Laws of the People's Republic of China

the State Administration of Taxation

Notice of the State Administration of Taxation on Printing and Issuing the Measures for the Administration of Tax Deduction or Exemption (for Trial Implementation)

Guo Shui Fa [2005] No. 129

The state and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and Yangzhou Taxation Institute:

With a view to regulating and intensifying the administration of tax deduction or exemption, the State Administration of Taxation has formulated the Measures for the Administration of Tax Deduction or Exemption (for Trial Implementation) and hereby prints and distributes it to you for implementation.

Annex: Measures for the Administration of Tax Deduction or Exemption (for Trial Implementation)

State Administration of Taxation

August 3, 2005

Measures for the Administration of Tax Deduction or Exemption (for Trial Implementation)

Chapter I General Provisions

Article 1

With a view to regulating and intensifying the administration of tax deduction and exemption, the present Measures are formulated in accordance with the Law of the People's Republic of China on Tax Collection and Administration (hereinafter referred to as the Law on Tax Collection and Administration) and the Detailed Rules for Implementation thereof and the provisions of the relevant laws, regulations and rules on tax deduction or exemption.

Article 2

The term "tax deduction or exemption" as mentioned in the present Measures refers to the treatment of tax deduction or tax exemption that is granted to a taxpayer under the laws and regulations on tax collection and the relevant provisions of the state on tax collection (hereinafter referred to as the provisions of tax laws). The term "tax deduction" refers to the deduction of some amount of tax from the tax payable; while "tax exemption" refers to the exemption of tax under a special tax category or item.

Article 3

The tax authorities at various levels shall, in accordance with the principles of legality, openness, impartiality, high-efficiency and convenience, standardize the administration of tax deduction and exemption.

Article 4

The tax deduction or exemption are classified into the tax deduction or exemption by way of approval and the tax deduction or exemption by way of archival filing. The term "tax deduction or exemption by way of approval" refers to the item of tax deduction or exemption that shall be subject to the examination and approval of the tax authority. The term ¡°tax deduction or exemption by way of archival filing" refers to the item of tax deduction or exemption for which the formalities of examination and approval have been eliminated and which is not subject to the examination and approval of the tax authority.

Article 5

A taxpayer who enjoys the tax deduction or exemption by way of approval shall submit relevant materials and file an application for approval. The tax deduction or exemption thereof is implemented upon the approval and verification of the tax authority that has the power of examination and approval (hereinafter referred to as the competent tax authority), as is prescribed in the present Measures. Where a taxpayer fails to file an application or fails to obtain the approval and verification of the competent tax authority, he may not enjoy any tax deduction or exemption.

A taxpayer that requests for enjoying the tax deduction or exemption by way of archival filing shall file an application for archival filing , the relevant tax deduction or exemption shall be implemented as of the date when the tax authority has handled the formalities of registration and record keeping. A taxpayer that fails to go through the archival filing in accordance with the relevant provisions may not enjoy any tax deduction or exemption.

Article 6

For a taxpayer that concurrently engages in activities under the item of tax deduction or exemption as well as item of non-tax-deduction or exemption, the tax amount thereof shall be verified and calculated separately, that is, the tax-computation base for those activities under the item of tax deduction or exemption as well as the amounts to be deducted or exempted shall be separately calculated. If they cannot be verified and calculated separately, no tax exemption or reduction is allowed. If they cannot be verified and calculated in a clear way, the tax authority shall verify and determine them in a reasonable way.

Article 7

A taxpayer may enjoy the treatment of tax deduction or exemption under the law. For anyone who fails to enjoy the said treatment, which result in his overpayment of taxes, if there is no definite provision that the refund of the overpaid taxes shall be subject to the examination and approval of the tax authority or there is no prescribed time limit for filing an application for such refund, the taxpayer may, within the time limit as prescribed in Article 51 of the Law on Tax Collection and Administration, file an application for refunding the overpaid taxes, but no interest calculated at the bank deposit rates for the corresponding period of time will be available.

Article 8

The authority in charge of the examination and approval of tax deduction or exemption shall be provided for by laws, regulations and rules on tax collection. Where the tax deduction or exemption is be subject to the examination and approval of the State Administration of Taxation, it shall be reported to the State Administration of Taxation through the tax authority of the province, autonomous region, municipality directly under the Central Government or the city under separate state planning. Where the tax deduction or exemption is subject to the examination and approval of the tax authority at or below the provincial level, it shall be subject to the examination and approval of the tax authority at the provincial level, which shall determine the power of examination and approval,, and as is the general principle, it is subject to the examination and approval of the tax authority of the county (district) where the taxpayer is located. For any item with a large sum of tax to be deducted or exempted or the condition is complicated, the tax authority of the province, autonomous region, municipality directly under the Central Government or the city under separate state planning shall, pursuant to the principles of efficiency and convenience, supervision and responsibility, define the power of examination and approval in a proper manner.

The tax authorities at various levels shall carry out the examination and approval for tax deduction or exemption in accordance with the prescribed power and procedures and are not allowed to carry out any examination and approval by exceeding their power or violating the relevant provisions.

