Corporate Income Tax: Carrying Forward Deduction & Credit in China

An Annual Corporate Income Tax filing is one of the most important activities in corporate finance. As when certain costs exceed the tax deduction limit for the year, the balance of deduction or credit can be carried forward to the following few years, we shall hereby list the main situations which this occurs according to the PRC regulations:

1. Advertising and Business Promotion Fees:

Qualified advertising and business publicity expenses incurred by the enterprise can be deducted up to 15% of the sales (operating) income for the year. Any excess amount can be carried forward for deduction in the following few years.

2. Staff Education Expenses:

The portion of employee education expenses not exceeding 8% of total wages and salaries can be deducted from the enterprise's taxable income. Any balance of the expenses can be carried forward and deducted in future tax years.

3. Public Welfare Donation Expenditure:

Enterprises' donation expenditures for charitable activities and public welfare undertakings can be deducted, provided they are less than 12% of the total annual profit. The excess balance can be carried forward and deducted within three years, after considering donations from the previous year.

4. Special Equipment – Investment Tax Credit:

Enterprises investing in special equipment for environmental protection, energy conservation, and production safety can receive tax credits up to a certain percentage. If not fully utilized in the current year, the credit can be carried forward and credited in the next five tax years.

5. Losses Incurred During the Tax Year:

Losses incurred by the enterprise in a tax year can be carried forward for a maximum of five years to be offset against future income. Qualified high-tech and technology-based small and medium-sized enterprises can carry forward unrecovered losses for up to 10 years.

6. Venture Capital Deduction – Taxable Income:

Venture capital enterprises investing in encouraged ventures can deduct 70% of the investment amount from taxable income after holding equity for at least two years. Any remaining deduction can be carried forward and deducted in the next tax year.

7. Insurance Company Fees and Commission Payments:

The part of the insurance company's handling fees and commission expenses that do not exceed 18% of the balance of total premium income after certain deductions can be deducted from the tax payable. The excess part is allowed to be carried forward for deduction in the next year.

8. Income Tax Amount Paid Overseas:

Income tax paid abroad on specific income obtained by an enterprise can be credited from the current tax payable. The credit limit is the tax payable calculated in accordance with the law, and any unused credit can be carried forward for the next five years. The creditable foreign income tax amount includes taxable income of resident enterprises derived from outside of China and non-resident enterprises' income connected with institutions and places within China.

At PHC Advisory we are constantly updated on the relevant news on business matters in the PRC. Feel free to follow our channel and contact us at info@phcadvisory.com if you have any inquiries or if you need accounting and tax compliance services.

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