Laws of the People's Republic of China

The State Taxation Administration

Circular of the State Taxation Administration on Relevant Issues concerning the Refund of Enterprise Income Tax to Foreign Investors upon their Reinvestment

GuoShuiFa [2002] No.90

July 17, 2002

The state taxation bureaus of all provinces, autonomous regions and municipalities directly under the Central Government and municipalities srparately listed on the State plan, Guangdong Provincial Local Taxation Bureau and Shenzhen City Local Taxation Bureau:

Recently, some questions concerning the implementation of the preferential policies on tax refund upon reinvestment, which need to be further clarified, are raised by some regions. In order to regulate the implementation of the preferential policies on tax refund upon reinvestment, which are provided for in the Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises(hereinafter referred to as the Tax Law) and in the Detailed Rules for its implementation, we hereby clarify the relevant issues as follows:

I.

In case an enterprise with foreign investment, pursuant to the resolutions of the board of directors, make re-investment by increasing its registered capital financed from the Accumulation Fund (or the Development Fund or the Reserve Fund) that it has set aside from its after-tax profits in accordance with the relevant provisions, the part of the reinvestment in the said increase of the enterprise's registered capital which is contributed by the foreign investor is entitled to a tax refund to the foreign investor upon reinvestment in accordance with Article 10 of the Tax Law and other relevant provisions.

II.

Being used directly as investment to establish other enterprises with foreign investment as mentioned in Paragraph 1 of Article 80 of the Detailed Rules for the Implementation of the Tax Law shall include the following circumstances:

(1)

being directly used as reinvestment to establish another enterprise with foreign investment, and such reinvestment constitutes the registered capital of the new enterprise;

(2)

being directly used as reinvestment to increase the registered capital of an existing enterprise with foreign investment.

A foreign investor shall not, if using the profits it obtained from the enterprise with foreign investment as reinvestment to purchase other investors equity share in an existing enterprise, but not increasing the registered capital or the operational fund of the said enterprise, enjoy the preferential treatment of tax refund upon such reinvestment.

III.

A foreign investor that uses its foreign currency reserve as reinvestment shall regard the Renminbi converted on the basis of the foreign currency quote price announced by the State on the day when the reinvested enterprise actually received the investment amount, as the reinvestment amount for calculating the tax to be refunded upon reinvestment.

IV.

Where a foreign investor makes one or more than one reinvestments by using the its after-tax profits derived from a fiscal year, the accumulative reinvestment amount for calculating the tax to be refunded shall not exceed the limited amount calculated from the following formula:

The limited reinvestment amount = (the taxable income of the enterprise with foreign investment in the year when the after-tax profits are obtained - the enterprise income tax actually paid by the enterprise with foreign investment in the year) * the equity share (or profit distribution proportion) held by the foreign investor in the enterprise with foreign investment in the year

Where a foreign investor reinvests all its annual after-tax profits derived from the enterprise with foreign investment in the same year, and the accumulative reinvestment amount is lower than the above said limited amount, the tax to be refunded shall be calculated on the basis of the actual reinvestment amount; if the accumulative reinvestment amount exceeds the above said limited amount, the tax to be refunded shall be calculated on the basis of the limited amount, and the part in excess shall not be entitled to tax refund.

V.

The enterprise with foreign investment with 100% of shares held by foreign investors, which engage wholly in investment business as provided for in the Official Reply of the State Taxation Administration on the Relevant Issues concerning the Tax Refund upon Enterprises with Foreign Investment Reinvestment (GuoShuiHanFa [1995] No.154), shall include enterprises which engage wholly in investment business and in business relating to investment.

Business relating to investment shall be limited to what is stipulated in the Interim Provisions on Foreign-funded Investment Companies promulgated by the Ministry of Foreign Trade and Economic Cooperation on April 4, 1995 and their supplementary provisions, i.e., services provided by a foreign-funded company within the business scope in its business license to its subsidiaries in which it has invested, such as purchase of raw materials, sale of products and after-sale service, financial and other ancillary services, like financial and technical supports, etc., as well as research and development, consulting, training and export business as authorized to be engaged in by the company inside or outside of the subsidiaries it has invested in.