Laws of the People's Republic of China

The State Administration of Taxation

Circular on Tax Paid by Foreign Investors Merging the Stock Equity of Chinese Enterprises

GuoShuiFa [2003] No. 60

May 28, 2003

In order to promote and regulate the investment launched by foreign investors in China, introduce foreign advanced technology and management experiences, raise China's level of utilizing foreign capital and realize reasonable allocation of resources, the former Ministry of Foreign Trade and Economic Cooperation, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange and the State Administration of Taxation jointly promulgated the Interim Regulations Concerning the Issue that Foreign Investor Merge Enterprises Within the Territory of China (hereinafter referred to as Interim Regulations) in March of 2003, which allows foreign investors to merge the stock equity of enterprises without foreign investment within the territory of China (hereinafter referred to as enterprises within the territory). Concerning the tax issue involved in the merger, it is hereby informed as follows:

I.

Foreign investors enable enterprises within the territory to become enterprises with foreign investment through purchasing the stock equity of their shareholders or subscribe their increased capital (hereinafter referred to as stock equity purchase). If foreign investors have more than 25% of the total shares, the enterprise may pay various taxes according to tax laws and regulations suitable to enterprises with foreign investment.

II.

For the enterprises with foreign investment changed into from an enterprise within the territory through stock equity purchase, if they meet the relevant conditions stipulated by the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises (hereinafter referred to as Tax Law) and its detailed rules, they could enjoy preferential tax treatment made by Tax Law and other relevant provisions. The preferential tax should be calculated according to the following provisions:

(I)

The beginning of business and operation period. The day when an industrial and commercial organ approves and issues business license means an enterprise with foreign investment changed into from an enterprise within the territory through stock equity purchase begins its business. From the beginning day to the business maturity date set by industrial and commercial registration is operation period.

(II)

The settlement of pre-establishment loss. The total business loss that has not been made up before an enterprise with foreign investment established may be covered by the enterprise with foreign investment changed into from an enterprise within the territory through stock equity purchase in the rest years of covering loss stipulated by Article 11 of Tax Law.

(III)

Identification of profit-making year. Profit-making year refers to the year when an enterprise with foreign investment changed into from an enterprise within the territory through stock equity purchase is established and it still makes profit after making up loss of the years before. In the profit-making year, if the production period is less than 6 months, the enterprise may choose the beginning year of tax reduction and remission according to Article 77 of detailed rules of Tax Law.

III.

The Circular shall enter into force as of January 1, 2003. The enterprises with foreign investment changed from enterprises within the territory through stock equity purchase established before the promulgation of the circular should adhere to the circular if they meet the conditions of Interim Regulations and the circular.