Laws of the People's Republic of China

the State Administration of Taxation

Order of the State Administration of Taxation

No. 13

The Administrative Measures for the Pre-income-tax Deduction of Property Losses of Enterprises, which, upon deliberation, have been adopted at the fourth executive meeting of the State Administration of Taxation on June 3, 2005, are hereby promulgated and shall go into effect as of September 1, 2005.

Xie Xuren, Director-general of the State Administration of Taxation

August 9, 2005

Administrative Measures for the Pre-income-tax Deduction of Property Losses of Enterprises

Chapter I General Provisions

Article 1

With a view to further regulating and improving the administration of the pre-income-tax deduction of property losses of enterprises and promoting the finer administration of enterprise income taxes, these Measures are formulated in accordance with the Law of the People's Republic of China on the Administration of Tax Collection and the detailed rules for the implementation thereof, the Interim Regulation of the People's Republic of China on Enterprise Income Taxes and the detailed rules for the implementation thereof.

Article 2

The term "property" as mentioned in these Measures refers to the assets that are owned or controlled by enterprises and used for business operations and management activities and are related to the taxable incomes, including cash, bank deposits, accounts receivable and prepayments (including notes receivable), inventories, investments (including entrustment loans and authorized financial management), fixed assets, intangible assets (excluding goodwill) and other assets.

Article 3

The various property losses of an enterprise can be classified, according to the nature of properties concerned, into the loss of monetary capital, loss from bad debts, loss of inventories, loss from investment transfer or liquidation, loss of fixed assets, loss from construction in process and construction materials thereof, loss of intangible assets and loss of other assets; or be classified, according to the declaration procedures for deduction, into the property loss deducted upon declaration by enterprises themselves or the property loss deducted upon examination and approval; or be classified, according to the cause of loss, into the normal loss (including normal transfer, discarding as useless or liquidation), abnormal loss (including the loss resulting from the such force majeure as wars and natural disasters, loss resulting from damages or theft due to poor management or loss resulting from policies, etc.), appraisal loss resulting from reorganization and permanent and substantial damages.

Article 4

The various property losses of an enterprise shall be deducted in the year when the losses occur, and may not be deducted in advance or afterwards. If an enterprise fails to declare its property losses on schedule due to reasons other than calculation errors or other objective reasons, such losses may not be deducted after expiry of the time limit. If the examination and approval by the competent taxation authority is required under these Measures, the declaration shall be timely made in accordance with the prescribed time and procedures. In case the property loss is not deducted on schedule due to any reason attributable to the taxation organ, the tax returns of the year when the property loss occurs shall be adjusted upon approval of the competent taxation organ, and the taxable incomes shall be recalculated. In case the taxable incomes after adjustment are less than that prior to adjustment, the tax overpayment in the year when the property loss occurs shall be refunded or can offset the tax arrears or the taxes payable of the following period according to the relevant provisions, provided that the current tax year for the property loss will not change.

Article 5

Where the property loss of an enterprise declared for deduction has been recovered or compensated, the value recovered or compensated shall be incorporated into the taxable incomes in the year when the value is recovered or actually compensated. Where the accounts receivable can not be recovered due to the creditor's reasons, including the accounts receivable that remain unpaid for over three years, if they have been confirmed as loss upon the application of the creditor for pre-income-tax deduction according to these Measures and has been deducted , they shall be incorporated into the taxable incomes of the current period and pay corresponding enterprise income taxes.

Chapter II Examination and Approval of Pre-income-tax Deduction of Property Losses

Article 6

The property loss resulting from the sale, transfer or realization of assets in the business operation and management activities of an enterprise, the normal loss of various inventories or the property loss resulting from the normal liquidation of fixed assets after they have reached or exceeded their service life shall be declared for deduction in the current period when the above-mentioned losses actually occur.