Chapter II Application, Report, Examination and Approval, and Implementation of Tax Deduction or Exemption

Article 9

A taxpayer who applies for tax deduction or exemption by way of approval shall, within the period as prescribed by policies for tax deduction or exemption, file a written application with the administrative tax authority and report the following materials:

(1)

An application report for tax deduction or exemption, clearly indicating the reason, basis, scope, period, quantity, amount, and so on;

(2)

The financial statements and a tax return;

(3)

The certification materials as issued by the relevant departments; and

(4)

Other material as required by the tax authority.

The materials reported by a taxpayer shall be authentic, accurate and complete. The tax authority may not require a taxpayer to submit any technical material or any other material that is irrelevant to the tax deduction or exemption item it applies for.

Article 10

A taxpayer may apply to the administrative tax authority for tax deduction or exemption or may apply to the competent tax authority directly.

For any application that is accepted by the administrative tax authority where the relevant taxpayer is located and shall be subject to the examination and approval of the tax authority at a higher level, the administrative tax authority shall, within 10 workdays as of acceptance of the application, directly report it to the tax authority at a higher level that has the power of examination and approval.

Article 11

The tax authority shall handle the applications for tax deduction or exemption in light of the following circumstances:

(1)

If the tax deduction or exemption item as applied for is not subject to the examination of the tax authority before implementation, the taxpayer shall be informed of the non-acceptance in a timely manner;

(2)

If the application material concerning tax deduction or exemption is not detailed enough or has any mistake, the taxpayer shall be informed of it and allowed to correct it.

(3)

If the application material concerning tax deduction or exemption is incomplete or out of line with the statutory form, the taxpayer shall be informed of all the content that needs to be supplemented and corrected in a one-off manner within 5 workdays; and

(4)

If the application material concerning tax deduction or exemption is complete and complies with the legal form, or the taxpayer has submitted all the tax deduction or exemption materials as is required to be supplemented or corrected by the tax authority, the application thereof shall be accepted.

Article 12

When the tax authority accepts or refuses to accept an application for tax deduction or exemption, it shall issue a written certification affixed with the special seal thereof and indicated with the date as well.

Article 13

The examination and approval for tax deduction or exemption is an examination on the situation whether the materials provided by the relevant taxpayer is pertinent to the statutory requirements of tax deduction or exemption. It does not change the responsibility of a taxpayer to file tax returns in a faithful manner.

Where it is necessary for the tax authority to carry out an on-the-spot verification of the contents of the application materials, it shall assign 2 or more working staff to conduct the on-the-spot verification according to the prescribed procedures and put the verification on record. Where it is both heavy and time-consuming for a superior tax authority to carry out on-the-spot verification regarding tax deduction or exemption, it may entrust the tax authority at the county level where the enterprise is located to conduct the verification.

Article 14

Where the period for tax deduction or exemption exceeds 1 tax year, the examination and approval shall be carried out in a one-off way.

Where the condition for a taxpayer to enjoy the tax deduction or exemption changes, it shall be reported to the tax authority within 15 workdays as of the change, and the tax deduction or exemption shall be terminated after the examination of the tax authority.

Article 15

The tax authority that has the power to examine and approve an application of a taxpayer for tax deduction or exemption shall complete the examination and approval within the time limit provided for as follows in a timely manner and make a decision thereon:

The tax authority at the county or district level in charge of the examination and approval of tax deduction or exemption shall, within 20 workdays, make a decision on the examination and approval. The tax authority at the prefectural or municipal level in charge of the examination and approval of tax deduction or exemption shall, within 30 workdays, make a decision on the examination and approval. The tax authority at the provincial level in charge of the examination and approval of tax deduction or exemption shall, within 60 workdays, make a decision on the examination and approval. In case an authority fails to make the relevant decision within the prescribed time limit may, upon the approval of the principal of the tax authority at the same level, the period for examination and approval may be extended for another 10 workdays and the taxpayer concerned shall be informed of the reason for the extension.

Article 16

Where an application for tax deduction or exemption satisfies the statutory requirements and standards, the competent tax authority shall, within the prescribed time limit, make a written decision on granting the approval. In the case of disapproval for the tax deduction or exemption, an explanation shall be given and the taxpayer concerned shall be informed of the right to apply for administrative reconsideration or file an administrative lawsuit according to law.

Article 17

Where the tax authority makes a decision on examination and approval of tax deduction or exemption, it shall, within 10 workdays as of the day when the decision is made, serve the taxpayer with the written decision of examination and approval of tax deduction and exemption.

Article 18

Prior to the service of the reply for tax deduction or exemption, the relevant taxpayer shall file tax returns and pay taxes in accordance with the relevant provisions.

Article 19

Prior to the implementation of the tax deduction or exemption by way of archival filing, a taxpayer shall file the following materials with the administrative tax authority for record:

(1)

The implementation of the policies for tax deduction or exemption; and

(2)

Relevant materials as required by the administrative tax authority.

The administrative tax authority shall, within 7 workdays as of the date of filing of the taxpayer¡¯s application, complete the work of registration and archival filing and inform the taxpayer to implement.

