Laws of the People's Republic of China

The State Administration of Taxation

Circular of the State Administration of Taxation on Policy Issues of Business Tax Concerning Foreign-capital Financial Institutions

GuoShuiFa [2000] No.135

July 28,2000

Along with the increase of foreign investment and foreign financial enterprises in China (hereinafter referred to as "foreign-capital financial institution"), and the expansion of the business scope, there are some problems rising gradually during the period of collecting the business tax from these financial institutions, so some relevant problems are specified as follows to facilitate the implementation of policies:

I.

The issue to charge business tax on off-land bank business of a foreign-capital financial institution

According to Article 7 of the Implementation Rules of Interim Regulations for Business Tax in the People's Republic of China and the principle that the location of financial institutions shall be the occurring location of labor services as specified by relevant stipulations of the Inform that Weather to Charge Business Tax on the Interests and rent Obtained by Foreign Enterprises in the People's Republic of China (GuoShuiFa [1997] No.035). For the foreign and internal financial institutions engaged in off-land bank business, if the payable-tax labor services of business tax are provided in China, the interests income shall be charged business tax according to relevant regulations.

As to the income of off-land business beyond the interests income of the foreign-capital financial institution, the location of the institution shall be regarded as the occurring location of payable-tax labor services for business tax, comparing with the management method of interests income to make the management easy.

So-called off-land bank business refers to the financial activities that the bank assimilates the capital of non-inhabitants and uses the capital to services non-inhabitants. Off-land bank business includes: Foreign exchange saving, foreign exchange loan, daily interest rates on short-term private loans of foreign exchange in same industry, international settlement, the issuing of large sum conveyable deposition certificate, the guarantee of foreign exchange, consultation, business witness and other services approved by the State Administration of Foreign Exchange.

II.

For the scope of business income that the foreign-capital financial institution gains in the special economic region

For the income that the foreign-capital financial institution gains in the special economic region, it may include the services income for the foreign-capital financial institution to provide the individuals in the special economic region with the services of finance, insurance and labor according to Article 1 and Article 2 of the Circular to Transmit the Circular of the State Council for Adjusting the Tax Policy on the Industry of Finance and Insurance (CaiShuiZi [1997] No.045) of the Ministry of Finance and the State Administration of Taxation .

The business income directly acquired by the insurance company with foreign investment through providing the units or individuals in the special economic region with the insurance services shall be exempted from the business tax charging within five years starting from the registration date according to Article 3 of the Circular for the State Council to Adjust the Tax Policy of Financial Insurance Industry (GuoFa [1997] No.5).

III.

The issue to charge business tax on RMB transferring loan business

RMB business operated by approved bank of foreign capital shall be carried out according to the Circular of Relevant Issues to Charge Sales tax on Financial Industry (CaiShuiZi [1995] No.79) of the Ministry of Finance and the State Administration of Taxation, i.e. the RMB transferring loan business shall be handled as general loan business, and the total interests income shall be used to charge business tax as turnover. The business among the foreign-capital financial institutions shall not be charged business tax temporarily.

IV.

The determination of financing and leasehold turnover

Shall be carried out in such way so that the expenditure of lending interests deducted from payable-tax turnover by the foreign-capital financial institution (engaged in financing and leasehold business) shall be only limited to the expenditure of lending interests of foreign exchange in foreign countries, while the expenditure of lending interests of foreign exchange/RMB in China must not deducted, according to Article 2 of the Circular of Relevant Issues to Charge Business Tax on Financial Industry (CaiShuiZi [1995] No.79) and relevant stipulations of the Circular of Relevant Issues to Use Financing Leasehold Business Tax to Calculate the Turnover (CaiShuiZi [1999] No.183) of the Ministry of Finance and the State Administration of Taxation.

V.

When self-holding capital is deposited into the bank in foreign countries and then is lent privately in daily interest rates on short-term, for the case that whether it can be charged business tax as transferring loan business of foreign exchange

Some banks of foreign capital, during the operation, deposit 30% of self-holding capital into the People's Bank according to relevant regulations and the deposit the rest self-holding capital into concerned bank in foreign countries. Those banks loan privately in daily interest rates on short-term when they grant of loans. In above loan, the part of deposition balance of self-holding capital shall not be regarded as the "transferring loan business of foreign exchange" as said in Article 2 of the Circular of Relevant Issues to Charge Business Tax on Financial Industry (Financial tax number: (1995)79), and it has the characteristics as said in Article 20 of the Implementation Rules of Interim Regulations for Business Tax in the People's Republic of China. Therefore, in the case that the bank of foreign capital loans privately in daily interest rates on short-term from concerned banks in foreign countries, the loan equal to the part of deposited self-holding capital shall be charged business tax according to the sum of interests income.

VI.

This Circular shall enter into force on August 1, 2000, and the event that has been handled in the aspect of tax affairs before this date may not be adjusted.