Article 7

Upon the examination and approval by the competent taxation authority, the property losses of an enterprise resulting from any of the following causes can be deducted when the enterprise declares the enterprise income taxes:

(1)

Loss of the cash, bank deposits, inventories, short-term investments or fixed assets due to force majeure, such as natural disaster or war, or from poor management;

(2)

Loss from doubtful debts of accounts receivable or prepayments;

(3)

Loss from bad debts of a financial enterprise;

(4)

Property loss confirmed due to permanent or substantial damage to inventories, fixed assets, intangible assets or long-term investments;

(5)

Investment loss resulting from the dissolution or liquidation of the invested party;

(6)

Loss resulting from the appraisal of various assets that can be deductible;

(7)

Property loss resulting from the relocation or expropriation as planned by the government; or

(8)

Loss of from direct loans other than the credit operations between enterprises that are permitted by the state.

Article 8

The examination and approval of pre-income-tax deduction of property losses of an enterprise is conducted to examine whether or not the declaration materials provided by taxpayers according to the provisions conform to the statutory conditions. Where it is necessary for the taxation authority in charge of examination and approval to verify the contents of declaration materials, the taxation authority in charge of examination and approval shall designate two or more functionaries to carry out the verification. If the workload of on-the-spot inspection is heavy or time-consuming in view of the large amount of property loss or insufficiency of extrinsic legal evidence, it may entrust the taxation authority at the county (district) level where the enterprise is located to organize the verification. Taxation authorities may check the authenticity of whether pre-income-tax deduction of property loss has been approved.

Article 9

As a general rule, the competent taxation authority at the level of county (district) where the enterprise is located is responsible for the pre-income-tax deduction of property loss of an enterprise. The taxation authorities of provinces, autonomous regions, municipalities directly under the Central Government or cities under separate planning (hereinafter referred to as provincial taxation authorities) may, on the basis of the amount of property loss, divide the power of examination and approval. The property loss resulting from the relocation or expropriation as planned by the government shall be subject to the examination and approval of the taxation authority at the next higher level of the taxation authority of the place where the said government is located.

Article 10

The pre-income-tax deduction of property losses of an enterprise may not be passed on to deferent levels for approval. The enterprise may file an application with the competent taxation authority at the county (district) level where the enterprise is located or may directly file an application with the competent taxation authority in charge of examination and approval as prescribed by the provincial taxation authority.

Article 11

The acceptance, examination and approval of applications for pre-income-tax deduction of property losses of enterprises shall be carried out by the taxation authorities at all levels in light of the relevant provisions in the Circular of the State Administration of Taxation on Several Issues Concerning the Implementation of Taxation Administrative Licenses (Guo Shui Fa [2004] No. 73), with the exception of hearings and public announcements.

Article 12

Where a taxation authority at the county (district) level is responsible for the examination and approval of the pre-income-tax deduction of property losses, it shall, within 20 working days as of the date of acceptance of the application, make an examination and approval decision; where a taxation authority at the level of a city divided into districts is responsible for the examination and approval of the pre-income-tax deduction of property losses, it shall, within 30 working days as of the date of acceptance of the application, make an examination and approval decision; where a taxation authority at the provincial level is responsible for the examination and approval of the pre-income-tax deduction of property loss, it shall, within 60 working days as of the date of acceptance of the application, make an examination and approval decision. If the above-mentioned examination and approval decision cannot be made within the prescribed time limit because the situation is complicated and needs to be verified, the time limit may be extended for another ten days upon approval of the person-in-charge of the taxation authority at the same level, and the taxpayer shall be notified of the reasons for such extension.

Article 13

the various property losses of an enterprise that are subject to examination and approval shall be reported, once and for all, to the taxation authority for examination and approval within 15 days after the end of a tax year. If an enterprise needs to collect evidence on the spot in the case of natural disasters or permanent or substantial damage, it shall file an application for examination and approval during the evidence preservation period, or may file an application for examination and approval after the end of the tax year. However, it must present the appraisal materials issued by intermediary institutions or technical appraisal departments of the state or those authorized by the state.