Chapter III Administration and Supervision of Tax Deduction and Exemption

Article 20

The tax deduction or exemption enjoyed by a taxpayer shall be incorporated into the normal tax return to apply for the tax deduction or exemption.

Upon the expiration of the period for tax deduction or exemption, a taxpayer shall file relevant tax returns and pay taxes.

The tax authority and tax administrators shall strengthen the administration of and supervision over tax deduction and exemption.

Article 21

The tax authority shall combine the inspection of tax return, law enforcement and other specific inspections with the through investigation and rectification on the of tax deduction or exemption items on a periodical basis every year to intensify its supervision and examination. The major contents shall include:

(1)

Whether or not a taxpayer satisfies the qualifications for tax deduction or exemption; whether or not the taxpayer cheats for tax deduction or exemption by means of concealing the relevant information or providing any false material;

(2)

If the condition for a taxpayer to enjoy tax deduction or exemption changes, whether or not he has gone through the formalities for tax deduction or exemption in light of the change after the tax authority has made a second examination;

(3)

If the amount of tax deduction or exemption is granted for a special purpose, whether or not the taxpayer has used the tax deduction or exemption for the prescribed purpose; where a time period is prescribed for tax deduction or exemption, whether or not the taxpayer have resumed the tax payment since the expiration;

(4)

Whether or not a taxpayer unlawfully has enjoyed any tax deduction or exemption without the examination and approval of the tax authority; or

(5)

Whether or not any tax deduction or exemption that a taxpayer has enjoyed fails to be reported.

Article 22

A responsibility system of "he who carries out the examination and approval shall take the responsibility" shall be adopted for the examination and approval of tax deduction or exemption. The tax authorities at various levels shall incorporate the examination and approval of tax deduction or exemption into the post responsibility assessment system and establish a system of investigating into the responsibility of administrative law enforcement of tax collection.

(1)

Establishing and improving the system of examination and approval, track-down and feedback. The tax authorities at various levels shall carry out the track-down and feedback on the examination and approval work on a periodical basis and duly improve the working mechanism of examination and approval.

(2)

Establishing an appraisal and examination system for examination and approval files. The examination and approval authority at various levels shall establish all categories of files for examination and approval and keep them in a proper manner. The superior tax authority shall assess and examine the archived materials on a periodical basis.

(3)

Establishing a hierarchical supervision system. The superior tax authority shall establish a frequent supervision system so as to strengthen the supervision of the examination and approval work of the tax authority at lower levels, including whether or not the tax deduction or exemption has been examined and approved according to the capacity, requirements and the time limit as prescribed in the present Measures.

Article 23

The tax authority shall, according to the time and procedures as prescribed in the present Measures and pursuant to the principles of fairness, transparency, honesty, high efficiency and convenience, accept the application that is filed by a taxpayer for tax deduction or exemption and carry out the relevant examination and approval in a timely manner. Where the tax authority fails to accept or carry out the relevant examination and approval in a timely manner without any objective causes, or a mistake is resulted in the examination and approval and verification it carries out due to its failure to comply with the prescribed procedures, it shall be subject to relevant liabilities in accordance with the relevant provisions of the Law on Tax Collection and Administration and the tax law enforcement responsibility system.

Article 24

Where the business situation of a taxpayer does not meet the requirements of tax deduction or exemption, or a taxpayer obtains the treatment of tax deduction or exemption by fraudulent means, or where there is a change in the condition for enjoying the tax deduction or exemption and the taxpayer concerned fails to report it to the tax authority, or a taxpayer deducts or exempts his taxes without applying for approval in accordance with the procedures as prescribed by the present Measures, the tax authority shall deal with it in accordance with the relevant provisions of the Law on Tax Collection and Administration.

In case an enterprise fails to pay taxes or fails to underpay tax as a result of a mistake as incurred by the tax authority in the process of examination and approval or verification, it shall be dealt with in accordance with Article 52 of the Law on Tax Collection and Administration.

Any tax authority that exceeds its power to approve any tax deduction or exemption shall be dealt with in accordance with the provisions of Article 84 of the Law on Tax Collection and Administration.

Article 25

The tax authority shall, in accordance with the principle of ¡°substance over form", carry out a post supervision and examination over the business situation of enterprises. In the process of examination, where finding any mistake in an appraisal as committed by the relevant department of professional or economic appraisal, it shall coordinate and communicate with the relevant departments for correction, disqualify the relevant taxpayer for preferential treatments in a timely manner, and urge to take legal actions against the relevant persons responsible. In case a relevant department unlawfully provides certification documents to a taxpayer resulting in the non-payment or underpayment of tax payable, it shall be dealt with in accordance with the provisions of Article 93 of the Detailed Rules for Implementing the Law of the People's Republic of China on Tax Collection and Administration.

Chapter IV Archival Filing of Tax Deduction or Exemption

Article 26

The administrative tax authority shall establish a management account of tax deduction or exemption for taxpayers, which registers the approval time, item, maximum years, amount of tax deduction or exemption in details and establish a dynamic administration and supervision mechanism of tax deduction or exemption.

