Laws of the People's Republic of China

the State Administration of Taxation

Reply of the State Administration of Taxation on Relevant Issues concerning the Tax Refund on Reinvestment by Foreign Investors

Guo Shui Han [2005] No.989

The Administration of State Taxation of Zhejiang Province:

The Request for Instructions on Defining the Tax Refund Conditions on Reinvestment by Foreign Investors (Zhejiang Shui Wai [2005] No.48 ) and the Letter of Transmitting Regulatory Documents (Zhejiang Fu Gui Zhuan Zi [2005] No.02 ) of your administration have been received. We hereby make the following reply on the relevant issues concerning tax refund enjoyed by foreign investors of foreign-funded enterprises for reinvestment:

The reinvestment as mentioned in Article 10 of the Income Tax Law of the People's Republic of China on Foreign-funded Enterprises and Foreign Enterprises (hereinafter referred to as the Tax Law) shall mean that an foreign investor uses the profits obtained from an foreign-funded enterprise to reinvest directly in the enterprise or any other foreign-funded enterprise, or to increase the registered capital of the enterprise or any other foreign-funded enterprise, or to establish any other foreign-funded enterprise with investment. If, according to the stipulations of any contract or agreement, these reinvestments need to be carried out by stages and step by step, the tax refund may be determined in light of the following conditions:

I.

Where the application of a foreign investor for making reinvestment with the profit of the foreign-funded enterprise is approved by the relevant departments of the State, and the profit for the reinvestment has been realized, the tax refund on reinvestment shall be granted at the occurrence of the reinvestment according to law, no matter it makes the reinvestment in a lump sum or by installments.

II.

Where the application of a foreign investor for making reinvestment with the profit of the foreign-funded enterprise is approved by the relevant departments of the state, if none or only part of the profit for the reinvestment has been realized, but the investor promises to make reinvestment with the profit realized in future years, the reinvestment shall be used to make up the registered capital of the enterprise, and does not fall within the provisions of "increasing registered capital or establishing other foreign-funded enterprises as capital investment" in the Tax Law, and it may not enjoy tax refund on the reinvestment at the occurrence of the reinvestment.

State Administration of Taxation

October 20, 2005