The Administrative Measures for the Pre-income-tax Deduction of Property Losses of Enterprises, which, upon deliberation, have been
adopted at the fourth executive meeting of the State Administration of Taxation on June 3, 2005, are hereby promulgated and shall
go into effect as of September 1, 2005.
Xie Xuren, Director-general of the State Administration of Taxation
August 9, 2005
Administrative Measures for the Pre-income-tax Deduction of Property Losses of Enterprises
Chapter I General Provisions
Article 1
With a view to further regulating and improving the administration of the pre-income-tax deduction of property losses of enterprises
and promoting the finer administration of enterprise income taxes, these Measures are formulated in accordance with the Law of the
People’s Republic of China on the Administration of Tax Collection and the detailed rules for the implementation thereof, the Interim
Regulation of the People’s Republic of China on Enterprise Income Taxes and the detailed rules for the implementation thereof.
Article 2
The term “property” as mentioned in these Measures refers to the assets that are owned or controlled by enterprises and used for business
operations and management activities and are related to the taxable incomes, including cash, bank deposits, accounts receivable and
prepayments (including notes receivable), inventories, investments (including entrustment loans and authorized financial management),
fixed assets, intangible assets (excluding goodwill) and other assets.
Article 3
The various property losses of an enterprise can be classified, according to the nature of properties concerned, into the loss of
monetary capital, loss from bad debts, loss of inventories, loss from investment transfer or liquidation, loss of fixed assets, loss
from construction in process and construction materials thereof, loss of intangible assets and loss of other assets; or be classified,
according to the declaration procedures for deduction, into the property loss deducted upon declaration by enterprises themselves
or the property loss deducted upon examination and approval; or be classified, according to the cause of loss, into the normal loss
(including normal transfer, discarding as useless or liquidation), abnormal loss (including the loss resulting from the such force
majeure as wars and natural disasters, loss resulting from damages or theft due to poor management or loss resulting from policies,
etc.), appraisal loss resulting from reorganization and permanent and substantial damages.
Article 4
The various property losses of an enterprise shall be deducted in the year when the losses occur, and may not be deducted in advance
or afterwards. If an enterprise fails to declare its property losses on schedule due to reasons other than calculation errors or
other objective reasons, such losses may not be deducted after expiry of the time limit. If the examination and approval by the competent
taxation authority is required under these Measures, the declaration shall be timely made in accordance with the prescribed time
and procedures. In case the property loss is not deducted on schedule due to any reason attributable to the taxation organ, the tax
returns of the year when the property loss occurs shall be adjusted upon approval of the competent taxation organ, and the taxable
incomes shall be recalculated. In case the taxable incomes after adjustment are less than that prior to adjustment, the tax overpayment
in the year when the property loss occurs shall be refunded or can offset the tax arrears or the taxes payable of the following period
according to the relevant provisions, provided that the current tax year for the property loss will not change.
Article 5
Where the property loss of an enterprise declared for deduction has been recovered or compensated, the value recovered or compensated
shall be incorporated into the taxable incomes in the year when the value is recovered or actually compensated. Where the accounts
receivable can not be recovered due to the creditor’s reasons, including the accounts receivable that remain unpaid for over three
years, if they have been confirmed as loss upon the application of the creditor for pre-income-tax deduction according to these Measures
and has been deducted , they shall be incorporated into the taxable incomes of the current period and pay corresponding enterprise
income taxes.
Chapter II Examination and Approval of Pre-income-tax Deduction of Property Losses
Article 6
The property loss resulting from the sale, transfer or realization of assets in the business operation and management activities of
an enterprise, the normal loss of various inventories or the property loss resulting from the normal liquidation of fixed assets
after they have reached or exceeded their service life shall be declared for deduction in the current period when the above-mentioned
losses actually occur.
Article 7
Upon the examination and approval by the competent taxation authority, the property losses of an enterprise resulting from any of
the following causes can be deducted when the enterprise declares the enterprise income taxes:
(1)
Loss of the cash, bank deposits, inventories, short-term investments or fixed assets due to force majeure, such as natural disaster
or war, or from poor management;
(2)
Loss from doubtful debts of accounts receivable or prepayments;
(3)
Loss from bad debts of a financial enterprise;
(4)
Property loss confirmed due to permanent or substantial damage to inventories, fixed assets, intangible assets or long-term investments;
(5)
Investment loss resulting from the dissolution or liquidation of the invested party;
(6)
Loss resulting from the appraisal of various assets that can be deductible;
(7)
Property loss resulting from the relocation or expropriation as planned by the government; or
(8)
Loss of from direct loans other than the credit operations between enterprises that are permitted by the state.