Article 14

The pre-income-tax deduction of property losses of an enterprise shall be governed by the rule that the department in charge of examination and approval shall be held responsible. The taxation authorities at all levels shall, pursuant to the requirements of these Measures, incorporate the examination and approval of property loss into the system of post responsibility assessment, standardize the procedures, specify the responsibilities and establish a sound supervisory and regulatory system and a responsibility investigation system.

Chapter III Evidence for the Determination of Property Losses

Article 15

When an enterprise applies for the deduction of various property losses, it shall provide legal evidences showing that the property loss it reports has actually been incurred, which shall include: external evidence with legal effects, economic appraisal certificates as issued by qualified intermediary agencies, and internal evidence of the enterprise on certain matters.

Article 16

The term "external evidence with legal effects" refers to the written documents with legal effects related to the property losses of an enterprise and issued by the judicial organs, public security organs, administrative organs or professional technical appraisal departments, etc., mainly including:

(1)

Judgments and rulings of the judicial organs;

(2)

Certification and official replies of the public security organs on filing or conclusion of cases;

(3)

Certification of write-off, revocation and suspension of business license issued by the administrative departments of industry and commerce;

(4)

Public announcements of bankruptcy liquidation and documents of debt discharge of the enterprise;

(5)

Official documents and documents on express prohibition issued by the government departments;

(6)

Appraisal reports given by the professional technical appraisal departments of the state and those authorized by the state;

(7)

Documents on the investigation of insured losses and the calculation sheet of claims settlement, etc., issued by the insurance companies for insured assets; and

(8)

Other evidence complying with the statutory conditions.

Article 17

The term "economic appraisal certificates issued by intermediary agencies" refers to those specific economic appraisal certificates or written appraisal opinion with respect to the given economic matters of an enterprise issued by registered tax firms or other professional appraisal institutions that have statutory qualifications, according to the principles of independence, objectivity and justice, on the basis of full investigation and study, demonstration and calculation, and upon professional conclusion and objective judgment.

Article 18

An enterprise with a sound accounting system and a perfect internal control system can take the internal evidence on certain matters as the evidence for determining the property loss. The term of "internal evidence of the enterprise on certain matters" refers to the internal certificates or declarations on assuming liabilities made by the enterprise in respect of the damages to, or discarding of, or inventory loss of various assets, mainly including:

(1)

The relevant accounting materials and original documents;

(2)

Asset inventory forms;

(3)

Business contracts relating to the economic acts concerned;

(4)

Appraisal documents or materials of the internal technical appraisal department of an enterprise (as for property losses in relatively large amounts and with significant impacts, industry experts shall be retained to participate in the technical appraisal and demonstration);

(5)

Internal examination and approval documents and explanations on the relevant conditions of the enterprise;

(6)

Explanations on the determination of liabilities of the liable person and the corresponding compensation with respect to the losses resulting from poor business operation and management; and

(7)

Declarations of legal representative, person-in-charge and finance chief of an enterprise on assuming legal tax liabilities for the authenticity of certain matters.

Chapter IV Determination of Monetary Asset Losses

Article 19

With respect to the cash shortage sorted out by an enterprise, the balance of the amount of the shortage less the amount of the compensation made by the person liable shall be determined as loss. The following evidences shall be provided for the determination of cash loss:

(1)

Cash inventory forms confirmed by the cash keeper (including the records back to the base date);

(2)

Explanations of the cash keeper on the shortage and the relevant verification documents;

(3)

Explanations on the determination of liabilities and the corresponding compensations if the shortage is incurred from poor management; and

(4)

Relevant judicial case materials if a criminal offence is involved.

Article 20

When applying for pre-income-tax deduction of loss from bad debts occurred to the accounts receivable or prepayment, an enterprise shall meet one of the following conditions:

(1)

The debtor is declared bankrupt, dissolved (including being ordered to close down by the government), deprived of industrial and commercial business license, deceased or missing, and its residual property or legacy is insufficient to discharge its or his debts;

(2)

The debts remain unpaid for over three years after the due date and the debtor can show strong evidence of lack of the ability to discharge the debts;

(3)

The bad debts have resulted from debt restructuring; or

(4)

The accounts receivable really can not be recovered due to force majeure, such as natural disasters, wars or international political events, and so on.

