How should the interest expenses on loans from enterprises to individuals be deducted when calculating taxable income?

Q: How should interest expenses from a company’s loans to natural persons be deducted when calculating taxable income?

A: Pursuant to the “Notice of the State Administration of Taxation on Issues Concerning Pre-tax Deduction of Interest Expenses for Enterprise Income Tax for Enterprises’ Loans to Natural Persons” ( Guo Shui Han [2009] No. 777 ), Article 1, interest expenses incurred by an enterprise from loans borrowed from shareholders or other natural persons that have an associated relationship with the enterprise shall be calculated for the deduction of enterprise income tax in accordance with the conditions prescribed in Article 46 of the “Enterprise Income Tax Law of the People’s Republic of China” (, hereinafter referred to as the Tax Law ), and the “Notice of the Ministry of Finance and the State Administration of Taxation on Tax Policy Issues Concerning the Deduction Standards for Interest Expenses of Related Parties” ( Cai Shui [2008] No. 121 ).

Pursuant to Article 2 of the “Notice of the State Administration of Taxation on Issues Concerning Pre-tax Deduction of Interest Expenses for Enterprise Income Tax for Enterprises’ Loans to Natural Persons” ( Guo Shui Han [2009] No. 777 ), interest expenses incurred by an enterprise from loans borrowed from internal staff or other persons other than those specified in Article 1, if the borrowing circumstances also simultaneously satisfy the following conditions, then the portion of such interest expenses that does not exceed the amount calculated based on the interest rates for similar loans from financial enterprises in the same period shall be allowed as a deduction in accordance with Article 8 of the Tax Law and Article 27 of the Implementation Regulations of the Tax Law.

(1)The loan between the company and the individual is genuine, lawful, and valid, and does not have any unlawful fundraising purpose or any other conduct that violates laws and regulations;

(2)A loan agreement has been signed between the company and the individual.

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