Laws of the People's Republic of China

The State Administration of Taxation

Circular of the State Administration of Taxation on Printing and Distributing the Protocol II on the Agreement between the Government of the People's Republic of China and the Government of the Republic of Korea on the Avoidance of Double Taxation and Getting Prepared for Its Implementation

Guo Shui Fa [2006] No. 52

To all state taxation bureaus and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and the cities specifically designated in the state plan,

The Protocol II to the Agreement between the Government of the People's Republic of China and the Government of the Republic of Korea on the Avoidance of Double Taxation and Prevention of Tax Evasion with respect to Taxes on Income was formally concluded in Beijing on March 23, 2006. This Protocol shall come into force after both contracting states have completed their respective legal procedures. The text of this Protocol is hereby printed and distributed to you. Please make good preparations for its implementation.

Annex: Protocol II to the Agreement between the Government of the People's Republic of China and the Government of the Republic of Korea on the Avoidance of Double Taxation and Prevention of Tax Evasion with respect to Taxes on Income

The State Administration of Taxation

April 5, 2006 Annex:Protocol II to the Agreement between the Government of the People's Republic of China and the Government of the Republic of Korea on the Avoidance of Double Taxation and Prevention of Tax Evasion with respect to Taxes on Income

As for the Agreement between the Government of the People's Republic of China and the Government of the Republic of Korea on the Avoidance of Double Taxation and Prevention of Tax Evasion with respect to Taxes on Income which was signed in Beijing on March 28, 1994 (hereinafter referred to as the Agreement), the Government of the People's Republic of China and the Government of the Republic of Korea agree to regard the following provisions as an integral part of the Agreement:

Article 1

As for Article 1 of this Agreement, both the contracting states agree that this Agreement does not apply to such a company, trust or any other entity, if a company or trust or any other entity is a resident of a contracting state, if it is owned or controlled by one or more direct or indirect beneficiaries who are not residents of this contracting state, and if the tax imposed by this contracting state on the income of this company, trust or any other entity (after considering the tax amount to be reduced or offset by any means, including the tax refund, reimbursement, donation, offset, deduction or exemption), the revenue of this contracting state has reduced substantially in comparison with all shares of the capital stock of the company or all equities of the trust or any other entity (depending on the corresponding circumstances) which benefit and are owned by one or more residents of this contracting state. However, if 90% or more of the income completely comes from active trade or business operation other than investment, the aforesaid provisions shall not apply.

Article 2

The "Korea taxes" as mentioned in Article 2 of the Agreement shall be deemed as including the special tax for rural development which is a surtax directly or indirectly collected by Korea on the tax base of the income tax or corporation tax.

Article 3

Paragraph 7 of Article 11 of the Agreement shall be deleted and replaced by the following paragraph:

"7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest payment exceeds the amount of what would have been agreed upon by the payer and the beneficial owner in the absence of such special relationship, the provisions of this Article shall apply only to the last-mentioned amount. Under this circumstance, the excessive part of the payment shall remain taxable according to the laws of each contracting state, with due attention being given to the other provisions of the Agreement."

Article 4

Paragraph 1 of Article 23 in the Korea text of the Agreement and paragraph 2 of Article 23 in the Chinese text shall be deleted and replaced by the following paragraphs:

"In the event of a resident of Korea, double taxation shall be avoided as follows:

According to the provisions of Korean tax law which regulates that any tax payable in any country other than Korea is allowed to be credited against the taxes payable in Korea (on condition that it shall not affect the general principle of the Agreement):

(a)

The Chinese taxes payable (excluding, in the case of dividend, tax payable in respect of profits out of which the dividend is paid), whether directly paid or withheld, in respect of the income sourced within China shall be allowed to credit against Korean taxes payable in respect of that income according to the laws of China and the provisions of the Agreement. However, the credit shall not exceed the proportion of Korean taxes payable for the income sourced within China against the entire income subject to Korean tax.

(b)

With regard to a dividend paid by a Chinese resident company to a resident company of Korea, if the Korea company owns not less than 10 percent of the shares of the Chinese company that pays the dividend, the credit shall take into account the Chinese taxes paid by the company that pays the dividend in respect of its income (except for the circumstance that any Chinese tax is allowed to be credited in accordance with Item (a) of this paragraph. "

Article 5

1.

Paragraph 3 of Article 23 of the Agreement shall be deleted and replaced by the following Paragraph, which shall cover a 10-year period as of January 1, 2005:

"3. The taxes payable in a contracting state as mentioned in paragraph 1 (a) and paragraph 2 of this Article shall be deemed to include the tax which would have been payable but is not paid as a result of tax reduction, exemption or other tax incentives as stipulated by the provisions of the contracting state for promoting economic development. For the purpose of this paragraph, the amount of tax shall be deemed to be 10 per cent of the total amount of the dividends, interest and royalties respectively according to paragraph 2 of Article 10 , paragraph 2 of Article 11 and paragraph 2 of Article 12 ."

2.

Paragraph 4 of Article 23 shall be deleted.

Article 6

In despite of the provisions of paragraph 3 of Article 23 , if the income that a resident of a contracting state obtains from the other contracting state falls within the scope of income as mentioned in this paragraph, and if the competent authorities of a contracting state considers that this resident shall not enjoy the benefits as described in paragraph 3 of Article 23 after consulting with the other contracting state and taking the following provisions into consideration, this resident shall be deemed to have paid the tax on the aforesaid income:

(a)

Whether or not a person makes any arrangement by making use of paragraph 3 of Article 23 of the Agreement for the benefits of his own or any other person; or

(b)

Whether or not any benefit falls or may possibly fall on a person who is neither a resident of a contracting state nor of the other contracting state;

(c)

The prevention of tax evasion and cheating of taxes to which the Agreement applies.

Article 7

Both contracting states shall, through the diplomatic channel, notify each other of the completion of legal procedures to be completed for the entry into force of Protocol II. The Protocol II shall come into force as of the date of the last notice issued by any of the contracting states.

In witness whereof the undersigned, duly authorized thereto by their respective governments, have signed this Agreement.

The Protocol II is signed in duplicate in Beijing on March 23, 2006 in Chinese, Korean and English, with all texts being equally authentic. In case of any divergence of interpretation, the English text shall prevail.

For the Government of the People's Republic of China　　　　　　 For the Government of the Republic of Korea