Article 21

Where a debtor has already been liquidated under any of the circumstances as described in Article 20 of the present Measures, the irrecoverable part of debts after deducting the debts that have actually been discharged in property liquidation shall be determined as the loss of the creditor.

As for the part that remain unliquidated, the intermediary institution shall issue an economic appraisal certificate upon its professional conclusion and objective judgment, and the part that really cannot be recovered shall be determined as the loss of the creditor.

In the case of the accounts receivable from a debtor who has already been missing or dead, if , upon the certification of the missing or dead status of the debtor issued by the public security organ, his/her legacy is legally judged as insufficient to discharge the debts or it is impossible to find the debtor to recover the debts, the intermediary institution shall issue an economic appraisal certificate upon professional conclusion and objective judgment, and the part that really cannot be recovered shall be determined as the loss of the creditor.

If the accounts receivable can not be recovered from the debtor due to force majeure, such as natural disasters, wars or international political events, the enterprise shall make a special explanation, and upon the relevant economic appraisal certificate issued by the intermediary institution on the basis of professional conclusion and objective judgment, or after obtaining the relevant certificates issued by the embassy (consulate) of China stationed in the foreign country, the part that really cannot be recovered shall be determined as the loss of the enterprise .

As for the accounts receivable that can not be recovered by the due date, if there is any judgment or ruling of the court against the enterprise, or if the court makes the rule of terminating (discontinue) the execution because, though the enterprise wins the case, yet the debtor is judged legally insolvent, such accounts receivable shall be determined as the loss of the enterprise, on the basis of the legal documents of judgment, ruling or termination (discontinuance) of execution of the court.

Among the accounts receivable that can not be recovered by the due date, as for those each of which is of small value and is not adequate to make up the cost for debt recovery, the enterprise shall make a special statement, and upon the relevant economic appraisal certificate issued by the intermediary institution issues on the basis of professional conclusion and objective judgment, the part that really cannot be recovered shall be determined as the loss of the enterprise.

As for the accounts receivable which have not been recovered for over 3 years after the due date, if the enterprise has the records of legal negotiation and urgency for payment, and it has been confirmed that the debtor is insolvent, and has made losses for 3 consecutive years or has suspended its business operations for 3 consecutive years, and it can also be confirmed that there is no business transactions between the enterprise and that debtor within the last 3 years, such accounts receivable may be determined as the loss of the enterprise upon the relevant economic appraisal certificate issued by the intermediary institution on the basis of professional conclusion and objective judgment.

As for the accounts receivable that have not been recovered for over 3 years after the due date, if the debtor is overseas or in Hong Kong, Macao or Taiwan Region and the sums can not be recovered after making urges for payment according to law, such accounts receivable shall be determined as the loss of the enterprise after the relevant certificate issued by the overseas intermediary institution or those issued by the embassy (consulate) of China stationed in the foreign country is obtained.

Article 22

The following evidence shall be provided in the application for pre-income-tax deduction of loss from bad debts incurred to the accounts receivable or prepayment of an enterprise if they are under any of the afore-mentioned circumstances:

(1)

Public announcements made by the court on the bankruptcy and the documents of debt discharge in the bankruptcy liquidation;

(2)

Certification of write-off or revocation of business license issued by the administrative department for industry and commerce;

(3)

Documents of relevant administrative decisions of the government on withdrawal or ordering to close down;

(4)

Certifications of the missing or dead status issued by the public security organ or other relevant department;

(5)

Absolute evidence showing that the debts have been outstanding for more than three years or the debtor lacks the ability to discharge the debts;

(6)

The debt restructuring agreement of the creditor, the judgment of the court, or the document on approving the conversion of the debts of a state-owned enterprise into shares; or

(7)

The judgment of the court or the certificate issued by the local taxation authority where there is any current account with an associated party.