Article 8
The examination and approval of pre-income-tax deduction of property losses of an enterprise is conducted to examine whether or not
the declaration materials provided by taxpayers according to the provisions conform to the statutory conditions. Where it is necessary
for the taxation authority in charge of examination and approval to verify the contents of declaration materials, the taxation authority
in charge of examination and approval shall designate two or more functionaries to carry out the verification. If the workload of
on-the-spot inspection is heavy or time-consuming in view of the large amount of property loss or insufficiency of extrinsic legal
evidence, it may entrust the taxation authority at the county (district) level where the enterprise is located to organize the verification.
Taxation authorities may check the authenticity of whether pre-income-tax deduction of property loss has been approved.
Article 9
As a general rule, the competent taxation authority at the level of county (district) where the enterprise is located is responsible
for the pre-income-tax deduction of property loss of an enterprise. The taxation authorities of provinces, autonomous regions, municipalities
directly under the Central Government or cities under separate planning (hereinafter referred to as provincial taxation authorities)
may, on the basis of the amount of property loss, divide the power of examination and approval. The property loss resulting from
the relocation or expropriation as planned by the government shall be subject to the examination and approval of the taxation authority
at the next higher level of the taxation authority of the place where the said government is located.
Article 10
The pre-income-tax deduction of property losses of an enterprise may not be passed on to deferent levels for approval. The enterprise
may file an application with the competent taxation authority at the county (district) level where the enterprise is located or may
directly file an application with the competent taxation authority in charge of examination and approval as prescribed by the provincial
taxation authority.
Article 11
The acceptance, examination and approval of applications for pre-income-tax deduction of property losses of enterprises shall be carried
out by the taxation authorities at all levels in light of the relevant provisions in the Circular of the State Administration of
Taxation on Several Issues Concerning the Implementation of Taxation Administrative Licenses (Guo Shui Fa [2004] No. 73), with the
exception of hearings and public announcements.
Article 12
Where a taxation authority at the county (district) level is responsible for the examination and approval of the pre-income-tax deduction
of property losses, it shall, within 20 working days as of the date of acceptance of the application, make an examination and approval
decision; where a taxation authority at the level of a city divided into districts is responsible for the examination and approval
of the pre-income-tax deduction of property losses, it shall, within 30 working days as of the date of acceptance of the application,
make an examination and approval decision; where a taxation authority at the provincial level is responsible for the examination
and approval of the pre-income-tax deduction of property loss, it shall, within 60 working days as of the date of acceptance of the
application, make an examination and approval decision. If the above-mentioned examination and approval decision cannot be made within
the prescribed time limit because the situation is complicated and needs to be verified, the time limit may be extended for another
ten days upon approval of the person-in-charge of the taxation authority at the same level, and the taxpayer shall be notified of
the reasons for such extension.
Article 13
the various property losses of an enterprise that are subject to examination and approval shall be reported, once and for all, to
the taxation authority for examination and approval within 15 days after the end of a tax year. If an enterprise needs to collect
evidence on the spot in the case of natural disasters or permanent or substantial damage, it shall file an application for examination
and approval during the evidence preservation period, or may file an application for examination and approval after the end of the
tax year. However, it must present the appraisal materials issued by intermediary institutions or technical appraisal departments
of the state or those authorized by the state.
Article 14
The pre-income-tax deduction of property losses of an enterprise shall be governed by the rule that the department in charge of examination
and approval shall be held responsible. The taxation authorities at all levels shall, pursuant to the requirements of these Measures,
incorporate the examination and approval of property loss into the system of post responsibility assessment, standardize the procedures,
specify the responsibilities and establish a sound supervisory and regulatory system and a responsibility investigation system.
Chapter III Evidence for the Determination of Property Losses
Article 15
When an enterprise applies for the deduction of various property losses, it shall provide legal evidences showing that the property
loss it reports has actually been incurred, which shall include: external evidence with legal effects, economic appraisal certificates
as issued by qualified intermediary agencies, and internal evidence of the enterprise on certain matters.
