On 9 June the Ministry of Finance and the State Administration of Taxation issued the Questions Regarding Individual Income Tax on Corporate Promotional Gifts Notice (Cai Shui [2011] No. 50). The new notice clarifies the individual income tax position in cases where enterprises and units (including companies, units of government institutions, social organizations, sole proprietorships, partnerships and individual businesses) make gifts to individuals of cash, coupons, goods or services in the course of their marketing activities.
Where tax is not to be collected
- Where enterprises sell goods or products and offer services to individuals at a discount;
- Where, at the same time as selling goods and products and offering services to individuals, enterprises offer bundled gifts. An example of this is where telecommunications companies give free telephone calls or waive network access fees to individuals buying mobile telephones, or give free mobile telephones to those who prepay telephone charges; and
- Where enterprises give points-based rewards to individuals whose cumulative consumption has reached a certain amount.
Where tax is to be collected
In any of the following circumstances, individuals who receive gifts should pay individual income tax in accordance with the law, with the enterprise that presents the gifts withholding and remitting the tax amount:
- Where, in the course of business promotion and advertising, enterprises present gifts at random to members of the public, the gifts are to be treated as “other income” and subject to individual income tax levied at a rate of 20% on the total amount;
- Where enterprises present gifts to outsiders at annual general meetings, seminars, celebrations and other activities, the gifts are to be treated as “other income” and subject to individual income tax levied at a rate of 20% on the total amount; and
- Where enterprises give customers whose cumulative consumption has reached a certain given amount the opportunity to enter draws for bonus prizes, the awards won are to be treated for tax purposes as “occasional income” and will be subject to individual income tax levied at a rate of 20% on the total amount.
Determination of taxable income
- If the gifts presented by an enterprise are its own products or services, the individual income tax due is to be determined on the basis of the market price of the products or services; and
- if the gifts presented by an enterprise are products or services it has purchased from elsewhere, the individual income tax due is to be determined on the basis of the actual price paid for the products or services.
Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.