Chapter V Determination of Non-monetary Asset Losses

Article 23

The inventory loss of an enterprise refers to those net losses resulting from inventory shortage, deterioration, elimination, damages, discarding as useless and theft of the relevant commodities, finished products, semi-finished products, products in process, various materials, fuels, packing, and low-value consumption goods, etc.

Article 24

As for the inventory shortage, the balance of their value less the amount compensated by the liable person shall be determined as loss on the basis of the following evidence:

(1)

Inventory forms;

(2)

Economic appraisal certificates issued by an intermediary institution;

(3)

Explanations of the inventory keeper for the inventory shortage;

(4)

The basis for determining the value of short inventories (including the relevant warehousing formalities, price of identical or similar inventories as indicated on the purchase invoices, or other basis for determination); and

(5)

Explanations on the determination of relevant liabilities within the enterprise and the compensation made by the person liable, and the internal ratification documents.

Article 25

As for the inventory discarded as useless or damaged, the balance of its book value less the salvage value, the insurance indemnity and the compensation made by the person liable shall be determined as loss on the basis of the following evidence:

(1)

As for the inventory each of which or each batch of which is of relatively low value, the relevant technical division of the enterprise shall issue the technical appraisal certificate;

(2)

As for the inventory each or each batch of which is of relatively high value, the enterprise shall obtain the technical appraisal certificate issued by the relevant technical appraisal department of the state or by the intermediary institution with the qualification for technical appraisal;

(3)

The explanation of the insurance company on the settlement of claims if any insurance claim is involved, ;

(4)

Explanations on the discarding and derogation of the inventory goods and the examination and approval documents within the enterprise;

(5)

Explanations on the salvage value; and

(6)

Explanations on the determination of the relevant liabilities within the enterprise and the compensation made by the person liable, and the internal ratification documents.

Article 26

As for the inventory goods that have been stolen, the balance of the book value thereof less the insurance indemnity and the compensation made by the person liable shall be determined as loss on the basis of the following evidence:

(1)

Records of reporting the theft to the public security organ, documents regarding the case-filing, case-breaking and case conclusion issued by the public security organ;

(2)

Explanations on the determination of the liabilities of the liable persons and the corresponding compensations; and

(3)

Explanations of the insurance company about the settlement of claims if any insurance claim is involved.

Article 27

The loss of fixed assets includes the net loss resulting from the inventory shortage, phasing out, derogation, discarding, loss and theft of the houses and buildings, machines and equipment, transportation facilities, tools and apparatus, etc., of an enterprise.

Article 28

As for the inventory shortage of fixed assets, the balance of the book value thereof less the amount compensated by the reliable person shall be determined as loss on the basis of the following evidence:

(1)

Inventory forms of fixed assets;

(2)

Explanations for the inventory shortage, as for the inventory shortage of fixed assets each or each batch of which is of relatively high value, the enterprise shall give a special explanation item by item and the relevant economic appraisal certificates shall be issued by the intermediary institution issue on the basis of professional conclusion and objective judgment;

(3)

Documents regarding the determination of relevant liabilities within the enterprise and the internal ratification documents, etc.

Article 29

As for the fixed assets that have been discarded as useless or derogated, the balance of the net book value thereof less the salvage value, insurance indemnity and compensation made by the person liable shall be determined as loss on the basis of the following evidence:

(1)

Appraisal certificates issued by the relevant departments within the enterprise;

(2)

Where the fixed assets each of which or each batch of which has been discarded as useless or damaged, the enterprise shall make a special explanation item by item and entrust the institution qualified for the technical appraisal to carry out appraisal and issue a appraisal certificate;

(3)

Where the fixed assets have been damaged or discarded as useless due to force majeure (natural disasters, accidents or battles), the enterprise shall have the appraisal report issued by the relevant functional department, for instance, the certification of suffering from a disaster as issued by the public fire department, on-the-spot accident handling report or certification of vehicle damages issued by the public security organ, the certification of house demolition issued by the housing administration department, and the boiler or elevator inspection report issued by the safety inspection department, etc.;

(4)

Explanations on the discarding of and damages to fixed assets and the internal ratification documents of the enterprise; and

(5)

The explanations on the settlement of claims given by the insurance company if any insurance claim is involved.

