China Clarifies CIT Issues on Income from Government Bonds

A recent announcement by the State Administration of Taxation clarified several corporate income tax (CIT) issues on the income enterprises receive through investments in government bonds. The document explained the CIT treatment towards the income from both state bond yields and transfers.

The “Announcement on CIT Treatment to Treasury Bonds Investment” (Announcement [2011] No.36), issued on June 22, announced the following issues:

Tax treatment towards Treasury bond interest income

The time to confirm Treasury bond interest income

• Under the provisions of Article 18, The CIT Law Implementation Rules, enterprises investing in Treasury bonds shall confirm the realization of interest income on the payable date, which is agreed by the enterprises and the State Council Financial Bureau (hereinafter referred to as Issuer) since the issuance of the Treasury bond
• Enterprises that transfer Treasury bonds shall confirm the realization of interest income upon confirming the revenue transfer

Treasury bond interest calculation
Those enterprises which transfer Treasury bonds before their expiration, or who purchase or invest in Treasury bonds from a non-Issuer, or who have accumulated unpaid bond interest income during the holding period shall calculate bond interest according to the following formula:

• Treasury bond interest income = The amount of bonds × (applicable annual interest rate÷365) × the number of days on hand

In the formula above, the bond amount shall be determined by the nominal value or the issued price. The applicable annual interest rate shall be decided according to the Treasury bond’s annual interest rate or the annualized rate of return. If an enterprise purchases one kind of Treasury bond at different times, the number of days on hand shall be calculated according to the average number of days on hand.

Tax exemption of Treasury bond interest income
Under the provisions of Article 26 of the CIT Law, Treasury bond income obtained by an enterprise can be exempted from CIT payment. Detailed provisions are specified below:

• Provided that the enterprise’s Treasury bonds are purchased directly from the Issuer and reach the expiration date, the enterprise bond income shall be fully exempted from CIT
• Provided that an enterprise transfers its Treasury bonds before their expiration date or purchases them from a non-issuer, the bond interest calculated based on the formula above shall be exempted from CIT payment

Tax treatment towards Treasury bond transfer

The time to confirm the income from Treasury bond transfer

• Realization of transfer income shall be confirmed on the effective date of the transferring contract or the transfer date of the Treasury bonds
• When an enterprise invests in Treasury bonds and the bonds reach their expiration date, it shall confirm the realization of Treasury bond transfer income on the interest payable date agreed since the issuance of the Treasury bonds

Calculation of profit / loss on Treasury bond transfer
Profit / loss on enterprises’ Treasury bonds transfer = Enterprises’ income from transferring Treasury bonds or cashing in on expired Treasury bonds – Cost of treasury bonds purchase – Treasury bond interest income – relevant tax payments made during the transaction.

Taxation on Treasury bond transfer profit/loss
Under the provisions of Article 16, CIT Law Implementation Rules, when an enterprise transfers its Treasury bonds, the bonds shall be considered as a property transfer, therefore the enterprise Treasury bond profit/loss shall be calculated as taxable income.

The cost of Treasury bonds

• The cost of Treasury bonds which are purchased in cash shall consist of the purchase price and the relevant paid tax fee
• The cost of Treasury bonds which are purchased by means other than cash shall consist of the bond’s fair value and the relevant paid tax fee

Calculation of the cost of Treasury bonds
When an enterprise purchases the same type of bonds at different times, the calculation method of the bonds cost during transfer shall be chosen among the methods of First in First out, Specific Identification or The Weighted Arithmetic Average. No change can be made once the calculation method is chosen.

The Announcement came into force on January 1, 2011.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. For advice, please email tax@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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