Article 27

For the annual tax deduction or exemption of a newly-established enterprise that has suffered a serious natural disasters such as hurricane, fire, flood or earthquake, etc., or that is located in former revolutionary base areas, areas inhabited by minority ethnic groups, remote or border areas, or poverty-stricken areas or in the western regions, whose deducted or exempted share of tax belonging to the central revenue reaches 1 million Yuan or more, it is no longer subject to the examination and approval of the State Administration of Taxation; instead, the authority of examination and approval shall be specified by the tax authority at the provincial level. The tax authority in charge of examination and approval shall report the information on tax deduction and exemption by taxpayer (including the item, base and amount of tax deduction or exemption) to the tax authority at the provincial level for archival filing on the basis of households.

Article 28

The tax authorities of all provinces, autonomous regions, municipalities directly under the Central Government and the cities under separate state planning shall, prior to the end of June each year, report in writing the information on tax deduction and exemption and submit a summary report of the previous year to the State Administration of Taxation. The fulfillment of tax deduction or exemption items that are subject to the examination and approval of the State Administration of Taxation shall be reported in writing by the tax authorities at the provincial level.

The summary report on tax deduction or exemption shall include the following contents: the basic information and analysis of tax deduction or exemption; the implementation of the policies for tax deduction or exemption as well as the existing problems; the experiences in the administration of tax deduction and exemption, and relevant suggestions.

Article 29

The measures for the accounting and statistics of tax deduction or exemption shall be separately formulated and distributed.

Chapter V Supplementary Provisions

Article 30

The present Measures shall go into effect as of October 1, 2005. In case of any discrepancy between previous provisions and the present Measures, the present Measures shall prevail.

Article 31

The state and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and the cities under separate state planning may formulate specific implementation plans in accordance with the present Measures.

Annex:Examination and Approval Requirements of the Deduction or Exemption of Enterprise Income Tax

I.

Preferential Policies for the Income Tax of Software Development Enterprises or Integrated Circuit Design Enterprises:

1.

A software development enterprise shall concurrently satisfy the following requirements:

(1)

Having obtained the Ascertainment Certificate of Software Enterprises as issued by the administrative department of information industry at the provincial level;

(2)

Undertaking the development and production of computer software, system integration, application services and other corresponding technical services as main business, with the exception of those enterprises that only engage in software trade who may not enjoy the preferential tax policy;

(3)

Having more than one software product that are developed by the enterprise or whose intellectual property right is owned by the enterprise, or providing such services as the system integration of computer information that has passed the qualification grade accreditation;

(4)

Having the technical equipment and business place that are necessary for software development and relevant technical services.

(5)

The technical personnel that engage in the development of software products and technical services occupying no less than 50 % of the total number of its employees.

(6)

The funds for the research and development of software techniques and products constituting more than 8% of its income as generated from software. and

(7)

The annual sales income from software constituting more than 35% of its total annual income. In particular, the sales income from self-produced software accounts for more than 50 % of its total sales income from software.

2.

An integrated circuit design enterprise shall concurrently satisfy the following requirements:

(1)

Having acquired the relevant certificates and certification documents as issued by an accreditation institution under the entrustment of the Ministry of Information Industry;

(2)

Undertaking the integrated circuit design as its main business;

(3)

Having the basic conditions, such as the business place, software and hardware facilities and personnel and so on, that comply with the design and development of integrated circuits, having standardized management on working procedures and integrated circuit design and having the means and capability to guarantee the quality of its design products; and

(4)

The income from self-designed integrated circuit products and the income from entrusted designing products taking up more than 30% of its total annual income.

3.

The key software enterprise under the state planning shall be the enterprise that is included in the list of key software enterprises , which are jointly determined by the National Reform and Development Commission, the Ministry of Commerce, the Ministry of Information Industry, and the State Administration of Taxation, and shall have obtained the Certificate of Key Software Enterprises under the state planning as accredited by the China Software Industry Association.

4.

The term "newly established software enterprise or integrated circuit enterprise" refers to an enterprise that is newly established after July 1, 2000. The term "profit-making year" refers to the first tax year, in which an enterprise is profitable since the start of production and business operations. Where an enterprise runs at a loss at the initial stage of its establishment, it may carry forward the losses to subsequent years in accordance with the provisions of tax law and the year when all the losses have been made up (the enterprise may exceed the prescribed makeup year) and there are still taxable incomes shall be deemed as the first profit-making year. The period for the income tax deduction or exemption shall be calculated as of the profit-making year in a consecutive manner and may not be extended due to any loss that occurs in the course.

II.

Preferential Policies for the Income Tax of Enterprises that Employ Laid-off Workers

1.

Scope of Laid-off Workers

Specifically including:

1. laid-off workers of state-owned enterprises;

2. unemployed workers of state-owned enterprises;

3. workers for whom other positions shall be found for due to bankruptcy of a state-owned enterprise;

4. other unemployed persons in the urban or suburban areas that receive the minimum living allowance and have been out of work for 1 year or more.

A laid-off worker an enterprise employs shall hold the Preferential Re-employment Certificate as issued by the administrative department of labor and securities.

2.