Article 30

As for the fixed assets that have been stolen, the balance of the net book value thereof less the compensation made by the person liable and the insurance indemnity shall be determined as loss on the basis of the following evidence:

(1)

Records of reporting the theft to the public security organ, and documents regarding the case-filing, case-breaking and case conclusion issued by the public security organ;

(2)

Explanations on the determination of the relevant liabilities within the enterprise and the compensation made by the person liable, and the internal ratification documents; and

(3)

Explanations on the settlement of claims given by the insurance company if any insurance claim is involved.

Article 31

The loss from construction in process and materials thereof refers to the loss resulting from the projects under construction of an enterprise which have been suspended, abandoned and discarded as useless, or demolished, as well as the loss resulting from the discarding or selling at reduced price of the corresponding project materials as a consequence.

Article 32

As for a project under construction which has been suspended, abandoned and discarded as useless, or demolished, the balance of the book value thereof less the salvage value shall be determined as loss on the basis of the following evidence:

(1)

Documents of the state expressly ordering to suspend construction projects;

(2)

Documents on suspension and demolition of construction projects issued by the relevant government departments;

(3)

Appraisal opinions, explanations of causes and ratification documents issued by the enterprise with regard to the project under construction which has been discarded or abandoned; As for the discarding of a project under construction which is of relatively high value, the enterprise shall have the technical appraisal opinions issued with the participation of industry experts; and

(4)

The basis for determining the actual investment in the project.

Article 33

As for a project under construction which has been damaged as a result of a natural disaster or an unexpected accident, the balance of the book value thereof less the salvage value, insurance indemnity and compensation made by the person liable shall be determined as loss on the basis of the following evidence:

(1)

The certification document proving the occurrence of the relevant natural disaster or unexpected accident;

(2)

The explanations on the settlement of claims given by the insurance company if any insurance claim is involved; and

(3)

Explanations on and ratification documents about the determination of the relevant liabilities and the compensation of the liable person within the enterprise.

Article 34

The loss of project materials shall be determined in light of the provisions on the determination of inventory loss in these Measures.

Chapter VI Determination of Permanent or Substantial Asset Damages

Article 35

Inventory goods under one or more of the following circumstances shall be deemed as having suffered from permanent or substantial damages:

(1)

It has become rotten and deteriorated;

(2)

It has exceeded the shelf life and is of no disposal value;

(3)

It is no longer needed in operation, and has no use value or disposal value; or

(4)

There is other justification that it is of no use value and disposal value.

Article 36

A fixed asset under any of the following circumstances shall be deemed as having suffered from permanent or substantial damages:

(1)

It has stood idle for long and is of no disposal value;

(2)

It is unable to be used due to technological advances;

(3)

It has been damaged and it is of no use value and disposal value;

(4)

Due to its own reason, the use of it will produce a large quantity of defective products;

(5)

Other circumstances under which it is practically unable to bring economic benefits to the enterprise.

Article 37

An intangible asset under one or more of the following circumstances shall be deemed as having suffered from permanent or substantial damages:

(1)

It has been substituted by other new technologies, and is of no use value or disposal value;

(2)

It has exceeded the time limit of legal protection, and is unable to bring economic benefits to the enterprise;

(3)

There is other justification that it is of no use value and disposal value.

