Laws of the People's Republic of China

Circular of the Ministry of Finance and the State Administration of Taxation on Adjusting the Policies on the Deduction of Wage Expenditures Prior to the Levy of Enterprise Income Taxes

Cai Shui [2006] No. 126

The departments (bureaus) of public finance, the state taxation administrations and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and cities under separate state planning, the Bureau of Public Finance of Sinkiang Production and Construction Corps:

Upon the approval of the State Council, we hereby give our notice as follows on the relevant issues concerning the adjustment of the policies on deduction of wage expenditures prior to the levy of enterprise income taxes:

I.

As of July 1, 2006, the capital limitation for pre-tax deduction of wage expenditures of enterprises shall be adjusted into 1,600 Yuan per month for each person. Among the amount of wages actually paid by an enterprise, the part within the above-mentioned limitation for deduction shall be permitted to be deducted actually prior to the levy of enterprise income taxes; while the part beyond the above-mentioned limitation for deduction shall not be deducted.

The wages paid by enterprises before June 30, 2006 shall still be subject to the deduction rate prior to the adjustment of policies, and the part beyond the prescribed deduction rate shall not be carried forward to the following 6 months of this year for deduction.

II.

The provisions on raising the limitation of deduction of taxable wages by a margin not higher than 20% for the people's governments of all provinces, autonomous regions and municipalities directly under the Central Government shall be stopped from implementation.

III.

The state-owned enterprises and state-owned share-controlling enterprises, which previously implemented the method of connecting wages with performance under the state provisions pursuant to the principles that the increase margin of the total amount of wages shall be under that of the economic benefits of the enterprise and that the increase margin of the average wage of employees shall be under that of the labor productivity (hereinafter referred to as the Two Under Principles), may continue implementing the said method. Among the total amount of wages actually paid by an enterprise, the part within the ratified quota may be deducted actually, while the excessive part shall not be deducted.

IV.

The taxable wages of state-owned or state-owned share-controlling financial and insurance enterprises, and those of restructured or reformed financial and insurance enterprises, may be ratified by the competent department of public finance and that of taxation of the State Council in light of the Two Under Principles in comparison with the method of connecting wages with performance.

V.

The labor remuneration of various forms and other relevant expenditures paid by an enterprise to its employees, including bonuses, allowances, subsidies and other wage expenditures, shall all be counted into the enterprise's total amount of wages.

VI.

Any locality may not raise the limitation of pre-tax deduction of enterprises' wage expenditures without permission, or enlarge the scope of enterprises implementing the method of connecting wages with performance. The provisions, which have been promulgated in any locality and do not conform to the above-mentioned policies, shall all be stopped from implementation.

VII.

The taxation authorities at each level shall carefully carry out the above-mentioned policies, estimate the influence resulted from the adjustment of the policies on taxable wages on the reduction of enterprise income tax revenues, and hereby timely adjust the amount of pre-payable enterprise income tax of each enterprise for July to December of this year.

VIII.

The present Circular shall come into force as of July 1, 2006. The "Circular on Adjusting the Limitation for Deduction of Taxable Wages" of the Ministry of Finance and the State Administration of Taxation (No. 43 [1996]), and Article 1 of the "Circular on the Relevant Issues Concerning the Adjustment of the Limitation for the Deduction of Taxable Wages" thereof (No. 258 [1999]) shall be abolished simultaneously.

The Ministry of Finance

The State Administration of Taxation

September 1, 2006