Q: How is public welfare donation treated for tax deduction purposes? A: According to the provisions of Corporate Income Tax Law, Implementation Regulations of the Corporate Income Tax Law and Notice of the Ministry of Finances and State Administration of Taxation on Relevant Policies on Pre-tax Carryover Withholding of Corporate Income Tax of Public Welfare Donation (2018, notice No. 15), an enterprise may enjoy certain preferential tax treatment if it donates to charity or public welfare causes through public welfare social organizations, the people’s government above county level (including) and its departments and subordinate agencies.
According to the provisions, charitable donation expenditure incurred by an enterprise which does not exceed 12% of its total annual profit may be deductible; the part exceeding 12% of its annual gross profit is permitted to be carried over to the next three years for deduction at the time of calculating the taxable income. Meanwhile, when calculating and deducting the expenditures for public welfare donations, enterprises may deduct the donation expenditure carried over from the previous years, and also deduct the donation expenditure incurred in the current year.
The provisions above will be specifically understood as follows: (1) instead of simply equalizing the deductions over the next three years, the part exceeding the deduction limit of the current year is carried over within the pre-tax deduction limit of public welfare donation, which should be calculated in the next three years; and (2) the donation expenditure is carried over for deduction in the next three consecutive years, if it is not carried over completely within three years, the remaining donation amount must not be deducted before tax.
Q: If an enterprise donates equity to a public welfare social organization, how is the deduction calculated in corporate income tax? A: According to the provision of Notice of the Ministry of Finances and State Administration of Taxation on the Policy Issues on Corporate Income Tax of Public Equity Donation (2016, notice No. 45), an equity donation is similar to an equity assignment. The amount of income from an equity assignment will be determined by its historical cost at the time of receiving the equity donated by the enterprise. The term “equity” refers to other companies’ stocks or listed shares held by the donee enterprise.
The enterprise may enjoy tax preferential treatment when the equity donation is completed. The amount of the donation should be determined based on the historical cost of the equity which could be deducted before paying income tax, according to relevant provisions of the Corporate Income Tax Law. After accepting the equity donation, the public welfare social organization must issue a donation invoice according to the equity historical cost provided by the donee enterprise.
As a new donation model, charity organizations may obtain benefits continually from the equity dividend. The new model is beneficial for the charity organizations’ assets to promote value preservation. Notice No. 45 reduces and exempts the income tax to be paid by the donor previously for stock appreciation, which has an active promotional role in improving the regime of charity tax preference and encouraging entrepreneurs to donate equity.
When interpreting the provisions of notice No. 45, it would be prudent to be aware of the following: (1) the equity donation is deemed an assignment of equity; (2) the amount of income from the equity assignment is determined at the historical cost not at the fair value or market sale price; (3) the amount of a donation is the historical cost of the equity, equal to the amount on the invoice issued by the donor party; (4) compliance with provisions regarding pre-tax deduction of corporate income tax is still required; and (5) equity donations must be domestic donations.
Q: Are there other issues to be aware of for enterprises to enjoy the preferential tax treatment for these types of donations? A: Enterprises should be mindful of whether the donation method complies with regulations and whether a compliant donation invoice is obtained. The donation must be conducted through public welfare social organizations that meet the conditions or the people’s government above county level and its departments. Enterprises cannot enjoy a preferential tax treatment if it donates directly to a beneficiary who is natural person or donates to organizations that are unqualified.
In terms of obtaining tax preferences, qualified organizations will be interpreted as public welfare organizations with tax exemption qualifications. The Notice of the Ministry of Finances and State Administration of Tax on Relevant Issues of Management of Affirmation of Tax Exemption Qualification for Non-profit Organizations (2018, notice No. 13) specifically stipulates the management of affirmation of tax exemption qualification for non-profit organizations, covers the departments approved to be established, the nature of activities engaged in, the purpose of income obtained, the reservation of property rights by the investor, the salary of staff in the organization and cost accounting, etc.
Generally, enterprises are required to note whether donee organizations can issue a compliant special invoice and receipt for donation. The donee must be able to issue a special receipt for public welfare donation that is uniformly printed and prepared by the provincial department of finances, and only by satisfying this condition can the donor enterprise enjoy the preference of pre-tax deduction as stipulated by the tax law.
Q: If an enterprise initiates a charity trust, can the donation amount be deducted? A: According to the current provisions of the law, an enterprise may enjoy preferential tax treatment if it can establish a charity trust as a settlor directly and the trustee is a public welfare organization with a tax exemption qualification. It is key to determine whether the public welfare organization can issue a compliance donation invoice to the enterprise in order to enjoy a deduction.
If the enterprise acts as the settlor and a trust company acts as the sole trustee, even if the purpose of the trust is still to be charitable, it will not be possible for the enterprise to enjoy a tax preference because Chinese charity law does not provide clear regulations in this situation.
Zhao Miao is a partner and Lin Na is a senior counsel at AnJie Law Firm