Laws of the People's Republic of China

The Ministry of Finance

Rules for the Implementation of the Income Tax Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures

The Ministry of Finance

December 14, 1980

(Approved by the State Council on December 10, 1980 , Promulgated by the Ministry of Finance on December 14, 1980)

Article 1

These Rules are formulated in accordance with the provisions of Article 17 of the Income Tax Law of the People's Republic of China for Chinese-foreign Equity Joint Ventures (hereinafter referred to as the "Tax Law").

Article 2

"Income derived from production and business operations" mentioned in Article 1 of the Tax Law means income derived from production and business operations in the fields of industry, mining, communications, transportation, agriculture, forestry, animal husbandry, fisheries, poultry farming, commerce, tourism, catering, service trades and other fields of production and business operations.

"Other income" mentioned in Article 1 of the Tax Law means: income from dividends, bonuses, interest and income from the leasing or transfer of property, patent rights, proprietary technology, trade mark rights, copyrights and other such property.

Article 3

"The local income tax of 10% of the assessed income tax" mentioned in Article 3 of the Tax Law means the local income tax computed and imposed on the basis of the actual amount of the income tax paid by a joint venture.

A reduction or exemption from the local income tax because of special reasons shall be decided by the people's governments of the respective provinces, autonomous regions or municipalities directly under the Central Government in which the joint venture is located.

Article 4

A foreign partner in a joint venture which remits its share of profits obtained from the joint venture shall file a return with the local tax authorities and the remitting agency shall withhold income tax of equal 10% of the amount remitted. Amounts not remitted shall not be subject to tax.

Article 5

"The first profit-making year" mentioned in Article 5 of the Tax Law means the year in which a joint venture begins to realize profits after the losses, if any, of the initial stage of its operation have been set off in accordance with the provisions of the Tax Law.

Article 6

A foreign partner in a joint venture which reinvests its share of profit obtained from the venture in the same venture or in other Chinese-foreign equity joint ventures for a period of not less than 5 consecutive years may, on the basis of the certificate of enterprise receiving such reinvestment, and upon examination, verification by and approval of the tax authorities to which payment of tax was made, receive refund of 40% of the income tax already paid on the amount reinvested.

Article 7

The tax year of a joint venture refers to each year of the Gregorian calendar commencing January 1 and ending December 31.

Article 8

The taxable income shall be calculated according to the following formulas:

1.

Industry:

a.

manufacturing cost for the period = direct materials consumed in production for the period + direct labor + manufacturing expenses;

b.

cost of the products manufactured for the period = inventory of semi-finished products and products in process at the beginning of the period + manufacturing cost of the period - inventory of semi-finished products and products in process at the end of the period;

c.

cost of products sold = cost of the products manufactured for the period + inventory the products at the beginning of the period - inventory of the products at the end of the period;

d.

not sales = gross sales - (sales returns + sales discounts and allowances);

e.

profit on sales = net sales - cost of products sold - tax on sales - cost of sales - (selling expenses + overhead expenses);

f.

taxable income = profit on sales + profit from other operations + non-operating income - non-operating expenses.

2.

Commerce:

a.

net sales = gross sales - (sales returns + sales discounts and allowances);

b.

cost of sales = inventory of merchandise at the beginning of the period + [purchases of merchandise during the period - (purchase returns + purchase discounts and allowances) + purchase expenses] -inventory of merchandise at the end of the period;

c.

profit on sales = net sales - tax on sales - cost of sales - (selling expenses + overhead expenses);

d.

taxable income = profit on sales + profit from other operations + non-operating income - non-business operating expenses.

3.

Service trades:

a.

net business income = gross business income - (tax on business income + operating expenses + overhead expenses);

b.

taxable income = net business income + non-operating income - non-operating expenses.

4.

Other lines of business: calculation shall be made with reference to the above formulae.

Article 9

The following items shall not be itemized as costs, expenses or losses in the calculation of the taxable income:

1.

expenditures related to the acquisition or construction of machinery, equipment, buildings, facilities and other fixed assets;

2.

expenditures related to the acquisition of intangible assets;

3.

interest on equity capital;

4.

income tax payments and local surtax payments;

5.

fines for illegal business operations and losses caused by the confiscation of property;

6.

penalties for the overdue payment of taxes and tax fines;

7.

the portion of losses caused by windstorms, floods, fires and other such disasters, which is compensated by insurance proceeds;

8.

donations other than those for public welfare and relief purposes; and

9.

the portion of the business expenses incurred within the tax year in excess of either 3 thousandths of gross sales of 10 thousandths of gross business income and entertainment expenses not relevant to production and business operations.

Article 10

The depreciation on fixed assets used by a joint venture shall be calculated on an annual basis. "Fixed assets of a joint venture" means buildings, machinery, mechanical apparatuses, means of transport and other such production equipment having a useful life of 1 year or more. However, articles having a unit value of 500 yuan or less and a shorter useful life may be itemized as expenses on the basis of actual consumption.

Article 11

The valuation of fixed assets shall be based on the original value.

For fixed assets regarded as investments, the original value shall be the price agreed upon by the parties at the time of investment.

For fixed assets that have been purchased, the original value shall be the purchase price plus transport expenses, installation expenses and related expenses incurred prior to the use of the assets.

For fixed assets that have been manufactured or constructed by the venture, the original value shall be the actual expenses incurred for manufacture or construction.

Article 12

In calculating depreciation of fixed assets, the salvage value shall be estimated and deducted from the original value; in principle, the salvage value should be 10% of the original value. In the case of fixed assets for which it is necessary to retain a lower or no salvage value, the matter shall be reported to the local tax authorities for approval.

