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The present Measures are hereby formulated in accordance with the "Interim Regulation of the People's Republic of China on Enterprise Income Tax" in order to strengthen the administration of enterprise income tax levying, as well as regulate the verification of deductions due to recovery of losses before levying of enterprise income tax. I. APPLICATION SCOPE OF RECOVERY OF LOSSES BEFORE TAX LEVYING In accordance with Article 11 of the "Interim Regulation of the People's Republic of China on Enterprise Income Tax", the annual losses occurred to a taxpayer who carries out independent accounting, and files income tax returns, accounting statements and other documents to the taxation organ in accordance with the provisions, may be recovered with the income in the next tax year. If the income in the next tax year is insufficient for recovery, the said losses may be recovered year by year, provided that the period of continuing recovery shall not exceed five years. II. RECOVERY OF LOSSES OF CONSOLIDATED OR COMBINED TAX PAYMENT MEMBER ENTERPRISES (ENTITIES) Since the losses occurred in the very year to a member enterprise (entity), which was approved by the State Administration of Taxation to implement consolidated or combined payment of enterprise income taxes by the industry or by group company, have already been offset by the amount of income of other member enterprises (entities) at the time of consolidated or combined tax payment, or have been included into the losses of the parent company, a member enterprise (entity) in loss shall not recover its losses with its income obtained in the subsequent years. The losses occurred to a member enterprise (entity) prior to the consolidation or combination of tax years may still be recovered with its income in the subsequent years in accordance with the taxation regulations, and shall neither be included into the amount of losses of its parent (general) company, nor be used to offset the amount of income of other member enterprises (entities). III. RECOVERY OF LOSSES DUE TO DIVISION, MERGER AND SHARE RIGHT RESTRUCTURING (1) The un-recovered operating losses of an enterprise prior to division shall be recovered year by year by all the enterprises after the division within the remaining period in light of the amount to be respectively borne by the enterprises after the division stipulated in the division agreement, and the duration of recovery prescribed in taxation regulations. (2) The un-recovered operating losses due to merger of enterprises shall be handled respectively in light of different circumstances. a. Where the merged enterprise continues to have the status as an independent taxpayer after the merger, its un-recovered operating losses prior to the merger shall be recovered year by year with its income in the subsequent years within the period prescribed in taxation regulations, and shall not be recovered with the income of the merging enterprise. b. Where the merged enterprise does not have the status as an independent taxpayer after the merger, its un-recovered operating losses prior to the merger may be recovered year by year with the income of the merging enterprise in the subsequent years within the period prescribed in taxation regulations. (3) The operating losses of an enterprise under share right restructuring, which have not been recovered prior to the share right transfer, may be recovered year by year by the enterprise after the share right restructuring within the remaining period in light of the duration for recovery of losses prescribed in taxation regulations. IV. CONFIRMATION OF ANNUAL LOSSES The amount of losses that may be recovered by a taxpayer before tax levying refers to the amount verified and adjusted by the competent taxation organ in accordance with the taxation regulations. A taxpayer running into annual losses must, within 45 days after the end of the year, submit its annual tax returns and final accounting statements to the local competent taxation organ. The competent taxation organ shall, in accordance with the taxation regulations and the relevant provisions, carefully verify the taxpayer's annual tax returns and the relevant documents, and shall, when necessary, read the taxpayer's account books, vouchers and other relevant documents, or be on the spot to verify them, so as to guarantee the authenticity and accuracy of the amount of annual losses recovered by the taxpayer before tax levying. V. VERIFICATION OF RECOVERY OF LOSSES BEFORE TAX LEVYING A taxpayer who recovers the losses of previous years with the annually achieved income within the period prescribed in taxation regulations for recovery of losses must, when filing enterprise income tax returns within 45 days after the end of the year, attach the "Application Form for the Enterprise to Recover Losses before Tax Levying" (the format of the table is to be respectively determined by the taxation organs at all regions). The competent taxation organ shall, in accordance with the taxation regulations and other relevant provisions, as well as the relevant accounts of the taxpayer on recovery of losses, carefully verify the amount of losses. The losses may only be recovered when they have been verified as inerrable. VI. SETTING UP ACCOUNTS FOR RECOVERY OF LOSSES The competent taxation organs shall set up accounts for taxpayers' recovery of losses. The contents of the accounts shall include information such as the amount of losses of the previous years, the amount of recovered losses, the amount of losses to be recovered, verification by the competent taxation organ of the taxpayers' recovery of losses, and so on. VII. OTHER The taxation organs of all provinces, autonomous regions, municipalities directly under the Central Government, and cities directly under state planning may, in accordance with the present Measures, formulate specific implementation proposals and submit them to the State Administration of Taxation for archival purposes. |
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