Laws of the People's Republic of China

the State Administration of Taxation

Circular of the State Administration of Taxation on Relevant Issues concerning Refund of Enterprise Income Tax to Foreign Investors for Reinvestments

Guo Shui Han [2005] No. 1093

The bureaus of state taxes of all provinces, autonomous regions, municipalities directly under the Central Government, and cities specifically designated in the state plan, Shenzhen Municipal Bureau of Local Taxes:

We are informed that some foreign-funded enterprises distribute the profits of the year prior to the transfer of their equities to the transferee foreign investors after the transfer. We hereby give our notice as follows regarding the issue on the refund of enterprise income tax to the foreign investors for reinvestments with the profits gained prior to the transfer of equities:

I.

Where a foreign investor that gains the equities of a foreign-funded enterprise by means of transfer makes reinvestment in China after the transfer with the profit distributed by the foreign-funded enterprise prior to the transfer, the profits for such reinvestment does not fall into the scope of the profits used for direct reinvestments as prescribed in Article 80 of the "Detailed Rules for the Implementation of the Law of the People¡¯s Republic of China on the Income Tax of Foreign-funded Enterprises and Foreign Enterprise", and the foreign investor may not enjoy the relevant tax refund treatment for reinvestment with profits.

II.

Where equities are transferred at the cost price to a foreign investor from any of the following associated parties with whom it has a direct or indirect ownership relationship or whose equities are 100% owned by an identical party, , and the said foreign investor makes a reinvestment in China after the transfer with the profits distributed by the foreign-funded enterprise prior to the transfer, it will not be restricted by the above Article 1 , and may enjoy the tax refund treatment for reinvestment with profits according to the relevant provisions.

(1)

Foreign investors;

(2)

Foreign-funded enterprises specializing in investment business, which may be deemed as foreign investors under the "Circular of the Ministry of Finance and the State Administration of Taxation on Some Taxation Issues for Foreign-funded Enterprises to Engage in the Investment Business" (Cai Shui Zi [1994]No. 083) to enjoy tax refund treatment for reinvestment.

III.

This Circular shall go into effect as of the date of promulgation. With regard to those who have enjoyed tax refund treatment for reinvestment prior to the said date, the tax refund will not be adjusted according to this Circular.

State Administration of Taxation

November 17, 2005