Specific Requirements for Commercial Enterprises

(1)

The term "commercial enterprise" refers to an enterprise that is involved in the retail industry (excluding the retail of tobacco products), or in the accommodation and catering industry (excluding tourist hotel). The term "commercial retail enterprise" refers to an retail enterprise that has its business place and counters for the sale of products and that doesn't produce any product by itself and directly supplies product to ultimate consumers, including department stores, supermarkets and retail stores engaging in the sale of various commodities, etc.

(2)

A newly established commercial enterprise shall have obtained a Certification of Reemployment of Laid-off Workers By A Newly-established Commercial Enterprise as approved and issued by the administrative department of labor and social security. An established commercial enterprise shall have obtained the Certification of Reemployment of Laid-off Workers By An Established Commercial Enterprise as approved and issued by the administrative department of labor and social security.

(3)

The number of laid-off personnel as employed in the current year shall comply with the required proportion.

(4)

The enterprise shall establish a stable labor relationship with laid-off workers by concluding labor contracts or agreements for a term of 1 year or more and purchase endowment insurance for the resettled laid-off workers.

3.

Specific Requirements for Service Enterprises

(1)

The term "service enterprise" refers to an enterprise that engages in the business operations as prescribed in the tax items of "service industry" under business tax and excludes such service enterprises that engage in advertising, sauna bath, massage, Internet bar, or oxygen bar.

(2)

A newly established service enterprise shall have obtained a Certification of Reemployment of Laid-off Personnel By A Newly-established Service Enterprise as approved and issued by the administrative department of labor and social security. An established service enterprise shall have obtained the Certification of Reemployment of Laid-off Personnel By An Established Service Enterprise as approved and issued by the department of labor and social security.

(3)

For other requirements, it shall be implemented by applying mutatis mutandis the requirements for commercial enterprises .

4.

An Economic Entity which is Established by a Medium and Large-sized State-owned Enterprise through Segmentation of the Primary Business from the Sideline Ones and Restructuring of the Sideline Ones and Resettlement of Redundant Personnel

(1)

An economic entity shall satisfy the following requirements:

(a) Using non-core assets and idle assets of the former enterprise as well as the efficient assets of a policy-related bankrupt enterprise (hereinafter referred to as the "three-type assets");

(b) Conducting independent accounting, having defined property rights clearly and realizing the pluralistic ownership of property rights;

(c) Employing more than 30% of redundant workers of the former enterprise; and

(d) Making amendment to labor contracts or concluding new labor contracts with the resettled personnel.

In particular, the department of public finance or the administrative department of stat-owned assets as authorized by the department of public finance shall issue relevant certification documents certifying the confirmation of the "three-type assets" of a local enterprise. The department of economy and trade shall issue relevant certification documents certifying the separation of the primary business from the secondary ones and the restructuring of the secondary ones as well as the pluralistic ownership of property rights. The administrative department of labor and social security shall issue the relevant certification documents certifying the determination of redundant workers and the conclusion of labor contracts with them and their employment proportion. A central enterprise shall produce the joint reply of the State Economic and Trade Commission, the Ministry of Finance and the Ministry of Labor and Social Security and the ascertainment certificate as issued by the group enterprise (parent company).

(2)

For the scope of separation of the primary business from the secondary ones, restructuring of the secondary ones of medium and large-sized state-owned enterprises (hereinafter referred to as enterprises), it shall be a medium and large-sized state-owned or state-owned holding enterprise. In particular, the term "state-owned holding" refers to the exclusive state-owned holding, which means that the state-owned capital (stock) takes up more than 50% of the total asset of the enterprise.

(3)

The standards for the classification of state-owned enterprises shall be implemented in light of the Circular on Printing and Distributing the Interim Provisions on the Standards of Medium and Small Enterprises as jointly issued by the former State Economic and Trade Commission, the former State Planning Commission, the Ministry of Finance and National Bureau of Statistics of China (Guo Jing Mao Zhong Xiao Qi [2003] No. 143).

(4)

The determination scope for non-core assets of an enterprise: The term "non-core assets" refers to the business entity that is not closely related to the major business operations of the principal enterprise and has certain survival and development potential as well as the relevant assets, mainly including entities engaged in component and part processing, repair and maintenance, transportation, design, consultation and scientific research institutions that serve the major business.

(5)

The service enterprises for processing labor and employment and the small community processing enterprises have obtained an Ascertainment Certification of Admitting Laid-off Personnel By A Service Enterprise for Processing Labor and Employment or an Ascertainment Certification of Admitting Laid-off Personnel By A Small-sized Community Processing Enterprise. The other requirements shall be implemented by applying mutatis mutandis the aforesaid standards;

(6)

The term "a newly-established enterprise that resettles laid-off workers" refers to an enterprise that is newly established after September 30, 2002.

III.

Preferential Policies for the Income Tax of Enterprises that Resettle Ex-servicemen in Towns and Cities Seeking Jobs by Themselves

(1)

The term " ex-servicemen in towns and cities seeking jobs by themselves" refers to the officers and compulsory servicemen that satisfy the requirements of resettlement in towns and cities, have concluded an Agreement on Self-Employment By Retired Soldiers with the civil affairs department in the resettlement place and obtained a Certificate of Self-Employment by Ex-serviceman in Towns and Cities;

(2)

The taxpayer is a newly established service enterprise (excluding an enterprise that engages in advertising, sauna bath, massage, internet bar or oxygen bar) or a commercial enterprise (excluding a commercial enterprise that engages in the wholesale business, both wholesale and retail business or other non-retail business) where the aforesaid ex-servicemen are employed. In particular, the term "service enterprise" refers to an enterprise that engages in the business operations set forth in the tax item of "service industry" under the business tax.