Article 16
The term “external evidence with legal effects” refers to the written documents with legal effects related to the property losses
of an enterprise and issued by the judicial organs, public security organs, administrative organs or professional technical appraisal
departments, etc., mainly including:
(1)
Judgments and rulings of the judicial organs;
(2)
Certification and official replies of the public security organs on filing or conclusion of cases;
(3)
Certification of write-off, revocation and suspension of business license issued by the administrative departments of industry and
commerce;
(4)
Public announcements of bankruptcy liquidation and documents of debt discharge of the enterprise;
(5)
Official documents and documents on express prohibition issued by the government departments;
(6)
Appraisal reports given by the professional technical appraisal departments of the state and those authorized by the state;
(7)
Documents on the investigation of insured losses and the calculation sheet of claims settlement, etc., issued by the insurance companies
for insured assets; and
(8)
Other evidence complying with the statutory conditions.
Article 17
The term “economic appraisal certificates issued by intermediary agencies” refers to those specific economic appraisal certificates
or written appraisal opinion with respect to the given economic matters of an enterprise issued by registered tax firms or other
professional appraisal institutions that have statutory qualifications, according to the principles of independence, objectivity
and justice, on the basis of full investigation and study, demonstration and calculation, and upon professional conclusion and objective
judgment.
Article 18
An enterprise with a sound accounting system and a perfect internal control system can take the internal evidence on certain matters
as the evidence for determining the property loss. The term of “internal evidence of the enterprise on certain matters” refers to
the internal certificates or declarations on assuming liabilities made by the enterprise in respect of the damages to, or discarding
of, or inventory loss of various assets, mainly including:
(1)
The relevant accounting materials and original documents;
(2)
Asset inventory forms;
(3)
Business contracts relating to the economic acts concerned;
(4)
Appraisal documents or materials of the internal technical appraisal department of an enterprise (as for property losses in relatively
large amounts and with significant impacts, industry experts shall be retained to participate in the technical appraisal and demonstration);
(5)
Internal examination and approval documents and explanations on the relevant conditions of the enterprise;
(6)
Explanations on the determination of liabilities of the liable person and the corresponding compensation with respect to the losses
resulting from poor business operation and management; and
(7)
Declarations of legal representative, person-in-charge and finance chief of an enterprise on assuming legal tax liabilities for the
authenticity of certain matters.
Chapter IV Determination of Monetary Asset Losses
Article 19
With respect to the cash shortage sorted out by an enterprise, the balance of the amount of the shortage less the amount of the compensation
made by the person liable shall be determined as loss. The following evidences shall be provided for the determination of cash loss:
(1)
Cash inventory forms confirmed by the cash keeper (including the records back to the base date);
(2)
Explanations of the cash keeper on the shortage and the relevant verification documents;
(3)
Explanations on the determination of liabilities and the corresponding compensations if the shortage is incurred from poor management;
and
(4)
Relevant judicial case materials if a criminal offence is involved.
Article 20
When applying for pre-income-tax deduction of loss from bad debts occurred to the accounts receivable or prepayment, an enterprise
shall meet one of the following conditions:
(1)
The debtor is declared bankrupt, dissolved (including being ordered to close down by the government), deprived of industrial and commercial
business license, deceased or missing, and its residual property or legacy is insufficient to discharge its or his debts;
(2)
The debts remain unpaid for over three years after the due date and the debtor can show strong evidence of lack of the ability to
discharge the debts;
(3)
The bad debts have resulted from debt restructuring; or
(4)
The accounts receivable really can not be recovered due to force majeure, such as natural disasters, wars or international political
events, and so on.
Article 21
Where a debtor has already been liquidated under any of the circumstances as described in Article 20 of the present Measures, the
irrecoverable part of debts after deducting the debts that have actually been discharged in property liquidation shall be determined
as the loss of the creditor.
As for the part that remain unliquidated, the intermediary institution shall issue an economic appraisal certificate upon its professional
conclusion and objective judgment, and the part that really cannot be recovered shall be determined as the loss of the creditor.
In the case of the accounts receivable from a debtor who has already been missing or dead, if , upon the certification of the missing
or dead status of the debtor issued by the public security organ, his/her legacy is legally judged as insufficient to discharge the
debts or it is impossible to find the debtor to recover the debts, the intermediary institution shall issue an economic appraisal
certificate upon professional conclusion and objective judgment, and the part that really cannot be recovered shall be determined
as the loss of the creditor.
If the accounts receivable can not be recovered from the debtor due to force majeure, such as natural disasters, wars or international
political events, the enterprise shall make a special explanation, and upon the relevant economic appraisal certificate issued by
the intermediary institution on the basis of professional conclusion and objective judgment, or after obtaining the relevant certificates
issued by the embassy (consulate) of China stationed in the foreign country, the part that really cannot be recovered shall be determined
as the loss of the enterprise .
