China to End Preferential Tax Rates for Foreign Companies
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On May 30, 2005, it was announced that, effective for tax years after
2007, the Chinese government will, as part of its current tax reform considerations,
repeal preferential corporate tax rates (an approximate 15 percent tax rate)
available to foreign businesses doing business in China. Taxpayers eligible
for the preferential rates before the new laws take effect will have a five-year
transition period to slowly adjust to the higher rates. The preferential
rates were originally enacted during the 1980s to promote foreign investment
details have not yet been released, a new flat tax of
approximately 25 percent, that would be applied evenly across
the board, has been openly but informally discussed by taxation
It is believed that the income tax rate for domestic Chinese companies
averages approximately 33 percent. Although specific details have not yet
been released, a new flat tax of approximately 25 percent, that would be
applied evenly across the board, has been openly but informally discussed
by taxation officials. This announcement comes on the heels of China’s entry
into the World Trade Organization (“WTO”) in 2001 and is believed to be
a part of China’s revamping of its tax code.
Many of our clients currently take advantage of the preferential rates
in China, either directly with their own operations or indirectly as customers
of companies/suppliers that are eligible for the preferential rate. In either
case, an increase in the tax rate will either mean less after tax profit
or higher costs from suppliers, as suppliers pass on the added tax costs
to avoid deep reductions in profit margins.
With respect to clients with direct operations in China, business model
adjustments and intercompany transfer pricing planning tools that we commonly
use in international tax planning projects may significantly reduce, or
eliminate, the impact of any tax rate increase in China.
With respect to clients that may be indirectly impacted by way of increased
costs from suppliers, clients may want to consider options such as alternative
suppliers (in Malaysia, Singapore, Taiwan, etc.), advanced negotiations
regarding price increase caps, hedging, establishing their own manufacturing/supply
operations in other similar but lower tax jurisdictions (i.e., Malaysia
and Singapore (extensive tax holiday programs)), and other business price
protection strategies they are familiar with. Clients can seek assistance
with these and other alternative strategies from Greenberg Traurig’s Tax,
Corporate and Securities, Global Trade, and Financial Institutions Practice
Groups, to name just a few GT practice groups with direct experience in
This Alert was written by
Frederic J. Adam in the Silicon Valley office.
Please contact Mr.Adam at 650.289.7880 or your Greenberg Traurig liaison
if you have any questions regarding the subject matter of this Alert.
© 2005 Greenberg Traurig
For more information, please review our Tax Practice description, or
feel free to contact one of our attorneys.
This GT ALERT is issued for informational purposes only and is not intended
to be construed or used as general legal advice. Greenberg Traurig attorneys provide
practical, result-oriented strategies and solutions tailored to meet our clients’
individual legal needs.