Laws of the People's Republic of China

Circular of the Ministry of Commerce on Relevant Matters Concerning the Handling of the Confirmation Letter for Domestic-funded or Foreign-funded Projects Encouraged by the State for Development for Foreign-funded Enterprises

Shang Zi Fa [2006] No. 201

The competent commercial departments in all provinces, autonomous regions, municipalities directly under the Central Government and cities specifically designated in the state plan, and that of Xinjiang Production and Construction Corps.,

As to the questions as recently encountered by many local competent departments of commerce in issuing confirmation letter of tax exemption, this Ministry has made a clear reply in the Reply Letter of the Ministry of Commerce on Relevant Matters Concerning the Handling of the Confirmation Letter of Tax Exemption for Foreign-Funded Enterprises in the Encouraged Category (Shang Zi Han [2006] No. 41).

In order to further regulate the operating procedures of tax exemption of import equipment for foreign-funded enterprises and clarify the specific requirements for foreign-funded enterprises to handle the procedure of obtaining the Confirmation Letter for Domestic-Funded or Foreign-Funded Projects Encouraged by the State for Development and the Certificate for Importation, by Foreign Investment Enterprises, of Renewal Equipment, Technology, Fittings and Spare Parts (hereinafter referred to as "Confirmation Letter" and "Import Certificate" respectively), the circular concerning relevant matters are hereby specified as follows in the light of the Law on Chinese-foreign Equity Joint Ventures, the Law on Chinese-foreign Contractual Joint Ventures, the Law on Foreign-capital Enterprises, Circular of the State Council On the Adjustment of Taxation Policy On Import equipment (Guo Fa [1999] No. 37, hereinafter referred to as Document No. 37), Circular on the Implementation of Adjustment of Taxation Policy On Import equipment (Ji Gui Hua [1998] No. 250) and other related documents.

I.

Basic Principles

Since the State Council decided to issue the Confirmation Letter to the encouraged projects for foreign investment in 1998 and to issue Import Certificate to qualified foreign-funded enterprises in 1999, relevant departments of the State Council have issued a series of documents (see Reply Letter of the Ministry of Commerce on Relevant Matters Concerning the Handling of the Confirmation Letter of Tax Exemption for Foreign-Funded Enterprises in the Encouraged Category (Shang Zi Han [2006] No. 41), prescribing clearly the departments issuing the Confirmation Letter and Import Certificate, procedures, basis and operational measures in the implementation.

In principle, the Confirmation Letter for foreign-funded projects in the encouraged category shall be issued respectively by departments of development & plan, trade & economic cooperation and foreign trade & economic cooperation, of which, the Confirmation Letters for foreign-funded projects in the encouraged category above the upper limit shall be issued by the National Development and Reform Commission and the Ministry of Commerce respectively; those below the upper limit shall be issued by relevant departments of the provincial people's government in light of the present division of duty and limit of power.

Each locality shall continuously comply with the aforesaid regulations and operational measures to ensure that the work of issuing the Confirmation Letter and Import Certificate and operational procedures run in a steady way.

II.

The Scope of the Confirmation Letter and Import Certificate issued by commercial departments

i.

The Confirmation Letter for Foreign-Funded Enterprises in the Encouraged Category as examined and approved once for all by the Ministry of Commerce or local competent departments of commerce (or foreign trade & economic cooperation) in accordance with the Law on Foreign-capital Enterprises and the detailed rules thereof

ii.

The Confirmation Letter of capital increase projects for Foreign-Funded Enterprises in the Encouraged Category as examined and approved by competent departments of commerce (or foreign trade & economic cooperation) in accordance with the Law on Chinese-foreign Equity Joint Ventures, the Law on Chinese-foreign Contractual Joint Ventures, the Law on Foreign-capital Enterprises, the detailed rules thereof and other relevant regulations

iii.

The Confirmation Letter for Foreign-Funded Joint Stock Limited Companies in the Encouraged Category

iv.

The Confirmation Letter for Foreign-Funded Enterprises in the Encouraged Category in the field of service trade

v.

The Confirmation Letter for Foreign-Funded Enterprises in the Encouraged Category as established by foreign investors through merger and acquisition

vi.

The Confirmation Letter of self-use equipment and supporting technologies, fittings and spare parts that cannot be produced by an import country at home or the performance of which cannot meet the needs within the total amount of investment for research and development center set up with foreign investment

vii.

The Confirmation Letter for Foreign-Funded Enterprises in the Encouraged Category as determined on its own initiative in light of local characteristics and uniformly examined and approved by the Ministry of Commerce in order to improve the investment environment and simplify the approval procedures

viii.

The Confirmation Letter that should be issued by commercial departments as prescribed in other laws and regulations

ix.

