enterprises may still benefit from a preferential tax rate of 15% under the EIT Law if they qualify as High and New Technology Enterprises strongly supported by the state, subject to
certain general factors described in the EIT Law and the related regulations.
A number of our PRC subsidiaries and
consolidated affiliated entities, such as Baidu Online Network Technology (Beijing) Co., Ltd., or Baidu Online, and Baidu Netcom are entitled to enjoy a preferential tax rate of 15% due to their qualification as High and New Technology
Enterprise, which has a term of three years. If any or some of these PRC subsidiaries and consolidated affiliated entities fail to maintain the High and New Technology Enterprise qualification, their applicable EIT rate will be up
to 25%. Furthermore, Baidu Online was entitled to a preferential income tax rate of 10% from 2013 to 2015 due to its Key Software Enterprise status designated by the relevant government authorities. Baidu China was also entitled to a
preferential income tax rate of 10% for 2015 due to its Key Software Enterprise status designated by the relevant government authorities. Both Baidu Online and Baidu China will file with the local tax authority for the preferential tax
rate of 10% for a Key Software Enterprise for 2016 before the end of May 2017, and will be subject to relevant governmental authorities assessment. However, there is no assurance that Baidu Online and Baidu China will continue to
enjoy the preferential tax rate as a Key Software Enterprise. See Item 5.A. Operating and Financial Review and ProspectsOperating ResultsTaxationPRC Enterprise Income Tax.
The discontinuation of any of the above-mentioned preferential income tax treatments currently available to us in the PRC
could have a material and adverse effect on our result of operations and financial condition. We cannot assure you that we will be able to maintain our current effective tax rate in the future.
If our PRC subsidiaries declare and distribute dividends to their respective offshore parent companies, we will be required to pay more
taxes, which could have a material and adverse effect on our result of operations.
Under the EIT Law and related
regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from any such
foreign enterprise investors disposition of assets (after deducting the net value of such assets) are subject to a 10% withholding tax, unless the foreign enterprise investors jurisdiction of incorporation has a tax treaty with China
that provides for a reduced rate of withholding tax. Undistributed profits earned by foreign-invested enterprises prior to January 1, 2008 are exempted from any withholding tax. The British Virgin Islands, where Baidu Holdings Limited, the
direct parent company of our PRC subsidiaries Baidu Online and Baidu International Technology (Shenzhen) Co., Ltd., or Baidu International, is incorporated, does not have such a tax treaty with China. Hong Kong has a tax arrangement with China that
provides for a 5% withholding tax on dividends subject to certain conditions and requirements, such as the requirement that the Hong Kong resident enterprise own at least 25% of the PRC enterprise distributing the dividend at all times within the 12-month period immediately preceding the distribution of dividends and be a beneficial owner of the dividends. For example, Baidu (Hong Kong) Limited, which directly owns our PRC subsidiaries Baidu
China and Baidu Times, is incorporated in Hong Kong. However, if Baidu (Hong Kong) Limited is not considered to be the beneficial owner of dividends paid to it by Baidu China and Baidu Times under the tax circulars promulgated in February and
October 2009, such dividends would be subject to withholding tax at a rate of 10%. See Item 5.A. Operating and Financial Review and ProspectsOperating ResultsTaxationPRC Enterprise Income Tax. If our PRC
subsidiaries declare and distribute profits earned after January 1, 2008 to us in the future, such payments will be subject to withholding tax, which will increase our tax liability and reduce the amount of cash available to our company.
We may be deemed a PRC resident enterprise under the EIT Law, which could subject us to PRC taxation on our global income, and which may
have a material and adverse effect on our results of operations.
Under the EIT Law and related regulations, an
enterprise established outside of the PRC with de facto management body within the PRC is considered a PRC resident enterprise and is subject to the EIT at the rate of 25% on its worldwide income as well as PRC EIT reporting obligations.
The related regulations define the term