On December 25, 2009 the Ministry of Finance and the State Administration of Taxation have issued a notice clarifying issues concerning the foreign tax credit (FTC) mechanism.
According to the Notice, foreign source income, credible tax, and credit limitation with respect to each country or region must be separately calculated. In calculating taxable income, the expenses must be allocated between China-origin income and foreign-origin income (by country). The losses of a branch in a foreign country may not offset any income originated from China or income from other foreign countries. Such losses can be used to offset income from the same country in the current year and subsequent five years.
The Notice also regulates clearly on when a resident enterprise claims indirect FTC in accordance with the relevant provisions in the Enterprises Income Tax Law, the foreign- source investment income on which the claim is based refers to the dividend income such as share interest and bonuses derived from the shares it holds directly or indirectly in a foreign subsidiary of the designated tier, with the total shares held at 20% or more. For dividend income such as share interest and bonuses, FTC claims can be made on a tier by tier basis by enterprises down to the lowest tier subsidiaries.
The notice states that for any amount of income received by resident enterprises from countries or regions, which are signatory to tax treaties with the Chinese government, those are entitled to tax exemption or deduction treatment according to the tax law of the country or region concerned. The amount exempted or deducted is also eligible for tax exemption or deduction in China. It can be treated as offshore income tax actually paid by the enterprise in applying for tax credits