Case 099: A Case Illustrating the Application of the Tax Sparing Credit System

II. Calculation of Tax Liability under the Client’s Proposed Plan Company B must pay corporate income tax in Country B: 20 million RMB × 10% = 2 million RMB; net profit: 20 million − 2 million = 18 million RMB. When remitting profits out of Country B, withholding income tax applies: 18 million × 10% = 1.8 million RMB. Under Chinese tax law, corporate income tax on this income is calculated as: 20 million × 25% = 5 million RMB. Since the income has already been taxed abroad—totaling 2 million + 1.8 million = 3.8 million RMB—only the difference remains payable in China: 5 million − 3.8 million = 1.2 million RMB. Final net profit: 20 million − 2 million − 1.8 million − 1.2 million = 15 million RMB. III. Calculation of Tax Liability under the Tax Planning Proposal It is recommended that Company A first establish Company C in Country A and transfer its equity stake in Company B to Company C. Profits from Company B would thus be distributed first to Company C, and then from Company C to Company A—enabling eligibility for the tax sparing credit preferential policy. Company B pays corporate income tax in Country B: 20 million × 10% = 2 million RMB; net profit: 20 million − 2 million = 18 million RMB. When Company B distributes all its profits to Company C, no withholding tax applies. In Country A, corporate income tax on this income would nominally be: 20 million × 30% = 6 million RMB. However, since Country B’s tax law would have imposed a tax liability of 6 million RMB (20 million × 30%) had the income been subject to Country B’s higher rate, this amount qualifies for full tax sparing credit—and thus no actual tax payment is required in Country A. Subsequently, when Company C distributes the entire profit to Company A, no withholding tax applies en route. Finally, this income is subject to Chinese corporate income tax: 20 million × 25% = 5 million RMB. Yet, because 6 million RMB in foreign taxes has already been paid (and credited), no additional tax is due in China. Company A’s final net profit: 20 million − 2 million = 18 million RMB. Through this tax planning arrangement, Company A increases its net profit by: 18 million − 15 million = 3 million RMB.

Can leveraging preferential policies offered by low-tax jurisdictions expand a company’s profit margin?

The primary authority collecting taxes is typically the state; a sound taxation system constitutes a vital pillar supporting the stable operation of a national economy. In a market economy, the principal taxes levied on limited liability companies include value-added tax (VAT), corporate income tax, surtaxes (e.g., urban maintenance and construction tax, education surcharge), and individual income tax. Beyond these, numerous other taxes exist—including turnover taxes, property tax, customs duties, and behavior-based taxes. Today, we analyze several tax planning cases involving limited liability companies. Shanghai, as one of China’s top-tier megacities, hosts numerous strong enterprises and features intense competition. Consider Company A—a Beijing-registered construction engineering firm specializing in fire protection system installation; fire protection engineering design; technology promotion services; installation of refrigeration and air-conditioning equipment; maintenance of fire protection equipment; engineering technical consulting; and inspection, repair, and maintenance of building fire protection systems across various construction projects. The company maintains a professional tax planning team. Last year, after implementing tax planning measures, the company paid approximately 60 million RMB in taxes. Upon reviewing this figure, senior management sought further enhancement of corporate net profit. After online research and comparison, they contacted the author to learn about preferential tax policies available in industrial parks located in northern Jiangsu Province. These policies do not interfere with their existing tax planning strategies; rather, they serve as an additional, complementary layer of tax incentives—enhancing overall tax efficiency.

Green Plains Swings to $67M Profit on Tax Credits

Aug 6, 2026

Green Plains Renewable Energy reported a Q2 2026 net income of $67.1 million, reversing a prior-year loss. The turnaround was driven primarily by $58.7 million in Section 45Z production tax credits and improved ethanol and agribusiness margins.

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