According to Article 37 of the Regulations for the Implementation of the Enterprise Income Tax Law of the People's Republic of China, reasonable borrowing expenses incurred by enterprises in production and business activities that do not require capitalization are allowed to be deducted.
So what kind of interest expenses can be deducted before corporate income tax? Let's find out!
1. Basic provisions on pre-tax deduction of interest expenses
There are mainly the following types of interest expenses incurred by enterprises in production and business activities:
What is the interest rate of the same type of loan for financial enterprises in the same period?
"Interest rate of similar loans in the same period" refers to the interest rate at which a financial enterprise provides a loan under the same conditions such as loan term, loan amount, loan guarantee and corporate creditworthiness. It can be the average interest rate of the same kind announced by a financial enterprise for the same period, or the actual loan interest rate provided by a financial enterprise to certain enterprises.
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If an enterprise and a related party can prove that the relevant transaction activities comply with the arm's length principle, or if the actual tax burden of the enterprise is not higher than that of the domestic related party, the interest expenses actually paid to the domestic related party shall be allowed to be deducted when calculating the taxable income.
2. There are also several special circumstances of interest expense pre-tax deduction policy
01. How to deduct the interest incurred by corporate investors if the investment is not in place?
According to the Reply of the State Administration of Taxation on the Issue of Pre-deduction of Enterprise Income Tax for Interest Expenses Incurred by Enterprise Investors Whose Investment is Not in Place (Guo Shui Han [2009] No. 312), if the enterprise investor fails to pay up its paid-in capital within the prescribed time limit, the interest incurred by the enterprise on its external borrowings is equivalent to the interest accrued on the difference between the investor's paid-in capital and the amount of capital payable within the specified time limit, which is not a reasonable expenditure of the enterprise and shall be borne by the enterprise investor, and shall not be deducted when calculating the taxable income of the enterprise.
02. How to deduct the interest incurred in the hybrid investment business before tax?
According to the Announcement of the State Administration of Taxation on Issues Concerning the Treatment of Enterprise Income Tax on Mixed Investment Business of Enterprises (Announcement No. 41 [2013] of the State Administration of Taxation), if an enterprise has a qualified mixed investment business, the investment enterprise shall recognize the realization of income and include it in the taxable income of the current period on the date of interest payable by the invested enterprise. The invested enterprise shall recognize the interest expense on the date of interest payable and make pre-tax deductions in accordance with the provisions of the Tax Law and Article 1 of the Announcement of the State Administration of Taxation on Several Issues Concerning Enterprise Income Tax (No. 34 [2011]).
03. Can the interest of perpetual bonds be deducted before tax?
According to the Announcement on Issues Concerning the Enterprise Income Tax Policy of Perpetual Bonds (Announcement No. 64 [2019] of the Ministry of Finance and the State Administration of Taxation), if the enterprise income tax policy on dividends and bonuses is applicable to the perpetual bonds issued by an enterprise, and both the issuer and the investor are resident enterprises, the interest income of the perpetual bonds can be exempted from the enterprise income tax provisions on dividends, bonuses and other equity investment income between resident enterprises as stipulated in the Enterprise Income Tax Law, and the interest expense of the perpetual bonds paid by the issuer shall not be deducted before enterprise income tax. If the enterprise income tax policy is applied according to the bond interest, the interest expense of the perpetual bond paid by the issuer is allowed to be deducted before the enterprise income tax, and the interest income of the perpetual bond obtained by the investor shall be taxed in accordance with the law.
3. Application examples
In 2023, enterprise A will borrow 10 million yuan from enterprise B for a period of one year, with a borrowing interest rate of 6%, assuming that the one-year loan interest rate is 4.5%, and the "A104000 Period Expense Schedule" should be filled in when declaring: 1000*6%=600,000 yuan.
In addition, the interest expense of enterprise A on borrowings from non-financial enterprises shall not exceed the part calculated according to the interest rate of similar loans of financial enterprises in the same period. That is, 1000 * 4.5% = 450,000 yuan is allowed to be deducted, and the excess part is 1000 * (6%-4.5%) = 150,000 yuan needs to be taxed. As follows:
Previous Review
Notice on the 2023 annual enterprise income tax final settlement
Enterprise Income Tax Final Settlement Topic 2丨One-time deduction policy for fixed assets
Topic 3 of Enterprise Income Tax Final Settlement丨Depreciation and Deduction Policy for Fixed Assets
Special Topic 4 of Enterprise Income Tax Final Settlement | Preferential income tax policies for small and low-profit enterprises
Enterprise income tax final settlement topic 5丨Common expenses pre-tax deduction ratio
Enterprise Income Tax Final Settlement Topic 6丨Pre-tax Deduction Voucher (1)
Enterprise Income Tax Final Settlement Topic 6丨Pre-tax Deduction Voucher (2)
Enterprise Income Tax Final Settlement Topic 6丨Pre-tax Deduction Voucher (3)
Enterprise Income Tax Final Settlement Topic 6丨Pre-tax Deduction Voucher (4)
Enterprise Income Tax Final Settlement Topic 7丨Provisions on Income Recognition
Enterprise income tax final settlement topic 8丨Wages and salaries