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Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes
18.
INCOME TAXES

 

Cayman Islands

 

Under current law of Cayman Islands, the Company is not subject to income or capital gains taxes. In addition, dividends payments are not subject to tax withholding in the Cayman Islands.

Hong Kong

 

The Company’s subsidiaries, Sunlands HK, Cheerwins Online Education HK Limited and FireSky Investment HK Limited are located in Hong Kong and are subject to a two-tiered income tax rate for taxable income earned in Hong Kong with effect from April 1, 2018. The first HK$2 million of profits earned by HK entity will be taxed at 8.25%, while the remaining profits will continue to be taxed at the existing 16.5% tax rate. In addition, to avoid abuse of the two-tiered income tax rate regime, each group of connected entities can nominate only one entity to benefit from the two-tiered income tax rate. No provision for Hong Kong profits tax has been made in the consolidated financial statements as it has no assessable income for the years ended December 31, 2020, 2021 and 2022.

 

China

The Group’s subsidiaries, VIEs and VIEs’ subsidiaries incorporated in the PRC are generally subject to a corporate income tax rate of 25%.

The Enterprise Income Tax Law (the “EIT Law”) of the PRC, effective since January 1, 2008, applies a uniform 25% enterprise income tax rate to all resident enterprises in China, including foreign invested enterprises.

 

Beijing Sunlands was qualified as “high and new technology enterprise strongly supported by the State” (“HNTE”) and was accordingly entitled to a preferential tax rate of 15% from calendar years 2016 through 2020. For 2021 and 2022, Beijing Sunlands was subject to an EIT rate of 25%.

 

Wuhan Shangde was qualified as HNTE and is accordingly entitled to a preferential tax rate of 15% from calendar years 2021 through 2023 and expected to be subject to an EIT rate of 15% as long as it maintains its status as a HNTE.

The reconciliation of the effective tax rate and the statutory income tax rate applicable to PRC operations was as follows:

 

 

 

Years ended December 31,

 

 

 

2020

 

 

2021

 

 

2022

 

 

 

RMB

 

 

RMB

 

 

RMB

 

(Loss)/income before income tax expenses

 

 

(432,573

)

 

 

197,634

 

 

 

648,548

 

Income tax (benefit)/expenses computed at
   applicable tax rates of 25%

 

 

(108,143

)

 

 

49,409

 

 

 

162,137

 

Non-deductible and super deduction expenses

 

 

769

 

 

 

(27,135

)

 

 

(6,035

)

Effect of tax holidays and tax rate difference

 

 

52,027

 

 

 

(263,431

)

 

 

(6,514

)

Change in valuation allowance

 

 

55,111

 

 

 

221,539

 

 

 

(137,596

)

Income tax (benefit)/expenses

 

 

(236

)

 

 

(19,618

)

 

 

11,992

 

 

If the tax holidays granted to Wuhan Shangde were not available, the Group’s income tax benefit and expenses would have been RMB11,560 and RMB24,338 and the basic and diluted net income per ordinary share attributable to the Group would have been RMB31.36 and RMB92.34, respectively, for the years ended December 31, 2021 and 2022.

18.
INCOME TAXcES - continued

China - continued

 

Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred taxes are as follows:

 

 

 

As of December 31,

 

 

 

2021

 

 

2022

 

 

 

RMB

 

 

RMB

 

Deferred tax assets

 

 

 

 

 

 

Accrued expenses

 

 

39,709

 

 

 

38,204

 

Advertising expenses carry-forwards

 

 

47,924

 

 

 

18,008

 

Net operating loss carry-forwards

 

 

732,873

 

 

 

614,232

 

Total deferred tax assets

 

 

820,506

 

 

 

670,444

 

Less: valuation allowance

 

 

(781,241

)

 

 

(643,645

)

Deferred tax assets, net

 

 

39,265

 

 

 

26,799

 

Deferred tax liabilities

 

 

 

 

 

 

Deferred costs

 

 

(21,782

)

 

 

(5,984

)

Total deferred tax liabilities

 

 

(21,782

)

 

 

(5,984

)

 

As of December 31, 2022, the Company’ subsidiaries, the VIEs and VIEs’ subsidiaries registered in the PRC have total net operating loss carry forwards of RMB2,544,003, which would expire on various dates through December 31, 2023 to December 31, 2029.

 

The authoritative guidance requires that the Group recognizes the impact of a tax position in the financial statements if that position is more likely than not of being sustained upon audit by the tax authority, based on the technical merits of the position. Under PRC laws and regulations, arrangements and transactions among related parties may be subject to examination by the PRC tax authorities. If the PRC tax authorities determine that the contractual arrangements among related companies do not represent a price under normal commercial terms, they may make adjustments to the companies’ income and expenses. A transfer pricing adjustment could result in additional tax liabilities. The Group did not have any significant unrecognized uncertain tax positions as of and for the years ended December 31, 2020, 2021 and 2022.

 

In addition, uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall operations, and more specifically, with regard to tax residency status. The New EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for Chinese income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the New EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties, occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be treated as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income taxes, at a rate of 25%.

 

If the Company were to be non-resident for PRC tax purpose, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax would be 10%. A lower withholding income tax rate of 5% is applied if the Foreign Invested Enterprise, or the FIE’s immediate holding company is registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with China, subject to a qualification review at the time of the distribution.

 

The Chinese tax authorities clarified that distributions made out of earnings prior to but distributed after January 1, 2008 will not be subject to withholding tax. The aggregate undistributed earnings of the Company's subsidiaries located in the PRC that are available for distribution are RMB167,946 as of December 31, 2022. Upon distribution of such earnings, the Company will be subject to PRC taxes, the amount of which is impractical to estimate. The Company did not record any withholding tax on any of the aforementioned undistributed earnings because it intends to permanently reinvest all earnings in China and the Company's subsidiaries located in the PRC do not intend to declare dividends to the Company.