Depreciation of fixed assets shall generally be calculated using the straight-line method of depreciation.

Article 13

In the calculation of depreciation, useful life of the various categories of fixed assets shall be as follows:

1.

for houses and buildings, the minimum useful life shall be 20 years;

2.

for railway rolling stock, boats and machinery and other production equipment the minimum useful life shall be 10 years; and

3.

for electronic equipment and means of transport other than railway rolling stock and boats and ships, the minimum useful life shall be 5 years.

Where, for special reasons, a joint venture needs to accelerate depreciation or change the method of depreciation, an application may be submitted to the local tax authorities for examination and then transmitted level by level to the Ministry of Finance of the People's Republic of China for approval.

Article 14

Expenses incurred on technical innovation which result in an increase in the value fixed assets in use shall not be itemized as expenses.

No further depreciation shall be allowed for fixed assets which remain in use after having been fully depreciated.

Article 15

The balance of the proceeds realized by a joint venture from the disposal of fixed assets at current prices shall, after deduction of the undepreciated amount or the salvage value, be entered into the profit and loss account for the current year.

Article 16

Intangible assets such as proprietary technology, patent rights, trade mark rights, copyrights, rights to the use of sites and other special rights regarded as investments, shall be amortized starting with the first year of use on the basis of the amount specified in the agreements or contracts; intangible assets acquired at a fixed price shall be amortized starting with the first year of use on the basis of actual cost.

The above-mentioned intangible assets which have a specified period of use shall be amortized according to the specified period; intangible assets without a specified period of use may be amortized over a 10 year period.

Article 17

Expenses incurred during the period of organization of a joint venture shall be amortized after the commencement of production or operation; the amount amortized each year shall not exceed 20% of such expenses.

Article 18

Inventory of merchandise, raw materials, products in process of production, semi-finished products, finished products and by-products shall be valued at cost. The joint ventures may choose one of the following methods of calculation: first-in first-out; moving average; or weighted average. Where a change in the method of calculation is necessary, the matter shall be reported to the local tax authorities for approval.

Article 19

Income tax to be paid in quarterly installments as stipulated in Article 8 of the Tax Low may be calculated on the basis of one-fourth of either the planned annual profit for the current year or the actual income of the preceding year.

Article 20

Joint ventures, whether realizing profits or losses in a tax year, shall file their income tax returns and final accounting statements with the local tax authorities within the prescribed period and shall include the audit statement of a certified public accountant registered in the People's Republic of China.

The accounting statements submitted by the domestic branches of a joint venture their head offices shall be filed at the same time with the local tax authorities for the record.

Article 21

Joint ventures shall file tax returns within the time limit set by the Tax Law. In case of failure to submit the tax returns within the prescribed time limit owing to special reasons, application shall be submitted to the local tax authorities within the said time limit, and the time limit may be appropriately extended upon the latter's approval.

The final day of the time limit for tax payment and that for filing tax returns may be postponed to the next business day if it falls on a public holiday.

Article 22

Income earned by a joint venture in foreign currencies shall be taxed on the equivalent amount converted into Renminbi according to the foreign exchange rate quoted by the State General Administration of Exchange Control on the day the receipt for payment of tax is issued.

Article 23

In principle, joint ventures shall use the accrual method of accounting to calculate income and expenditure. All accounting records shall be accurate and complete and shall be supported by valid vouchers as the basis for entries.

Article 24

The financial and accounting procedures of a joint venture shall be submitted to the local tax authorities for the record.

Where the financial and procedures of a joint venture are inconsistent with the provisions of the Tax Law, the tax liability shall be determined according to the provisions of the Tax Law.

Article 25

The accounting vouchers, books, statements and reports adopted by joint ventures shall be kept in the Chinese language, or in both Chinese and a foreign language.

Accounting vouchers, books, statements and reports shall be retained for at least 15 years.

Article 26

Forms of sales invoices and business receipts used by a joint venture shall be submitted to the local tax authorities for approval prior to use.

Article 27

Officials assigned by the tax authorities to conduct investigation of the financial, accounting and tax affairs of a joint venture, shall produce identification cards and undertake to maintain confidentiality.

Article 28

The tax authorities may, according to the seriousness of the case, impose a fine of 5,000 yuan or less on a joint venture which violates the provisions of Article 9 , 11 or 12 of the Tax Law.

Article 29

The tax authorities may impose a fine of 5,000 yuan or less on a joint venture which has violated the provisions of paragraph 2 of Article 25 , or Article 26 of these Rules.

Article 30

Notice of disposal of a violation shall be served in the cases in which the tax authorities impose a fine in accordance with provisions of the Tax Law and these Rules.

Article 31

When a joint venture applies for reconsideration of a case in accordance with the provisions of Article 15 of the Tax Law, the tax authorities concerned shall decide upon the disposition of the case within 3 months after receipt of the application.

Article 32

Income tax paid to foreign authorities by a joint venture or its branches on their income received outside China may be credited against the amount of income tax to be paid by their head office upon presenting the foreign tax payment certificate. But the credit amount shall not exceed the tax payable on the income received abroad computed according to the tax rate prescribed by China's Tax Law.

Article 33

Standardized income tax returns and tax payment receipt to be used by joint ventures shall be printed by the General Taxation Bureau of the Ministry of Finance of the People's Republic of China.

Article 34

The right to interpret these Rules shall reside with the Ministry of Finance of the People's Republic of China.

Article 35

These Rules shall enter into force on the same date of promulgation and effective date of the Income Tax Law of the People's Republic of China for Chinese-foreign Equity Joint Ventures.