CHINA Law and Practice Contributed by: James Hu, Yingjie Kang, Huihui Li, Sherry Xu, Bivio Yu and Lisa Zhao, Fangda Partners
reduced depreciation period or other eligible acceler - ated depreciation methods. VAT Credits Refunds Under qualified conditions, enterprises may apply to the tax authorities for refund of VAT credits that could not be recovered through sales. 9.4 Tax on Sale or Other Dispositions of FDI Non-resident enterprises are subject to EIT at 10% on the capital gains derived from the transfer of equity interests in resident enterprises. Special treatments may be specified by DTAs for such capital gains. Under most DTAs, China would not levy income tax on the capital gains derived by non-res - ident enterprises if they hold less than 25% equity interest in the resident enterprises transferred for the 12 months prior to the transfer; under certain DTAs, China would not levy income tax on the capital gains derived by non-resident enterprises. 9.5 Anti-Evasion Regimes Under the EIT regime, there are specific tax rules and regulations pertaining, respectively, to transfer pricing for related-party transactions, cost-sharing arrange - ments, advanced pricing arrangements, thin capitali - sation and general anti-avoidance. Transfer Pricing Business transactions between related parties must be made on an arm’s length basis; otherwise, the tax authority may apply special tax adjustments to the transactions by reasonable methods. Thin Capitalisation If an enterprise’s debt-to-equity ratio for related par - ties exceeds 2:1 (5:1 for financial institutions), the excessive interest expenditure will not be allowed for deduction when calculating EIT, unless the enterprise could prepare transfer pricing documentation to justify
Specifically, arrangements adopted by non-resident enterprises for the indirect transfer of taxable assets in China, including equity interests of resident enterpris - es, immovable properties situated in China, if deemed to be lacking in sufficient commercial substance, will be subject to EIT at 10%, pursuant to the State Administration of Taxation Public Notice Regarding Certain Enterprise Income Tax Matters on Indirect Transfer of Properties by Non Resident Enterprises (Bulletin [2015] No 7). 10. Employment and Labour 10.1 Employment and Labour Framework In China, the employment relationship between an employer and an employee is mainly governed by: • national laws including the PRC Labour Law, PRC Employment Contract Law, PRC Social Insur - ance Law, PRC Law on Mediation and Arbitration of Labour Disputes, and certain provisions on the implementation of these national laws; • interpretations by the PRC Supreme Court on the Application of Law in the Trial of Labour Dispute Cases (I) and (II); • national regulations and policies issued by relevant governmental authorities, particularly the Ministry of Human Resources and Social Security; and • local regulations and policies issued by local gov - ernmental authorities. Under the PRC Trade Union Law, a basic-level trade union committee should be established in any enter - prise with 25 or more members but, in practice, not all enterprises establish these trade union committees. Even in enterprises with trade union committees, col - lective bargaining is not common in practice in China. Foreign investors should also pay attention to the immigration regulations in China, including work visa, work permit and residence permit requirements at national and local levels. Foreign investors who wish to initially establish representative offices instead of companies should note that PRC laws restrict repre - sentative offices of foreign enterprises from directly hiring local employees and require them to hire local employees through labour dispatch service providers.
the arm’s length nature of the expense. General Anti-Avoidance Rules (GAAR)
The tax authorities shall have the discretion to make tax adjustments on arrangements adopted by enter - prises that do not have reasonable commercial pur - poses but are mainly for the purpose of tax avoidance.
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