(3)

The enterprise has obtained an ascertainment certificate of employment of the aforesaid ex-servicemen by a newly-established service enterprise or commercial retail enterprise;

(4)

The number of aforesaid ex-servicemen who are newly employed in the current year comes up to the prescribed proportion; and

(5)

The enterprise have concluded labor contracts with aforesaid ex-servicemen for a term of 1 year or more and have purchased social insurance for them.

IV.

Preferential Policies for the Income Tax on Transfer of Technical Achievements that Serve in all Industries by Scientific Research Entities and Colleges and Universities

1.

Scientific research institutes under the ownership by the whole people and with an independent accounting system, which have been recognized by the science and technology committee of the province, autonomous region, municipality directly under the Central Government or the city under separate state planning and has passed the examination of the tax authority at the same level, with the exception of one subordinate to a enterprise or public institution and any organization engaging in technical development, consultation, or service agency.

2.

Colleges and universities that have been approved by the people's government above the provincial level or by the state administrative department of education and whose academic credential are recognized by the state, as well as the design and research institutes and scientific research institutes as established by colleges and universities for integration of scientific research, , production and education and study.

3.

Having obtained the effective certification document or instrument on sponsoring the educational institution from the sponsor (namely, the government or educational department) and the technology contract that has been recognized and registered, and being able to provide the itemized schedules concerning the actual income as derived from technical services.

V.

Preferential Policies for the Transfer of Technical Achievements, etc by Enterprises or Public Institutions.

1.

It shall be an institution that engages in the scientific and technical development subordinate to a public institution owned by the whole people, a privately-run scientific and technical institution or a public institution that is established by a medium and large-sized state-owned enterprise for scientific and technical development; and

2.

It shall have obtained a technical contract that has been recognized by and registered with a competent accreditation institution and shall be able to provide the itemized schedules concerning the actual income as derived from technical services.

VI.

Preferential Policies for the Income Tax of Logistics Entities of Colleges and Universities

1.

The colleges and universities which logistics entities belong to shall be institutions of higher learning that have been approved by the people's government above the provincial level or by the state administrative department of education and whose academic credentials are recognized by the state.

2.

A logistics entity shall be an establishment with legal personality as well as independent accounting system that is separated from the former logistics department in a college or university, and has its major income derived from providing services chiefly for the relevant college or university.

Any other entity as established beyond the College Logistics Reform may not enjoy any tax exemption policy as the "logistics entity of a college or university".

3.

For the part of income that is rent and service income as derived from providing logistic services to students, teachers and teaching, a logistics entity may enjoy the preferential policy of tax deduction or exemption; for any other part, it may not enjoy any preferential tax policy.

4.

A logistics entity shall have the certification document regarding the logistics reform of the college and university.

VII.

Preferential Policies for the Income Tax of Transformed Scientific Research Institutes

1.

It shall be one of the 242 scientific research institutes that are subordinate to any of the 10 state bureaus under the former State Economic and Trade Commission or one of the 134 scientific research institutes that are subordinate to any of the 11 departments (entities), such as the Ministry of Construction, etc., upon the approval of the State Council, which have been transformed into an enterprise or that has been incorporated into an enterprise. A scientific research institute which, upon the approval by the Ministry of Science, the Ministry of Finance, and the General Office of the Central Organization & Staffing Committee, has been transformed into an enterprise or has been incorporated into an enterprise, from a public scientific research institute subordinate to the department (entity) under the State Council, may enjoy the aforesaid preferential policies.

2.

The starting time of enjoying the relevant tax preference shall be the registration day of the transformation.

3.

The stock right owned by the former scientific research institute shall come up to the prescribed standard;

4.

It shall have obtained the reply of the relevant department on system reform and the reform scheme as approved; and

5.

The stock right owned by the scientific research institution after an overall reform shall take up more than 50% of the stock right of the new enterprise.

VIII.

Preferential Policies for the Tax Policies of Service Centers of All Departments and Organs under the CPC Central Committee and the State Council

1.

It shall be an office service center of any department of the Central Government, ministry or affiliated institution of the State Council after the logistics system reform, which has been approved by the General Office of the Central Organization & Staffing Committee, including the office service entities without an independent accounting system that provide logistics services for office work or living of the staff, such as, the dining room, transportation team, medical office, kindergarten, barber's room, laundry room, bath room, the subsidiary foodstuff base (forestation base), etc. of an organ.

2.

It shall conduct independent accounting with legal personality of a public institution or enterprise and shall have gone through the formalities of tax registration.

3.

The income shall be generated from the logistic services as provided within the organ, which is the income from all kinds of labor and technical services that are provided according to the work requirements of the departments and organs whose administrative office funds are fully appropriated by the public finance of the state.