Article 38

An investment under one or more of the following circumstances shall be deemed as having suffered from permanent or substantial damages:

(1)

The invested party has been declared bankrupt, revoked or closed down, or its industrial and commercial business license has been written off or revoked in accordance with the law;

(2)

The financial condition of the invested party is seriously deteriorated, a huge loss has been incurred accumulatively, and the invested party has suspended its business for 3 consecutive years or more, and has no plans of reorganization, etc. to resume its business operation;

(3)

The financial condition of the invested party is seriously deteriorated, a huge loss has been incurred accumulatively, and the stock of the invested party has been delisted in the stock exchange and the stock trading has been suspended for 1 year or more; or

(4)

The financial condition of the invested party is seriously deteriorated, a huge loss been incurred accumulatively, and it has been liquidated.

Article 39

If there is strong evidence proving that any inventory goods, fixed asset, intangible asset or investment has suffered from property losses or permanent or substantial damages, the property loss shall be confirmed after the converted income, recoverable amount and liability, and insurance indemnity are deducted.

The recoverable amount shall be determined upon the appraisal by an intermediary institution. If it is not appraised by any intermediary institution, the recoverable amount of fixed assets or long-term investment may be generally and provisionally determined as 5% of the book value thereof, and 1% for inventory goods. The accounting records shall be preserved for all kinds of assets that are confirmed as having suffered form permanent or substantial damages. When each asset is actually liquidated for discarding, the losses and gains shall be confirmed on the basis of the actual liquidation and rejection as well as the estimated recoverable amount.

Article 40

As for inventory goods, fixed assets, intangible assets or investment that are suffered from permanent or substantial damage, the property loss shall be confirmed on the basis of the following evidence:

(1)

Explanations of economic and technical factors for the elimination or deterioration of assets;

(2)

Written statements signed by and affixed with the seals of the legal representative, person-in-charge or financial chief of an enterprise on the fact that the relevant assets have been rotten and deteriorated, are of no use value or disposal value or has been damaged;

(3)

The quality appraisal report as issued by an intermediary institution or by the relevant technical department;

(4)

Documents on the time limit for legal protection of intangible property;

(5)

An announcement on the bankruptcy and the documents on liquidation of the relevant invested party, the write-off or revocation documents issued by the administrative department for industry and commerce, the documents regarding administrative decision of the relevant governmental department; or legal or other certification documents on the termination of business operation or suspension of trading;

(6)

Explanations on the recovery of costs and value of the relevant assets; or

(7)

Certification on the distribution of the residual assets upon liquidation of the invested party.

Article 41

Where an enterprise entrusts a financial institution to provide loans to any other entity and the said entity can not pay loans on schedule, it shall be handled in light of the provisions on the disposal of investment transfer loss in these Measures.

Chapter VII Determination of Asset Appraisal Losses

Article 42

The following conditions shall be satisfied if an application for pre-income-tax deduction is filed for the loss of various assets of an enterprise confirmed upon appraisal:

(1)

The asset appraisal loss arises from the asset and capital verification of the enterprise as uniformly organized by the state;

(2)

The appraisal loss arises from the various taxable reorganizations of the enterprise; and

(3)

The tax payment adjustment has been conducted to the net appreciation or losses from various asset appraisals in the case of tax-free reorganization of the enterprise.

Article 43

The asset appraisal loss of various assets of an enterprise shall be determined on the basis of the following evidence:

(1)

Documents on the asset and capital verification as uniformly organized by the state (excluding the regular and institutionalized asset liquidations in the daily administration of state assets);

(2)

Assets appraisal materials issued by intermediary institutions;

(3)

Assets appraisal confirmation documents issued by the governmental department;

(4)

Certification materials on the tax payment for a taxable reorganization business; and

(5)

Certification materials on the tax payment adjustment if a tax-free reorganization business involves the appreciation or loss arising from the asset appraisal.

Chapter VIII Determination of Other Special Property Losses

Article 44

The following conditions shall be met if an application for pre-income-tax deduction of is filed for property loss resulting from the relocation or expropriation as planned by the government:

(1)

Having a definite legal and policy basis; and

(2)

Not belonging to the government apportion.

Article 45

The property loss of an enterprise resulting from relocation or expropriation as planned by the government shall be determined on the basis of the following evidence:

(1)

Documents on administrative decisions of the relevant governmental departments and the legal and policy bases;

(2)

Appraisal certificates issued by professional technical departments or intermediary institutions; and

(3)

The basis for determining the book value of the enterprise's properties.

