The State Council publicized over the weekend policies aimed at cushioning the impact of enforcing the unified corporate income tax law.
The new law, to take effect on January 1, 2008, will replace two earlier regulations that date back more than a decade and unify income tax rates for domestic and foreign-funded companies at 25 percent.
The government said that the new law would be phased in five years. Companies that currently face an income tax of 15 percent will pay 18 percent in 2008, 20 percent in 2009, 22 percent in 2010, 24 percent in 2011 and 25 percent from 2012.
Companies that are exempt from taxes or have concessional rates will retain their preferences until the original expiration date. Those that don't show the level of profit can retain their benefits in 2008.
Companies can make a one-time choice of the tax system that will be most beneficial.
The cabinet said the transitional steps targeted companies registered with industry and commerce administrations before March 16, 2007.
Companies in the western part of the country aren't affected by the new law but will continue to enjoy preferential rates under regulations jointly issued by the Ministry of Finance, State Administration of Taxation and China Customs.
Also, the country would offer incentives for key high-tech companies registered in special economic zones, including Shenzhen, Zhuhai, Shantou, Xiamen and Hainan, as well as in Shanghai Pudong New Area, on and after January 1, 2008.
These companies must have proprietary technology and must comply with a range of requirements to be classified as high-tech enterprises.
For earnings collected within their registered area, such companies would be exempted from corporate income tax for the first two tax years and pay income tax of just 12.5 percent from the third to the fifth tax years. Gains from outside these areas must be calculated separately.
The transitional polices are effective on January 1, 2008.
Chinese companies are subject to a statutory income tax rate of 33 percent, while many foreign investors have been given tax waivers or reduced tax rates as an incentive to invest in China.
The new law will, for the first time since 1978, put domestic and foreign firms on an equal footing in income taxation in a government effort to promote fair competition.
China has been among the top destinations for foreign direct investment (FDI) since it opened up to the world. It was the largest recipient of FDI among all developing nations for 15 successive years. Yet it also attracted per capita foreign investment of $53, less than one third of the world average and one-twelfth that of developed nations, according to the Ministry of Commerce.
The government has become increasingly selective over what types of foreign investment should be preferred and it doesn't believe the unified arrangements would have much impact on inward FDI.