Income tax policy on donations by individuals
Following the implementing regulations under China’s personal income tax law, individuals who made donations through public welfare social groups can enjoy tax exemptions by deducting the donation expenses before their taxable income.
Moreover, Announcement 99  determines the total expense of public welfare donations according to specific provisions outlined below.
- The actual amount of donated goods in terms of monetary assets.
- Donated real estate or equity equals the original property value.
- Other non-monetary assets depending on the market price.
How to deduct public welfare donations?
Individuals who made charitable donations can enjoy tax deductions on their classified, comprehensive, and operating income. Furthermore, donors can also decide the type of income they wish to make deductions.
The following conditions apply to individuals who choose to deduct from their comprehensive income:
- If the individual has two or more sources of income, he or she can only choose one type of income to make the deductions and it cannot change once decided. Furthermore, individual donors can apply the deductions when withholding taxes or during the annual tax settlement.
- Individuals with income derived from labor service, manuscript, or royalties can only make deductions during the annual tax settlement.
- Individuals earning non-taxable one-time annual bonuses, equity incentives, or other income can choose to deduct from either classified or operating income.
Classified income refers to property lease income, property transfer income, dividends, dividends interests, and accidental income. Thus, the individual can only adjust deductions to either these types of classified income.
On the other hand, individuals who want to deduct from their operating income can refer to the following provisions:
- Self-employed individuals can deduct donated expenses from their operating income.
- Individuals proprietors and partners along with their investors can deduct the combined donation expenditures from their operating income.
- These individuals can apply the deductions when withholding taxes or during the annual tax settlement.
As for non-resident taxpayers, they can also deduct the expenses of donated goods from their taxable income. This applies for as long as the amount does not exceed 30 percent of their taxable income.
How to enjoy the deduction claim?
In order to claim deductions, individual or enterprise donors must present proof of donation to the tax authorities. Therefore, recipients of donations should issue a Certificate of Donation for Public Benefits since it is necessary when claiming a tax deduction. On the other hand, donors must also obtain a copy of the General Payment Voucher of Non-tax Revenue with the stamp of the recipient organization as supporting evidence of the donations made.
CIT policy on donations by enterprises
According to the provisions stated in Announcement 15 , companies and enterprises who made donations through non-profit or public welfare organizations can make tax deductions on their corporate income taxes. This applies if the donation expense does not exceed 12 percent of the enterprise’s annual total profit. Furthermore, the policy also noted that deductions may be carried forward for a maximum of three years. This means that an enterprise can still carry deductions in the next three years given that it has not deducted the donation expense in the current year.
Following the rules, enterprises should first deduct the carried forward deductions from the previous years and then, deduct the donation expenditure made in the current year.
Case scenario: What are the rules on business-related donations?
Companies making “donations” to another company may deal with different tax implications. For example, Company A overseas sends out products or equipment to Company B in China and gives them for free. In the end, Company B gives away these “donated” products or equipment to its customers.
How to treat taxes?
1.) Company A “donates” products or equipment to Company B.
- The rules of accounting regard the products or equipment as accounts payable that do not need to be paid. Thus, they are treated as non-operating income.
- The donation of products and equipment to the company has no relevant treatment for VAT and the annual corporate income tax is calculated uniformly.
2.) Company B gives away the received “donations” to its customers.
- Accounting does not meet the criteria for confirming revenue in accordance with the accounting standards. Thus, the cost of donated goods is a non-operating expense.
- VAT is recognized as sales revenue based on the fair value of donated goods, and output tax is recognized.
- Corporate income tax is settled in two steps at the time of the final settlement. One, “deemed sales” treatment recognizes operating income and operating costs separately. Two, the tax deduction is capped at 12 percent of the company’s total annual profit.