Laws of the People's Republic of China

Ministry of Finance, State Administration of Taxation

Circular of the Ministry of Finance and the State Administration of Taxation on the Standards for Determining the Newly-established Enterprises that May Enjoy the Preferential Policies for the Enterprise Income Tax

Cai Shui [2006] No. 1

The fiscal departments (bureaus), state taxation bureaus and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and cities under separate state planning, the Financial Bureau of the Xinjiang Production and Construction Corps, the financial supervision commissioners' offices dispatched by the Ministry of Finance in all provinces, autonomous regions, municipalities directly under the Central Government and cities under separate state planning:

With the unswerving development of society and economy as well as further deepening of the reform of enterprises, a new problem that is not clear enough occurred on the standards for determining the newly-established enterprises that may enjoy the preferential policies for the enterprise income tax. Upon deliberation, we hereby clarify again the standards for determining the newly-established enterprises that may enjoy the deduction or exemption of the enterprise income tax on a periodic base as follows:

I.

Standards for Determining the Newly-established Enterprises that may enjoy the deduction or exemption of the enterprise income tax on a periodical base

1.

Where an new establishing enterprise has transacted the formalities of book in and registration in the administrative department for industry and commerce according to the relevant laws, regulations and provisions of the state;

2.

Where the accumulated contributed amount of non-monetary assets as fixed assets and intangible assets as actually contributed by equity contributors (shareholders or any other equity investors) of a newly-established enterprise shall not be permitted to exceed 25% of its registered capital.

In particular, the registered capital of a newly-established enterprise shall be the real paid-in capital or equity that has been registered by the administrative department for industry and commerce. The non-monetary assets include such fixed assets as buildings, machines and equipments as well as such intangible assets as patent rights, trademark rights and non-patented technologies. Where the non-monetary assets contributed by the equity contributor of a newly-established enterprise that have been assessed by a qualified accountant (auditing or taxation) firm shall be the amount of capital contributions upon the value of assessment In the case of no assessment, the same kind of assets or the market price of identical assets in the current day or in the latest month as provided by taxpayers shall be subject to the verification of the competent tax authority.

II.

During the period when a newly-established enterprise enjoys the preferential policies of deduction or exemption of the enterprise income tax on a periodical base, where the non-monetary assets as accumulatively purchased by the equity investors as well as the associated parties thereof exceeded 25% of its registered capital, the enterprise may no longer enjoy any relevant preferential policies of deduction and exemption of the enterprise income tax.

III.

The present Circular shall come into force as of the day of issuance. The specific taxation collection and administration scope of newly-established enterprises implemented by the state taxation bureaus and local taxation bureaus shall be based on the standards for determining the newly-established enterprises as prescribed in the present Circular. The taxation collection and administration scope shall not be adjusted to those enterprises that have been collected and administrated by the state taxation bureaus and local taxation bureaus before the present Circular issuance. e. For any newly-established enterprise that has obtained the approval for enjoying the preferential policies for the enterprise income tax, the preferential treatment may continue to the expiration according to the relevant provisions.

IV.

The term "VI. Definition of newly-established enterprises" and the conditions for determination as prescribed in the Circular of the State Administration of Taxation on Several Specific Issues concerning the Enterprise Income Tax (No. 229 [1994] of the State Administration of Taxation) shall be simultaneously abolished.

Ministry of Finance

State Administration of Taxation

January 9, 2006