In order to support the development of the entities, the government may provide specific grants with the entities such as the grants for R&D projects, high-tech products, talents attraction, etc.. For these grants, some entities consider that since the money is from the government, no tax shall be levied. Is it true? In this article, we will discuss the tax treatment on government grants by analyzing the tax regulations.
Firstly, it is true that grant from the government is non-tax levy item for corporate income tax (“CIT”). According to PRC CIT law, the following grants from government are not included in income for CIT payment,
1) Funds appropriated by the Finance Department of government
2) Fees and government funds collected according to the laws and regulations and managed as capital of Finance Department of government
3) Other non-tax levy income stipulated by the state council
Item 2 above refers to the income collected by the entities on behalf of the government. Item 3 above refers to the fund received by the entity and the Finance and Tax Department under State Council has specified the utilization and the funds have been approved by the State Council.
Then, can we say that as long as the fund is from the Finance Department of government, no tax shall be paid? No explicit further explanation is noted in the CIT law. In order to make clarification for implementation, tax authority issued a tax document (Caishui (2011) No.70) in 2011 to supplement the conditions to the grants which can be non-tax levy.
According to the tax document (Caishui (2011) No.70), the grants, which are from the Finance or other department of county or above level government and shall be included in income, can be non-tax levy income for CIT, if satisfying all below conditions:
1) The entity can provide with the government document stipulating the specific utilization purpose for the fund appropriated.
2) The finance or other department of government which appropriates the fund has stipulated fund management measures or requirements for the funds.
3) The entity separately books the collection and payments for the funds.
In short, to judge whether the grants can be non-tax levy income, the entity shall check whether they have government documents stipulating the utilization of the funds, management measures and requirements and separate booking of collection and payment. Without those documents, the grants shall be included in income to levy tax.
Even if the entity has sufficient documents for no-tax levy, the entity actually still levies tax. Since according to CIT law of PRC, for non-tax levy income, the related expense incurred shall not be deducted before CIT and shall be added back. Therefore, in calculating CIT, if the grant received is excluded from income, the related expense shall also be excluded, and if grant is not excluded, neither does the related expense. In this regard, no matter how the grant is treated, no-tax levy income or not, the resulted CIT of the entity will not be impacted. The tax favor for grant is actually the delay of tax payment when the grant is used for purchase of fixed assets which shall be depreciated after being put in use.
In addition, for the grants, the no- tax levy treatment has a valid period of 5 years. If the grant is still not used up within 5 years (60 months) after receiving and the remaining balance has not yet been returned to the government, the remaining balance shall be included in taxable income in the 6th year for tax payment.
In sum, if the conditions are satisfied, the grants can be excluded from income for tax, but at the same time, the expense generated shall be added back.
If you need further assistance on the details of tax regulations or further explanations, please contact us.
Remarks:Please note that the article only represents the opinion of the writer. Regarding the implementation of the tax treatment, the consultation with the local in-charge tax authority is required.