As for the accounts receivable that can not be recovered by the due date, if there is any judgment or ruling of the court against
the enterprise, or if the court makes the rule of terminating (discontinue) the execution because, though the enterprise wins the
case, yet the debtor is judged legally insolvent, such accounts receivable shall be determined as the loss of the enterprise, on
the basis of the legal documents of judgment, ruling or termination (discontinuance) of execution of the court.
Among the accounts receivable that can not be recovered by the due date, as for those each of which is of small value and is not adequate
to make up the cost for debt recovery, the enterprise shall make a special statement, and upon the relevant economic appraisal certificate
issued by the intermediary institution issues on the basis of professional conclusion and objective judgment, the part that really
cannot be recovered shall be determined as the loss of the enterprise.
As for the accounts receivable which have not been recovered for over 3 years after the due date, if the enterprise has the records
of legal negotiation and urgency for payment, and it has been confirmed that the debtor is insolvent, and has made losses for 3 consecutive
years or has suspended its business operations for 3 consecutive years, and it can also be confirmed that there is no business transactions
between the enterprise and that debtor within the last 3 years, such accounts receivable may be determined as the loss of the enterprise
upon the relevant economic appraisal certificate issued by the intermediary institution on the basis of professional conclusion and
objective judgment.
As for the accounts receivable that have not been recovered for over 3 years after the due date, if the debtor is overseas or in Hong
Kong, Macao or Taiwan Region and the sums can not be recovered after making urges for payment according to law, such accounts receivable
shall be determined as the loss of the enterprise after the relevant certificate issued by the overseas intermediary institution
or those issued by the embassy (consulate) of China stationed in the foreign country is obtained.
Article 22
The following evidence shall be provided in the application for pre-income-tax deduction of loss from bad debts incurred to the accounts
receivable or prepayment of an enterprise if they are under any of the afore-mentioned circumstances:
(1)
Public announcements made by the court on the bankruptcy and the documents of debt discharge in the bankruptcy liquidation;
(2)
Certification of write-off or revocation of business license issued by the administrative department for industry and commerce;
(3)
Documents of relevant administrative decisions of the government on withdrawal or ordering to close down;
(4)
Certifications of the missing or dead status issued by the public security organ or other relevant department;
(5)
Absolute evidence showing that the debts have been outstanding for more than three years or the debtor lacks the ability to discharge
the debts;
(6)
The debt restructuring agreement of the creditor, the judgment of the court, or the document on approving the conversion of the debts
of a state-owned enterprise into shares; or
(7)
The judgment of the court or the certificate issued by the local taxation authority where there is any current account with an associated
party.
Chapter V Determination of Non-monetary Asset Losses
Article 23
The inventory loss of an enterprise refers to those net losses resulting from inventory shortage, deterioration, elimination, damages,
discarding as useless and theft of the relevant commodities, finished products, semi-finished products, products in process, various
materials, fuels, packing, and low-value consumption goods, etc.
Article 24
As for the inventory shortage, the balance of their value less the amount compensated by the liable person shall be determined as
loss on the basis of the following evidence:
(1)
Inventory forms;
(2)
Economic appraisal certificates issued by an intermediary institution;
(3)
Explanations of the inventory keeper for the inventory shortage;
(4)
The basis for determining the value of short inventories (including the relevant warehousing formalities, price of identical or similar
inventories as indicated on the purchase invoices, or other basis for determination); and
(5)
Explanations on the determination of relevant liabilities within the enterprise and the compensation made by the person liable, and
the internal ratification documents.
Article 25
As for the inventory discarded as useless or damaged, the balance of its book value less the salvage value, the insurance indemnity
and the compensation made by the person liable shall be determined as loss on the basis of the following evidence:
(1)
As for the inventory each of which or each batch of which is of relatively low value, the relevant technical division of the enterprise
shall issue the technical appraisal certificate;
(2)
As for the inventory each or each batch of which is of relatively high value, the enterprise shall obtain the technical appraisal
certificate issued by the relevant technical appraisal department of the state or by the intermediary institution with the qualification
for technical appraisal;
(3)
The explanation of the insurance company on the settlement of claims if any insurance claim is involved, ;
(4)
Explanations on the discarding and derogation of the inventory goods and the examination and approval documents within the enterprise;
(5)
Explanations on the salvage value; and
(6)
Explanations on the determination of the relevant liabilities within the enterprise and the compensation made by the person liable,
and the internal ratification documents.