4.

An office service center that has gone through the reform shall verify and calculate the income from providing logistic services within an organ and the income from providing services to outsiders in a separate manner. Any center that cannot verify and calculate the aforesaid incomes separately may not enjoy any preferential tax policy.

5.

For an enterprise as newly established by an office service center that mainly engages in business operations and services for the purpose of resettling reassigned personnel, the specific examination and approval requirements for income tax preference are as follows:

(1)

Where the number of reassigned workers in the current year exceeds 60% of the total number of employees of an enterprise, the enterprise may be exempted from income tax for 3 years. After the tax exemption period has expired, where the number of newly reassigned workers in the current year exceeds more than 30% of the total personnel that are originally employed, the enterprise income tax may be collected at a reduced rate of 50% for 2 years.

(2)

The total number of employees in an enterprise comprises all kinds of personnel that work in the enterprise, including the temporary workers it employs, contract workers, and retirees..

(3)

The relevant enterprise shall establish a stable labor relationship with the reassigned workers by concluding labor contracts or agreements for a term of 1 year or more.

(4)

The labor relationship between reassigned workers and their former entities has terminated, and the new entity has bought endowment insurance for reassigned workers.

6.

For the office service centers that have gone through the official logistic reform as carried out by the local party committees or governments at the provincial level, it shall be implemented by applying mutatis mutandis the aforesaid requirements.

IX.

Preferential Policies for the Income Tax of Enterprises that Specially Engage in Producing Products That Fall into the Catalogue of the Equipment (Products) in the Environmental Protection Industry as Encouraged by the State at Present

1.

The enterprise shall produce equipment (products) that fall into the Catalogue of the Equipment (Products) in the Environmental Protection Industry as Encouraged by the State at Present (first batch);

2.

The enterprise shall be capable of conducting independent accounting and dependently calculating its profits and losses.

3.

The enterprise shall have obtained the certification of environmental equipment (product) production enterprises as issued by the former economic and trade commission (the development and reform commission) at or above the prefectural level.

X.

Preferential Policies for the Income Tax of Forestry Enterprises

(1)

The subject to enjoy the tax preference includes all the enterprises and public institutions that engage in tree planting, forest tree seeds and nursery stock and the preliminary processing of forest products.

(2)

The income thereof shall be derived from the planting of trees, forest tree seeds and nursery stock and the preliminary processing of forest products. The scope of the planting of trees, forest tree seeds and nursery stock and the preliminary processing of forest products shall be implemented by applying mutatis mutandis the provisions of the Circular of the Ministry of Finance and the State Administration of Taxation on the Enterprise Income Tax of Agricultural Enterprises and Institutions (Cai Shui Zi [1997] No. 49). and

(3)

The planting of trees, forest tree seeds and nursery stock and the preliminary processing of forest products that are exempted from taxes shall be calculated respectively from any other business operation, and the information thereof shall be provided in an accurate manner.

XI.

Preferential Policies for the Income Tax of Fishery Enterprises

1.

A pelagic fishery enterprise shall satisfy the following requirements for tax deduction or exemption:

(1)

It shall have obtained a Qualification Certificate of Pelagic Fishery Enterprises as issued by the Ministry of Agriculture, which is still within the period of validity.

(2)

The income thereof shall be derived from the business operations of pelagic fishery.

2.

A fishery enterprise shall satisfy the following requirements for tax deduction or exemption:

(1)

It shall have obtained a "Fishing License of the Fishery Industry", which is still within the period of validity.

(2)

The income shall be derived from the fishery operations in the open seas or pelagic fishery. The income that is derived from the fishery operations in near seas and inland rivers may not be qualified for any tax preference.

3.

For the income of a state-owned agricultural pelagic fishery enterprise and other state-owned agricultural fishery enterprise that is derived from the preliminary processing in the fishery industry, the enterprise income thereof may be exempted from tax according to the Circular of the Ministry of Finance and the State Administration of Taxation on the Income Tax of State-owned Agricultural Enterprises and Institutions (Cai Shui Zi [1997] No. 49).

4.

The fishery enterprises shall be able to carry out verification and calculation on their tax-free business separately from the taxable business.

XII.

Preferential Policies for the Income Tax Concerning Western Development

(1)

Enterprises that enjoy preferential tax policies for participation in the Western Development shall be Chinese-funded enterprises locating in the western regions in the Catalogue of Encouraged Industries of the state. The aforesaid western regions comprise the Municipality of Chongqing, Sichuan Province, Guizhou Province, Yunnan Province, Shaanxi Province, Gansu Province, Qinghai Province, Tibet Autonomous Region, Ningxia Hui Autonomous Region, Xinjiang Uygur Autonomous Region, Xinjiang Production and Construction Corps, Inner Mongolia Autonomous Region, and Guangxi Zhuang Autonomous Region. For Xiangxi Tujia and Miao Autonomous Prefecture of Hunan Province, Enshi Tujia Autonomous Prefecture of Hubei Province, Yanbian Korean Autonomous Prefecture of Jilin Province, the preferential tax policies shall be implemented in light of those for the western regions.

