Laws of the People's Republic of China

Notice of the Ministry of Finance and the State Administration of Taxation on the Preferential Policies for Enterprise Income Taxes of Technical Innovation Enterprises

Cai Shui [2006] No. 88

Public finance departments (bureaus), state taxation bureaus and local taxation bureaus of all provinces, autonomous regions and municipalities under the Central Government and cities specifically designated in state plan, and the Public Finance Bureau of Xinjiang Production and Construction Corps.

With a view to implementing the Outline for the State Mid/Long-term Scientific and Technical Development (2006-2020) (Guo Fa [2005] No. 44), we hereby notify the related preferential policies for enterprise income taxes of technical innovation enterprises as follows under the Notice of the State Council on Printing, Distributing and Implementing Several Supporting Policies for the Outline for the State Mid/Long-term Scientific and Technical Development (2006-2020) (Guo Fa [2006] No. 6),

1.

With regard to the Expenditure for Technical Development

As regards the Chinese-funded and foreign-funded enterprises, scientific research institutions and universities and colleges with perfect financial verification system and tax collection by checking accounts (hereinafter referred to as the enterprises), the expenditure for technical development occurring for the research and development of new products, new technologies and work techniques shall be deducted before tax collection under the related provisions.

The following items of expenditure for technical development that actually occur within the tax year of any of the aforesaid enterprises is allowed, on the basis of 100% offset under the related provisions, to be re-deducted at the rate of 50% of the amount that actually occurs before the enterprise income tax is collected, which shall include the expenditure for new product designs, expenditure for formulating technical procedures, expenditure for equipment adjustments, expenditure for trial production of raw materials and semi-products, expenditure for technical books and materials, expenditure for intermediate experiments that have not been included into the state plan, wages of researchers, depreciation of instruments and equipments for research and development, expenditure for commissioning any other entity or individual to make scientific research and trial production and other expenditure directly related to scientific research and trial production.

The part that fails to be offset with the expense for technical development that actually occurs in an enterprise's annual year may be offset with the taxable income of the enterprise in the next following year, for which the time limit for offset may not be longer than 5 years.

2.

With Regard to the Fund for the Education of Staff

With regard to the fund for the education of staff that an enterprise collects and actually uses in the very year, the part within 2.5% of the aggregate taxable wage may be deducted before the enterprise income tax is collected.

3.

With regard to the Accelerated Depreciation

Where the unit value of any of the enterprise's instruments and equipments for research and development is less than 0.3 million Yuan, the expenditure may be calculated into the cost in one or several installments and shall be deducted before the enterprise income tax is collected. Any instrument or equipment that meets the standards for fixed assets shall be subject to separate administration, and no depreciation shall be made any more.

Where the unit value of any of the enterprise's instruments and equipments for research and development is more than 0.3 million Yuan, accelerated depreciation may be based on either the double-declining balance method or the sum of the year digits method. Once a specific method for depreciation is determined, it may not be modified at will.

The instruments and equipments as provided for in the aforesaid two paragraphs refer to those that an enterprise has newly purchased for research and development after January 1, 2006.

4.

With regard to the Tax Preferential Policies for High Tech Enterprises

Any high tech enterprise established within the state high-tech industrial development park as of January 1, 2006 shall be exempted from enterprise income taxes within 2 years as of the year when it starts to make profits. After the expiration of the time limit for tax exemption, the enterprise income tax shall be collected at a reduced tax rate of 15%.

After the aforesaid enterprise starts its business operation, its profit-making year shall be the first tax year when it starts to make profits. In case the enterprise is run at a loss at the beginning, the balance may be made up on a year basis under the provisions of taxation laws. Its first profit-making year shall be the tax year when it can offset the losses and begins to make profits.

As for any Chinese-funded enterprise that enjoys the tax preferential policy for two-year exemption of enterprise income tax as of the year when it begins business operation, it can enjoy the preferential policy till the expiration and may not enjoy any preferential policy for the exemption of enterprise income tax any more within 2 years as of its profit-making year.

The present Notice shall go into effect as of January 1, 2006. Where any related provision conflicts with the present Notice, the present Notice shall prevail. Where the state makes any further reform on the tax collection system, the related tax preferential policies shall be implemented under the updated provisions on tax collection.

Please carry them out accordingly.

The Ministry of Finance of the People's Republic of China

The State Administration of Taxation

September 8, 2006