Memorandum on Matters Relating to the Deduction of Business Entertainment Expenses Before Enterprise Income Tax

　　Ⅰ. Description of the Factual Situation

　　In 2025, Company A generated sales revenue amounting to RMB 10 million, and its business entertainment expenses incurred were as follows:

　　1. RMB 30,000 dining expenses for expanding the client base, and RMB 20,000 for customized gifts presented to clients;

　　2. RMB 50,000 for staff team-building meals;

　　3. RMB 10,000 rebates paid to clients;

　　4. RMB 10,000 business entertainment expenses during the preparation period.

　　Can the above-mentioned expenses be deducted before enterprise income tax?

　　Ⅱ. Relevant Tax Laws and Regulations

　　1. Law of the People’s Republic of China on Enterprise Income Tax and its implementing rules

　　2. Announcement of the State Taxation Administration on Several Tax Treatment Issues concerning Taxable Income for Enterprise Income Tax (Announcement No. 15 [2012] of the State Taxation Administration)

　　III. Problem Analysis

　　1. Scope of accounting for business entertainment expenses

　　Business entertainment expenses are limited to reasonable costs incurred by the enterprise in its interactions with external clients and partners for production and operation purposes. They are mainly used in operating activities, including business negotiations and client relationship maintenance. Expenses unrelated to business operations, employee benefits, unlawful expenditures, and expenses lacking proper and compliant supporting documentation are excluded from business entertainment expenses. They shall not be deducted as business entertainment expenses and are not eligible for any pre-tax deduction.

　　According to the situation of Company A:

　　The expenditures that may be recognized as production and operation-related business entertainment expenses include: RMB 30,000 dining expenses for expanding the client base, RMB 20,000 for customized gifts presented to clients, and RMB 10,000 business entertainment expenses during the preparation period, totaling RMB 90,000.

　　The team-building expense of RMB 50,000 for employees is classified as employee benefits and is not recognized as business entertainment expenses. It shall be deducted subject to the applicable limit for employee benefits expenses.

　　The RMB 10,000 rebates paid to clients are illegal and non-compliant expenses that bear no connection to production or business operations, and shall not be deducted before enterprise income tax.

　　2. Rules on the deduction of business entertainment expenses during the operating period

　　According to Article 43 of the Law of the People’s Republic of China on Enterprise Income Tax, entertainment expenses incurred for business purposes are deductible for tax purposes only up to 60% of the actual amount incurred. Furthermore, this deductible portion cannot exceed 0.5% (5‰) of the annual sales (business) revenue of the enterprise.

　　Calculated based on the cap of 5‰ of the annual sales revenue: RMB 10 million × 5‰ = RMB 50,000

　　Business entertainment expenses incurred during the normal operating period: RMB 30,000 + RMB 20,000 = RMB 50,000

　　Calculated based on 60% of the actual amount incurred: RMB 50,000×60%＝RMB 30,000

　　Based on the lower-of-the-two principle, the deduction allowed for the normal operating period is RMB 30,000.

　　3. Rules on the deduction of business entertainment expenses during the preparation period

　　According to the Announcement No. 15 [2012] of the State Taxation Administration, business entertainment expenses incurred in connection with the preparation activities may be included in the enterprise preparation expenses at the rate of 60% of the actual amount incurred and deducted before tax in accordance with the relevant provisions.

　　According to the situation of Company A, business entertainment expenses incurred in the preparation period are RMB 40,000, and the deductible amount is calculated as follows: RMB 40,000 × 60% = RMB 24,000

　　IV. Conclusion

　　For Company A, business entertainment expenses incurred in the preparation period shall be included in the enterprise preparation expenses at the rate of 60% of the actual amount incurred and deducted before tax, without reference to revenue. During the normal operating period, compliant business entertainment expenses shall be deducted before enterprise income tax, subject to the limit of "up to 60% of the actual amount incurred and not exceeding 0.5% (5‰) of the annual sales revenue of the enterprise".

　　Enterprises shall clearly distinguish business entertainment expenses from employee benefits, conference costs, travel expenses, and the like. Staff team-building activities and employee dinners shall not be recognized as business entertainment expenses. Non-compliant or business-unrelated expenses such as rebates, cash gifts, and personal expenses shall be strictly excluded from business entertainment expenses. All tax filings shall be made in accordance with laws and tax amounts shall be paid in good faith.