Laws of the People's Republic of China

The State Administration of Taxation

Circular of the State Administration of Taxation on the Question Conecrning the Handling of Tax Related to Foreign Currency Business of Enterprises with Foreign Investment

GuoShuiFa [1994] No.107

April 21,1994

The tax bureaus of various provinces, autonomous regions and municipalities directly under the Central Government, the tax bureaus of various municipalities separately listed on the State plan, and various sub-bureaus of the Offshore Oil Tax Administration:

Due to the merger of exchange rates after reform of the state foreign exchange control system, enterprises with foreign investment shall adjust their foreign exchange accounts in accordance with related accounting system. Questions related to the handling of tax are hereby clarified as follows:

I.

An enterprise which has received the capital funds and has entered them in the related capital account in accordance with the specified account exchange rate shall not adjust the book balance of the capital account just because of the merger of fluctuation of exchange rates.

II.

The early year balance of the enterprise's related foreign exchange account (including foreign cash, foreign currency bank deposits and creditor's right and debt settled in foreign currency) shall be adjusted in accordance with the market exchange rate published on January 1, 1994 by the People's Bank of China and be converted into balance of account standard money. The difference between the converted account standard money and the book balance of the original account standard money shall be reflected independently and shall be dealt with in accordance with the following methods when calculating the taxable amount of the enterprise's income:

(1)

The net loss, if any, may be amortized on an average within five years beginning from 1994, if the remaining operational period is less than five years, the net loss shall be amortized on an average within the remaining operational period. If the amount of the net loss is small and does not have much effect on the calculation of the enterprise's current taxable amount of income and so needs to be amortized lump sum in the current year of 1994, or if the amount of the net loss is huge and indeed needs to be amortized in a period of over five years, the enterprise shall file an application and report it to competent tax authorities for verification and approval.

(2)

The net profit, if any, may be written off on an average in light of a five-year period, or be used to make up the annual loss, the balance may be incorporated into the enterprise's clearing income.