deducted when calculating the taxable income. The excess part shall be allowed to carry forward the deduction for subsequent years.
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- Research and Development (R&D) Expenses
(1)
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General deduction ratio
Where the R&D expenses actually incurred by an enterprise in carrying out R&D activities are not included in the profit or loss of the current period, based on the deductions in accordance with the provisions, between January 1, 2018, and December 31, 2023, an additional deduction 75% of the actual amount incurred can be deducted. If intangible assets are formed, they are amortized before tax at 175% of the cost of intangible assets during the above period.
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(2)
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Deduction ratio of manufacturing enterprises
Where the R&D expenses actually incurred by manufacturing enterprises in carrying out research and development activities are not included in the profit or loss of the current period based on the actual deductions in accordance with the regulations. From January 1, 2021, an additional deduction 100% of the actual amount incurred can be deducted. If intangible assets are formed, they will be amortized before tax at 200% of the cost of intangible assets from January 1, 2021.
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- Expenditure on Donations for Public Welfare Purposes
Donation expenditures used by enterprises through public welfare social organizations or people’s governments at or above the county level (including the county level) and their constituent departments and directly subordinate institutions for charitable activities and public welfare undertakings shall be allowed to be deducted in the calculation of taxable income within 12% of the total annual profits; the part exceeding 12% of the total annual profits shall be allowed to carry forward the deduction in the subsequent tax year.
- Enterprise Liability Insurance Expenditure
Enterprises participating in liability insurance such as employer’s liability insurance and public liability insurance shall be allowed to deduct the insurance premiums paid in accordance with the regulations before tax.
- Borrowing Interest Expense
(1)
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Interest expenses to financial enterprises
Reasonable borrowing expenses incurred by enterprises in production and operation activities that do not need to be capitalized shall be deducted.
Where an enterprise borrows money for the acquisition or construction of fixed assets or intangible assets and inventory that has been constructed for more than 12 months to reach a predetermined saleable state, the reasonable borrowing expenses incurred during the purchase or construction of the relevant assets shall be included as capital expenditures in the cost of the relevant assets and deducted in accordance with the provisions of these regulations.
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(2)
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Interest expenses to non-financial institutions
When the following conditions have been met at the same time, the interest expenses on inter-enterprise loan can be deducted:
- The loan must be used for operation and income obtained
- The amount of interest shall not exceed the amount calculated according to the interest rate of the same type of loan of the financial enterprise for the same period. (Tip: When an enterprise first pays the interest on the loan and deducts it before tax, it should provide" Statement for Interest Rate in Same Period of Same Type by Financial Enterprises " to justify their interest expenses.
- If the two enterprises that borrow from each other are related enterprises, the pre-tax deduction of interest expenses incurred between related parties needs to consider the "debt-to-capital ratio", that is, the ratio of debt investment to related parties to equity investment is: the ratio of financial enterprises is 5:1; the proportion of other enterprises other than financial enterprises is 2:1.
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(3)
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Interest expenses to individuals
Interest expenses borrowed by an enterprise from internal employees or other personnel, and their borrowing conditions meet the following conditions, and their interest expenses do not exceed the amount calculated according to the interest rate of similar loans of the financial enterprise for the same period, and the deduction is granted in accordance with Article 8 of the Tax Law and Article 27 of the Implementing Regulations of the Tax Law.
- The loan between the enterprise and the individual is true, legal, and valid, and does not have the purpose of illegal fundraising or other violations of laws and regulations
- The loan contract has been signed between the enterprise and the individual.
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Annex: Comparison table of deduction ratios for expenses
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Expense item
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Deduction Criteria
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Taxable income adjustments
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Wages and salaries
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Full deduction
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No Adjustment
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Employee welfare
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The part that does not exceed 14% of the total salary and salary
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Increase taxable income
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Employee education funds
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General: the part that does not exceed 8% of the total salary and salary shall be deducted in the following years
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Increase taxable income for current period
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Integrated circuit design enterprises and eligible software enterprises separately account for the full deduction
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No Adjustment
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Eligible animation enterprises shall be separately accounted for and deducted in full
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The training cost of power plant operators of Heli Power Generation Enterprises shall be deducted in full separately
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The air service training expenses of aviation enterprises shall be fully deducted
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Trade union funds
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The part that does not exceed 2% of the total salary and salary
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Increase taxable income
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Supplementary pension insurance and supplementary medical insurance
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Separately, within the standard of not more than 5% of the total salary of the employee
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Increase taxable income
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Entertainment fee
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The actual amount of 60% is less than 4?of the sales revenue of the current year
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Increase taxable income
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Advertising costs and business promotion costs
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General: the part not exceeding 15% of the sales revenue of the current year, the excess part is deducted in the following years
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Increase taxable income for current period
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Cosmetics manufacturing or sales, pharmaceutical manufacturing and printing manufacturing enterprises, not more than 30% of the sales revenue of the current year, more than the deduction in subsequent years
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Increase taxable income for current period
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Tobacco companies are not allowed to deduct
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Increase taxable income in full
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Fees and commissions
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General: Within 5% of the amount of revenue recognized by the agreement or contract
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Increase taxable income
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Real estate development enterprise: entrust overseas institutions to develop No more than 10% of the entrusted sales revenue paid to overseas institutions
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Increase taxable income
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Insurance industry: not more than 18% of the balance of the current year’s premium income after deducting surrender payments. The excess part is deducted in subsequent years.
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Increase taxable income for current period
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Annex: Comparison table of deduction ratios for expenses
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Expense item
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Deduction Criteria
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Taxable income adjustments
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R& D expenses
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General:
No intangible assets are formed, plus 75% deduction.
Form intangible assets, amortized at 175% before tax.
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Decrease taxable income
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Manufacturing enterprises:
No intangible assets, plus 100% deduction
the formation of intangible assets, according to 200% pre-tax amortization
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Donations for the benefit of the public
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The part of the total annual profit that is less than 12%. The excess is deducted for three years after the partial carry-forward
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Increase taxable income for current period
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Corporate Liability Insurance
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Full deductions
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No adjustment
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Interest on borrowings
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Full deduction of interest on borrowings from financial enterprises
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No adjustment
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The interest on borrowings from non-financial institutions shall not exceed the amount calculated at the interest rate of the same type of loan of the financial enterprise for the same period
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Increase taxable income
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Loans between affiliated enterprises, debt-to-capital ratio:
Financial enterprises: 5:1
Other enterprises: 2:1
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Increase taxable income
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Interest on borrowings from individuals is deducted in full and eligible
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No adjustment
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