Article 46

As is a general rule, no enterprise may directly engage in credit operations, with the exception of the financial insurance institutions (including internal financial companies of enterprise groups established upon approval) that can engage in credit operations as prescribed by the state. Except the commercial credits that result from the sale of commodities between enterprises, the loss resulting from other fund lending may not be deducted without the approval of the State Council.

Article 47

If an enterprise provides guarantee to other party which is related to its taxable incomes and shall assume the joint and several liability for repayment because the warrantee fails to discharge its debts by the due date, and upon check and urgency for payment, the warrantee has no capacity to discharge its debts, the unrecoverable loss shall be administrated in light of the provisions on the Loss from bad debts in these Measures. If an enterprise provides loan guarantee, which is not related to its taxable incomes, to other independent taxpayer, and shall repays the principal and interest for the warrantee because the warrantee lacks capacity to pay off its loans, the loss resulting therefrom can not be declared for deduction.

Article 48

If an enterprise fails to redeem the assets under mortgage by the due date and the said assets are thus auctioned or realized, the balance of the book value thereof less the realization value may be determined as property loss on the basis of certification document of the auction or realization of the assets.

Chapter IX Liabilities

Article 49

A taxation authority shall, according to the time and procedures as prescribed in these Measures and pursuant to the principles of fairness, transparency, honesty, high efficiency and facilitating taxpayers, timely accept, examine and approve the matters concerning the examination and approval of property losses declared by taxpayers. If it fails to accept, examine or approve the said matters in a timely manner due to reasons other than objective factors or fails to comply with the prescribed procedures to carry out the examination and approval and verification and thus causes any errors in the examination and approval, it shall be subject to liabilities according to the Law of the People's Republic of China on the Administration of Tax Collection and the provisions on the responsibility system of tax law enforcement.

Article 50

The examination and approval of an application for pre-income-tax deduction of property loss of an enterprise carried out by taxation authorities does not change the declaration-related liabilities borne by the enterprise. Where an enterprise overstates its property loss by forging or altering the relevant materials and evidence, or fails to go through the examination and approval as prescribed by these Measures and directly carries out the pre-income-tax deduction of property loss and causes the underpayment of the tax payable, the taxation authority shall deal with it in accordance with the Law of the People's Republic of China on the Administration of Tax Collection.

In case an enterprise fails to pay or underpays the taxes payable as a result of the mistake of the taxation authority in the examination and approval or verification, it shall be implemented in accordance with Article 52 of the Law of the People's Republic of China on the Administration of Tax Collection.

Article 51

When conducting tax payment inspection of the property loss which is deducted upon declaration by an enterprise itself or upon examination and approval, the taxation authority shall examine the authenticity, legality and rationality of the relevant evidence according to the principle of substance over form, and conducts tax payment adjustment if there is absolute proof that the pre-income-tax deduction is caused due to untrue, illegal or irrational evidence or estimation, and shall distinguish the different conditions and responsibilities and punish the guilty taxpayers and the relevant persons responsible according to the provisions. Where a technical appraisal department or intermediary institution provides any false documentation to the taxpayer and causes the tax payable unpaid or underpaid, the taxation authority shall deal with it in accordance with the Law of the People's Republic of China on the Administration of Tax Collection and the detailed rules for the implementation thereof.

Chapter V Supplementary Provisions

Article 52

The bureaus of state taxation and local taxation of all provinces, autonomous regions, municipalities directly under the Central Government and the cities under separate state planning may formulate their detailed implementation measures in accordance with these Measures.

Article 53

These Measures shall go into effect as of September 1, 2005. The Administrative Measures for the Pre-tax Deduction of Property Losses of Enterprises (Guo Shui Fa [1997] No. 190) as printed and issued by the State Administration of Taxation on December 16, 1997 shall be simultaneously abolished.