(2)

It shall be an enterprise that is established and operated by an investor himself that may enjoy the tax preference. Any construction enterprise that only undertakes project construction may not enjoy the tax preferential treatment.

(3)

It shall be able to provide the itemized schedules on the total income of project operations as well as on its total income.

(4)

An enterprise that enjoys a tax preference at reduced tax rate of 15% shall satisfy the following requirements:

(a) It shall undertake the industrial projects as prescribed in the Catalog of Industries, Products and Technologies That Are Encouraged by the State at Present (Revised 2000) as the major business operations.

(b) The income as derived from its main business shall take up more than 70% of its total income.t(c) It has obtained the certification documents regarding the key industries, products and technologies that are encouraged by the state, which are issued by the competent department of the industry at or above the provincial level.

(5)

An enterprise that engages in transportation, electric power, water conservancy, post service, and broadcasting and television shall satisfy the following requirements for the tax preferential treatment of "two-year exemption and three-year half-payment":

(a) The income thereof as derived from its main business shall take up more than 70% of the total income.

(b) The term "transportation enterprise" refers to an enterprise that is newly established by investment to engage in the operation of road, railway, aviation, port and wharf as well as pipeline transportation. The term "newly-established power enterprise" refers to an enterprise that is newly established with investment to engage in the power operation. The term "newly-established water conservancy enterprise" refers to an enterprise that is newly established with investment to engage in water resource development as well as prevention and control of flooding damages in respect of comprehensive harnessing of rivers and lakes, flood prevention and control, irrigation, water supply, water resources protection, hydraulic power generation, soil and water conservation, river dredging, construction of dike and levee. The term "newly-established postal enterprises" refers to an enterprise that is newly established by investment to undertake postal operations. The term "newly-established broadcasting and television enterprise" refers to an enterprise that is newly established to engage in the business operations of broadcasting and television.

(6)

The national autonomous areas shall provide the approval document of the corresponding people's government at the provincial level for tax deduction or exemption on a periodical basis.

(7)

Where it is hard to determine whether an investment project falls into the catalogue of encouraged projects, the tax authority shall require the enterprise to provide the certification documents as issued by the competent department of the industry at or above the provincial level and, in conjunction with other relevant materials, carry out the examination and verification.

XIII.

Preferential Policies for the Income Tax of Juvenile Activity Places

(1)

It shall be the public places for extramural activities, such as the juvenile's or children's palace and juvenile activity center that carry out education in science and technology, culture, moral and patriotism as well as physical activities especially for young students;

(2)

It shall have obtained the certification materials as issued by the communist youth league at or above the county level certifying that it exclusively engages in public activities for young students; and

(3)

It shall have obtained the business license as issued by the administrative departments of culture or physical education.

XIV.

Preferential Policies for the Income Tax of Enterprises That Produce and Assemble Special Articles for the Wounded and Disabled

1.

The enterprise shall be an enterprise that produces and assembles special articles for the wounded and disabled within the scope of the Catalogue of Special Articles for the Wounded and Disabled in China (first batch).

2.

The annual sales income as derived from the sale of special articles that are produced or assembled for the wounded and disabled shall take up more than 50% of its total income (excluding the export income).

3.

It shall have complete accounting books and documents and be able to provide accurate and complete taxation materials to the competent tax authority. The income thereof as derived from the production and assembling of special articles for the wounded and disabled may be verified and calculated independently and accurately.

4.

It shall have good conditions for its production and assembling and other supplementary conditions that are helpful for the recovery of the wounded and disabled. In particular:

(1)

The enterprise shall have no less than 2 specialized technical personnel who have acquired the qualification certificate of manufacture of artificial limbs and orthopedic appliances. Where the production personnel of an enterprise exceed 20, the specialized technical personnel who have acquired the qualification certificate of manufacture of artificial limbs and orthopedic machines shall take up no less than 1/6 of the total production personnel.

(2)

It shall have such special equipment and tools for measurement and modeling, gypsum processing, vacuum forming, burnishing and decorating, bench-work and assembly, alignment, thermoforming and artificial limb training.

(3)

The reception room for the wounded and disabled shall be no less than 15 sq meters, the room for the manufacture of artificial limbs and orthopedic machines shall be no less than 20 sq meters, and the room for artificial limb training shall be no less than 80 sq meters.

5.

The enterprise shall provide the roster of the manufacturers of special articles for the wounded and disabled and the relevant Practitioners' Certificate (photocopy).

XV.

The starting time for tax exemption and deduction shall be implemented in accordance with the following provisions:

1.

If it's provided for by any law, regulation or any relevant tax policy of the state, it shall be implemented in line with the relevant provisions.

2.

The first day of production and operation when the tax deduction or exemption treatment for a newly-established enterprise is implemented refers to the day when the taxpayer earns its first income.

3.

If it's prescribed that the aptitude certificate or other qualification certificate shall be issued by the relevant governmental department or industrial association, which is regarded as the requirement for the deduction or exemption of enterprise income tax, the newly-established enterprise may, from the day when the relevant department has verified its aptitude or qualification, enjoy the enterprise income tax deduction or exemption within the remnant period of tax deduction or exemption in accordance with Item 2 of this Article.