Laws of the People's Republic of China

Supplementary Circular of the State Administration of Taxation on Problems of Implementary Criteria of the Cognizance for the New Enterprises to Pay Corporate Income Tax

Guo Shui Fa [2006] No. 103

The state tax bureaus and local tax bureaus in all provinces, autonomous regions, municipalities and cities specifically designated in the state plan:

After the Circular of the Ministry of Finance, the State Administration of Taxation of the People's Republic of China, on Criteria of the Cognizance of New Enterprises Enjoy Incentive Income Tax Policies (Cai Shui [2006] No.1, hereinafter referred to as the Circular) has been distributed. The response from all regions is that the specific implementary criteria should be detailed further. After research, the relevant problems are hereby given as follows:

1.

The cognized criteria in the Circular for newly-established enterprises shall be applicable to all the domestically-funded enterprises enjoying or not the preferential policy of income tax.

2.

Where such enterprises as have been registered in the authorities of industrial and commercial administration in accordance with national laws, rules and the relevant regulations as of the date of the promulgation of the Circular does not accord with the standard for newly-established enterprises, the attribution of tax imposition scope shall be determined in accordance with investors' proportion among the equity investors in the registered capital of the enterprises (including currency investment and non-currency investment, the same below) . That is to say: where the investment proportion of investors among such enterprises as have registered yet not accord with the standard for newly-established enterprises administered by state tax bureaus is higher than that of local tax bureaus, the income tax of the enterprise shall be imposed and administered by the state tax bureau where the enterprise is located; inversely, it shall be imposed and administered by the local tax bureau where the enterprise is located; where the proportion of enterprise's investment imposed and administered by the state tax bureau and local tax bureau is equal, it shall be imposed and administered by the local tax bureau where the enterprise is located. Where the equity investors of the enterprises are all natural persons, the tax shall be imposed and administered by the local tax bureau where the enterprise is located.

3.

Where the branches of the newly¨Cestablished enterprises do not have the quality of legal person, no matter what proportion its currency accounts, they shall not act as newly-established enterprises, the taxation management authority of its income tax shall be determined by the tax authority in charge of the current enterprise.

(1)

Where they do not have independent accountability condition, its taxation management shall be determined by the tax authority in charge of the current enterprise.

(2)

Where they have independent accountability condition, the tax authority in charge shall be determined differentially. Where the tax authority in charge of the current enterprise is state tax bureau, the state tax bureau where the branch is located shall be responsible for its taxation management.

4.

Where the accumulated proportion of non-currency assets purchased, leased or possessed freely from the equity investor and its associated party of such enterprises as have handled registration among that of registered capital exceeds 20%, the enterprise shall not enjoy the preferential policy of the newly-established enterprises, and its taxation management shall be determined in accordance with Article 2 of the Circular.

5.

The tax authority in charge may, in accordance with the principle of substance over form, gives the following treatments:

(1)

The interest transferred from the newly-established qualified enterprise by such means as transfer pricing shall not enjoy preferential policy of income tax for the newly-established enterprises.

(2)

Where the business and key personnel of the newly-established qualified enterprises are transferred from the current enterprises, all its gains shall not enjoy preferential policy of income tax for the newly-established enterprises.

6.

The non-currency assets as stated in the Circular and the document refers to stockpile, fixed assets, intangible assets, disinclined due investment in bonds and long-term investment and etc.

7.

Where such enterprises as have been established before the promulgation of the Circular is entitled to enjoy regular tax reduction and tax exemption in accordance with the original prescription, it may be performed to its expired date in accordance with the original prescription.

The State Administration of Taxation

July 13, 2006