Article 26
As for the inventory goods that have been stolen, the balance of the book value thereof less the insurance indemnity and the compensation
made by the person liable shall be determined as loss on the basis of the following evidence:
(1)
Records of reporting the theft to the public security organ, documents regarding the case-filing, case-breaking and case conclusion
issued by the public security organ;
(2)
Explanations on the determination of the liabilities of the liable persons and the corresponding compensations; and
(3)
Explanations of the insurance company about the settlement of claims if any insurance claim is involved.
Article 27
The loss of fixed assets includes the net loss resulting from the inventory shortage, phasing out, derogation, discarding, loss and
theft of the houses and buildings, machines and equipment, transportation facilities, tools and apparatus, etc., of an enterprise.
Article 28
As for the inventory shortage of fixed assets, the balance of the book value thereof less the amount compensated by the reliable person
shall be determined as loss on the basis of the following evidence:
(1)
Inventory forms of fixed assets;
(2)
Explanations for the inventory shortage, as for the inventory shortage of fixed assets each or each batch of which is of relatively
high value, the enterprise shall give a special explanation item by item and the relevant economic appraisal certificates shall be
issued by the intermediary institution issue on the basis of professional conclusion and objective judgment;
(3)
Documents regarding the determination of relevant liabilities within the enterprise and the internal ratification documents, etc.
Article 29
As for the fixed assets that have been discarded as useless or derogated, the balance of the net book value thereof less the salvage
value, insurance indemnity and compensation made by the person liable shall be determined as loss on the basis of the following evidence:
(1)
Appraisal certificates issued by the relevant departments within the enterprise;
(2)
Where the fixed assets each of which or each batch of which has been discarded as useless or damaged, the enterprise shall make a
special explanation item by item and entrust the institution qualified for the technical appraisal to carry out appraisal and issue
a appraisal certificate;
(3)
Where the fixed assets have been damaged or discarded as useless due to force majeure (natural disasters, accidents or battles), the
enterprise shall have the appraisal report issued by the relevant functional department, for instance, the certification of suffering
from a disaster as issued by the public fire department, on-the-spot accident handling report or certification of vehicle damages
issued by the public security organ, the certification of house demolition issued by the housing administration department, and the
boiler or elevator inspection report issued by the safety inspection department, etc.;
(4)
Explanations on the discarding of and damages to fixed assets and the internal ratification documents of the enterprise; and
(5)
The explanations on the settlement of claims given by the insurance company if any insurance claim is involved.
Article 30
As for the fixed assets that have been stolen, the balance of the net book value thereof less the compensation made by the person
liable and the insurance indemnity shall be determined as loss on the basis of the following evidence:
(1)
Records of reporting the theft to the public security organ, and documents regarding the case-filing, case-breaking and case conclusion
issued by the public security organ;
(2)
Explanations on the determination of the relevant liabilities within the enterprise and the compensation made by the person liable,
and the internal ratification documents; and
(3)
Explanations on the settlement of claims given by the insurance company if any insurance claim is involved.
Article 31
The loss from construction in process and materials thereof refers to the loss resulting from the projects under construction of an
enterprise which have been suspended, abandoned and discarded as useless, or demolished, as well as the loss resulting from the discarding
or selling at reduced price of the corresponding project materials as a consequence.
Article 32
As for a project under construction which has been suspended, abandoned and discarded as useless, or demolished, the balance of the
book value thereof less the salvage value shall be determined as loss on the basis of the following evidence:
(1)
Documents of the state expressly ordering to suspend construction projects;
(2)
Documents on suspension and demolition of construction projects issued by the relevant government departments;
(3)
Appraisal opinions, explanations of causes and ratification documents issued by the enterprise with regard to the project under construction
which has been discarded or abandoned; As for the discarding of a project under construction which is of relatively high value, the
enterprise shall have the technical appraisal opinions issued with the participation of industry experts; and
(4)
The basis for determining the actual investment in the project.
Article 33
As for a project under construction which has been damaged as a result of a natural disaster or an unexpected accident, the balance
of the book value thereof less the salvage value, insurance indemnity and compensation made by the person liable shall be determined
as loss on the basis of the following evidence:
(1)
The certification document proving the occurrence of the relevant natural disaster or unexpected accident;
(2)
The explanations on the settlement of claims given by the insurance company if any insurance claim is involved; and
(3)
Explanations on and ratification documents about the determination of the relevant liabilities and the compensation of the liable
person within the enterprise.
Article 34
The loss of project materials shall be determined in light of the provisions on the determination of inventory loss in these Measures.
Chapter VI Determination of Permanent or Substantial Asset Damages
