Laws of the People's Republic of China

Official Reply of the State Administration of Taxation on How to Deal with the Income Tax on the Government Subsides Acquired by Foreign-funded Enterprises and Foreign Enterprises

Guo Shui Han [2007] No. 408

State Taxation Bureau of Gansu Province:

We have received your Request for Instructions on Whether Netzsch (Lanzhou) Pumps Co., Ltd. Should Pay Enterprise Income Tax on Its Income from Government Subsidies (Gan Guo Shui Fa [2006] No. 146). We hereby render a reply as follows:

1.

The various forms of monetary assets or non-monetary assets gratuitously acquired from the government (hereinafter referred to as government subsidies) by the agencies and offices set up by foreign-funded enterprises and foreign enterprises inside China (hereinafter referred to as enterprises) shall be dealt with respectively in light of the following circumstances:

(1)

Subject to the laws, regulations and the provisions of the State Council, if the government subsides acquired by the enterprises are exempted from enterprise income tax, such government subsides acquired by the enterprises shall be taken as investments, that is to say, the assets of government subsides as accepted shall be assessed and may be depreciated or amortized in light of the taxation treatments for investment assets, and the value of such government subsides are not calculated into the amount of taxable incomes of the enterprises.

(2)

Unless it is under the circumstance as prescribed in Item (1) of this Article, if the government subsides acquired by the enterprises satisfies any of the following conditions, they may not be calculated into current losses and profits of the enterprises, but the assets purchased or formed by the said government subsides shall be estimated, depreciated or amortized after deduction of the amount of government subsides:

(a)

The assets from government subsidies are the non-current assets an enterprise owns for a long time; or

(b)

An enterprise has acquired government subsidies in the form of current assets, but it has used or must use such subsidies for purchase, construction or improvement of non-current assets in accordance with the requirements for government subsidies.

(3)

Where the government subsidies acquired by an enterprise do not fall into the circumstances as provided in items (1) or (2) of this Article, the amount of government subsidies shall be calculated into the current losses and profits of the enterprise, and the enterprise income tax shall be paid by the enterprise.

2.

Where the taxation treatment is dealt with in accordance with the present Reply, and the tax repayment or refund is involved, it shall be dealt with under the Law of the People's Republic of China on the Administration of Tax Collection and the detailed rules for the implementation thereof.

The State Administration of Taxation

April 5, 2007