Import Certificate of self-use equipment and supporting technologies, fittings and spare parts that cannot be produced by an import country at home or the performance of which cannot meet the needs for the established foreign-funded enterprises in the Encouraged Category and Restrictive Category B, foreign-funded research and development centers, foreign-funded enterprises of advanced technology and export-oriented foreign-funded enterprises (hereinafter referred to as "Enterprises within the five categories" for short) for technological reform, within the scope of production and operation originally approved and with self-possessed funds beyond the total amount of investment

III.

The procedure of the Ministry of Commerce issuing the Confirmation Letter and Import Certificate

i.

For the foreign-funded enterprises for which the Ministry of Commerce shall issue the Confirmation Letter (hereinafter referred to as "enterprises above the limit"), a written application shall be transferred to the Ministry of Commerce through the people's governments at the provincial level.

1.

Local commercial departments and enterprises above the limit shall provide the following materials:

(1) The request for instruction of the Confirmation Letter and Import Certificate reported by local competent departments of commerce

(2) The explanation of enterprises above the limit that file the application for the Confirmation Letter and Import Certificate

(3) The document of approval based on which an enterprise above the limit is set up, photocopies of certificate of approval and business license, and the record of passing the joint annual inspections

(4) The photocopy of the report of asset appraisal

(5) The list of import equipment in triplicate under the seal of the competent departments of commerce at the provincial level and enterprises above the limit

(6) Other materials as required by the Ministry of Commerce

For the enterprises within the five categories that apply for the issuing of Import Certificate for the first time, they shall submit the audit report of the previous year or the photocopy thereof bearing the official seal of the enterprises and other documents, and give explanations on the total amount of "self-possessed funds" (to be specific, the reserve funds, development funds, depreciations and post-tax profits of the enterprises) beyond the total amount of investment.

2.

Competent departments of commerce at the provincial level shall make a preliminary examination on the amount of foreign exchange, execution term (which may not exceed the enterprise construction term in principle), list of import equipment, industrial policy items to be applied and the total amount of "self-possessed funds" of enterprises above the limit.

3.

The Ministry of Commerce shall review the written applications filed by competent departments of commerce at the provincial level within 10 workdays after receiving them. For those complying with the state laws, the Ministry of Commerce shall issue the Confirmation Letter or Import Certificate in triplicate and a sealed list of import equipment, and send copies of them to the General Administration of Customs and local customs houses simultaneously. For those failing to comply with the state laws, the Ministry of Commerce shall issue written opinions and explain the reasons.

4.

Enterprises above the limit shall, before importing equipments, go through the formalities of archival filing of tax reduction and exemption at the customs offices directly under the General Administration of Customs of the place where the enterprises are located upon the strength of the Confirmation Letter or Import Certificate and other relevant documents.

ii.

The change procedures of the Confirmation Letter for enterprises above the limit

1.

Where the Ministry of Commerce has issued the Confirmation Letter but the investment indeed needs to be changed in the process of execution

Where the major items like the total amount, amount of foreign exchange and execution term need to be changed, the competent departments of commerce at the provincial level shall make a preliminary examination on the changed items and the reasons, and file an application of change with the Ministry of Commerce, attaching the following materials:

(1) Originals of the Confirmation Letter issued and the record of passing the joint annual inspections,

(2) Explanative materials on changed items (the comparison table shall be attached),

(3) The photocopy of the report of asset appraisal,

(4) Other materials as required by the Ministry of Commerce.

2.

The Ministry of Commerce shall review the written applications within 5 workdays after receiving them. For those complying with the state laws, the Ministry of Commerce shall issue changed Confirmation Letter in triplicate, and send copies to the General Administration of Customs and local customs houses simultaneously. If the Ministry of Commerce disagrees with the change, it shall issue written opinions and explain the reasons.

3.

Enterprises above the limit shall go through the formalities of relevant change at the customs offices directly under the General Administration of Customs of the place where the projects are located on the strength of the Confirmation Letter and other relevant documents.

iii.

Principles for Examining the List of Import Equipment

In principle, the list of import equipment of a foreign-funded enterprise shall be issued together with the Confirmation Letter or Import Certificate, and the Ministry of Commerce shall affix a special seal for the import equipment thereto. The equipment mentioned in the list of the import equipment attached to the Confirmation Letter shall be the self-use equipment imported by the foreign-funded enterprise within the total amount of investment, as well as the technologies, fittings and spare parts attached to such equipment in accordance with the contract. The equipment mentioned in the list of the import equipment attached to the Import Certificate shall be the self-use equipment as well as the technologies, fittings and spare parts attached to such equipments that cannot be produced at home or the performance of which cannot meet the needs.

Where the import scale is large and the construction period is long, and all the import equipment can not be determined by the foreign-funded enterprise when the Confirmation Letter is issued, the written application may be filed by the local commercial department to the Ministry of Commerce by batches, and the Ministry of Commerce may affirm them by batches and affix a special seal for the import equipment.

IV.

Procedures for the Local Commercial Department to Issue Confirmation Letters and Import Certificates

i.

The competent department of commerce at the provincial level shall be responsible for issuing Confirmation Letters and Import Certificates for the foreign-funded enterprises as approved by the local commercial department (hereinafter referred to as the "enterprises under the limit").

ii.

