Interim Provisions of the Ministry of Finance Concerning the Reduction and Exemption of Income Tax on Interest Derived from China by Foreign Businesses

CaiShuiZi [1983] No.348 January 7, 1983

In order to contribute to the utilization to the greatest extent possible of foreign funds for China's economic development, the question of preferential treatment with respect to the reduction of or exemption from income tax on interest income obtained from China by foreign companies, enterprises and other economic organizations shall be handled pursuant to these Interim Provisions as follows:

(1) With respect to credit contracts or trade contracts signed between 1983 through 1985 by foreign companies, enterprises and other economic organizations with Chinese companies and enterprises, all interest obtained on loans, funds advanced and deferred payments, during the effective term of the contract, may be subjected to income tax at the reduced rate of 10 per cent.

(2) In addition to the tax exemptions already provided in the Income Tax Law of the People's Republic of China Concerning Foreign Enterprises and the rules for its implementation, the following types of interest income may also temporarily be exempted from income tax:

(a) Interest income on loans made to the state banks of China by foreign banks at the international interbank call rate.

Trust and investment corporations that engage in foreign exchange business with foreigners with the approval of the State Council or units authorized by the State Council may also be treated with reference to the above provision.

(b) Interest income on loans made by foreign banks to the China National Offshore Oil Corporation at rates not exceeding the interbank call rate.

(c) Where Chinese companies, enterprises or institutions purchase technology, equipment and commodities from abroad and the state bank of the other party's country provide seller's credits, the interest passed on by Chinese side on deferred payments to the seller that does not exceed the interest rate on buyer's credits charged by the foreign state bank.

(d) Interest on deposits of foreign banks and individuals in Chinese state banks where the interest rate on such deposits is less than the interest rate on deposits in the country where the depositor bank or individual is located.

(e) Where technology and equipment are provided to Chinese companies and enterprises, the principal and interest on payments of the purchase price made in kind by Chinese side, such as by means of product buy-back or payment in product, or the principal and interest on payments or repayments of the purchase price made by Chinese side through processing of imported materials or assembly.

(3) With respect to equipment and components provided between 1983 through 1985 by foreign leasing companies to Chinese companies and enterprises using the leasing trade method, during the effective term of the relevant signed contract, the rental fee obtained after deducting the equipment price may be subjected to income tax at the reduced rate of 10 per cent.

If the rental fee includes interest, where the loan agreement or contract and receipts or vouchers for interest payments can be provided and are sufficient to prove that the interest rate conforms to Item c of Article (2) of these Provisions, it may be permissible to pay a 10 per cent income tax only on the amount left after deducting the interest component.

Rental fees obtained from product buy-back or payment in product or other forms of payment in kind may be exempted from income tax.

(4) With respect to foreign banks that have been approved to establish a resident representative office within China, if the resident representative office directly signs contracts with and provides loans to Chinese companies and enterprises, it shall be permissible to deduct relevant costs and expenses from the interest obtained therefrom. In order to facilitate computation, 15 per cent of the amount of interest earned may temporarily be deemed to be taxable income, and income tax shall be paid in accordance with the tax rates provided in Articles 3 and 4 of the Income Tax Law Concerning Foreign Enterprises.

(5) In the case of interest obtained from China on deposits, loans, funds advanced and deferred payments and on purchased bonds, in all cases in which it is necessary to grant an exemption from income tax in accordance with these Provisions, Chinese companies and enterprises that receive the deposits, accept the loans and funds advanced, bear responsibility for deferred payments and issue bonds shall submit all relevant agreements contracts and data on interest rates to the local tax authorities for appraisal and determination. No units and individuals that have not gone through the procedures for appraisal and determination may of their own accord reduce or exempt the income tax.

(6) These Provisions shall enter into force as of January 1, 1983. With respect to contracts that were signed and approved by the competent departments and became effective before these Provisions came into effect, where the taxation of interest was already provided for at that time, the original provisions shall be implemented and not be changed during the effective term of the contract (not including extensions of the contract term).

Promulgated by The Ministry of Finance on 1983-1-7