China Issues Preferential Taxation Policies for Energy-Saving Service Sector

The Ministry of Finance and the State Administration of Taxation jointly promulgated the Circular on Issues Concerning the Value-Added Tax, Business Tax and Corporate Income Tax Policies for Promoting the Development of the Energy-Saving Service Sector, which came into effect on January 1, 2011.

1. Value-Added Tax and Business Tax
According to the Circular, the taxable business income earned by qualified energy-saving service companies engaging in energy management contracting projects shall be temporarily exempted from business tax. Further, when an energy-saving service company transfers its taxable goods from qualified energy management contracting projects to energy-consuming enterprises, the value-added tax arising therefrom shall be temporarily exempted.

To qualify for these exemptions, both of the following criteria must be met: (i) the relevant technology of the energy management contracting project implemented by the energy-saving service company shall meet the requirements specified in the General Technical Rules for Energy Performance Contracting (GB/T24915-2010) promulgated by the General Administration of Quality Supervision, Inspection and Quarantine and the Standardization Administration; and (ii) the format and content of the energy-saving benefit sharing contract signed between the two companies shall comply with the Contract Law and the General Technical Rules for Energy Performance Contracting (GB/T24915-2010).

2. Corporate Income Tax
With regard to corporate tax income exemptions, qualified energy-saving service companies engaging in energy management contracting projects that meet the relevant stipulations of the Corporate Income Tax Law are exempt from corporate income tax for the first year to third year of participation, starting from the tax year in which the companies receive the first sum of manufacturing operation income. For the forth to sixth years of participation, corporate income tax will be levied at a rate of half of the 25% the statutory tax rate. The Circular also provides that when calculating the taxable income of the energy consuming company, all actual and reasonable expenses paid as part of the energy management contract can be deducted for the relevant period, and for tax purposes a distinction will no longer be made between service fees and asset purchase prices.　

In addition to the above, the energy-saving service company must also meet a number of other criteria to qualify for these exemptions. For example, said company must possess a registered capital of no less than RMB 1 million. Further, the energy management contracting project implemented by the energy-saving service company must meet the criteria of items one to eight of section four, “Energy Saving Emission Reduction Technology Transformation”, in the Circular on the Catalogue (Trial) for Environmental Protection, Energy and Water Conservation Projects Qualified for Corporate Income Tax Preferential Treatments, which is issued by the Ministry of Finance, State Administration of Taxation, and National Development and Reform Commission (Caishui [2009] No. 166).

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