The competent department of commerce at the provincial level shall issue Confirmation Letters and Import Certificates by reference to the procedures prescribed in this Circular. The Confirmation Letters and Import Certificates issued by the competent department of commerce at the provincial level shall be reported to the Ministry of Commerce for archival filing within one month.

V.

Relevant Principles for Issuing Confirmation Letters and Import Certificates

i.

The following principles shall be followed in issuing Confirmation Letters:

1.

Where an enterprise which does not meet the production requirement applies for a Confirmation Letter, the amount of tax exemption shall be: the total amount of investment (the amount of the increased capital) £­the amount of the investment in infrastructure£­the amount for purchasing domestic equipment and other£­the fluid capital of the enterprise£­the non-cash capital contribution of both Chinese and foreign parties (except for the capital contributions by equipment).

2.

Where the business scope of a foreign-funded enterprise covers not only the category of encouragement but also the category of permission or the category of restriction, its application for a Confirmation Letter and the list of the import equipment attached thereto shall only include the self-use equipment imported for the business scope in the Encouraged Category and the technologies, fittings and spare parts attached to such equipment in light of the contract, while the import equipment under the business scope of the permitted category or the restrictive category shall not be listed into the application or the list.

ii.

The following principles shall be followed in issuing Import Certificates:

1.

Each locality shall issue Import Certificates for the "enterprises within the five categories" in strict accordance with the requirements in the Circular of the former Ministry of Foreign Trade and Economic Cooperation on the Relevant Issues Concerning the Import Equipment of Foreign-funded Enterprises (Wai Jing Mao Zi Fa [2000] No. 478) and the Circular of the General Administration of Customs on the Relevant Taxation Policies for Further Encouraging Foreign Investment (Shu Shui [1999] No. 791).

2.

Each local commercial department shall set up a database of "self-possessed funds", and deduct the amount of "self-possessed funds" correspondingly after issuing Import Certificates to the enterprises.

Where any "enterprise within the five categories" applies for issuing an Import Certificate again, the amount of tax exemption shall not exceed the amount of "self-possessed funds" after deduction. After the Import Certificate is issued to an enterprise, the newly added "self-possessed funds" can be included into the amount of "self-possessed funds", and the enterprise shall provide corresponding certificates when he files an application.

iii.

Where a foreign-funded enterprise is created by means of merger, the following principles shall be followed when a Confirmation Letter or Import Certificate is issued thereto:

1.

If the merged enterprise meets the production requirement, no Confirmation Letter may be issued in principle;

2.

If the foreign investor mergers an enterprise within the territory of China by means of capital increase and newly increases its production capacity and enlarges its production scale, the commercial department shall issue a Confirmation Letter in light of the principles as prescribed in Paragraph 1 of Article 5 ; and

3.

If the foreign-funded enterprise established by means of merger falls within "enterprises within the five categories", it shall apply for issuing an Import Certificate in accordance with the relevant provisions on the "self-possessed funds" beyond the total amount of investment of the "enterprises within the five categories", and the aforesaid "self-possessed funds" shall be newly added after merger by the foreign-funded enterprise, and the foreign-funded enterprise shall provide corresponding certificates and explanations to the commercial department.

iv.

Each commercial department at the provincial level shall strictly enforce the relevant provisions, and may not enlarge the application scope of the clauses and items on the category of encouragement at will or illegally issue Confirmation Letters or Import Certificates, and may not issue Confirmation Letters or Import Certificates to the enterprises that fail to conform to the requirements of environmental protection as prescribed by the State.

v.

The Ministry of Commerce shall strengthen its supervision over and guidance of the work on issuing Confirmation Letters to the "enterprises under the limit", and shall order the Confirmation Letters or Import Certificates for which the archival filing formalities have not been handled in time or issued against the provisions to be corrected or cancelled; and shall suspend the qualifications for issuing Confirmation Letters or Import Certificates if the circumstance is serious, and also notify the relevant customs houses in combination with the General Administration of Customs for suspending the relevant tax exemption at the import link.

VI.

The enterprises invested by the residents in Taiwan, Hong Kong and Macao shall be governed by this Circular by analogy.

VII.

This Circular shall be implemented as of the promulgation date, and the power to interpret it shall remain with the Ministry of Commerce. When encountering any problem in the course of implementation, please contact this Ministry (to be exact, the Department of Foreign Investment) in a timely way.

Attachment: List of the Import Equipment of Foreign-funded Enterprises

(Seal of) the Ministry of Commerce

April 29, 2006

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Annex:

List of the Import Equipment of Foreign-funded Enterprises

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Shang Zi Que Zi [200 ] Attached Form No.

¡¡¡¡         (Seal of) the Company

¡¡¡¡              List of the Import Equipment for the Project

¡¡¡¡Unit: 10,000 US Dollars

¡¡¡¡Date                    Contact Person                      Telephone