Laws of the People's Republic of China

the State Administration of Taxation

Circular of the State Administration of Taxation on the Issue concerning the Handling of Relevant Income Taxes of Foreign-funded Enterprises for Their Internal Disposal of Assets

Guo Shui Han [2005] No. 970

The state taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and the Local Taxation Bureau of Shenzhen,

In light of the relevant provisions of the Income Tax Law of the People's Republic of China on Foreign-funded Enterprises and Foreign Enterprises and the detailed rules for its implementation, we hereby make the following circular on the issue concerning the handling of relevant income taxes for the internal disposal of assets of foreign-funded enterprises and branches or business places established by foreign enterprises (hereinafter collectively referred to as enterprises) within China:

I.

The internal disposal of assets by any enterprise (involving various self-produced and purchased assets), except that the assets are transferred abroad, shall not be determined as income; the historical costs of the relevant assets shall be calculated continually.

II.

The internal disposal of assets as mentioned in Article I of the present Circular refers to the disposal act whereby the ownership of the assets is not changed either formally or substantively, including but not restricted to the following circumstances:

1.

Using the assets to produce, manufacture or process any other product;

2.

Changing the shape, structure or performance of the assets;

3.

Changing the purpose of usage of the assets (for example, changing the self-constructed commercial house into self-used house or for operational purposes);

4.

Transferring the assets between the headquarter and its branches; or

5.

Under the aforesaid two or more circumstances.

The following circumstances under which an enterprise transfers its assets to any other person may not be regarded as internal disposal of assets due to the change of the ownership of the assets:

1.

Using the assets for marketing promotion or sales promotion;

2.

Using the assets for entertainment expense;

3.

Using the assets for workers' bonus and welfare;

4.

Using the assets for dividend distribution;

5.

Using the assets for donation; or

6.

Other usages which do not change the ownership of the assets.

III.

For the taxation handling of the turnover taxes and other types of taxes on the internal disposal of assets of an enterprise, the existing relevant provisions shall still be followed.

the State Administration of Taxation

October 14, 2005