Shanghai Jerry Group Inc. - China Business Consultants

Detailed Rules and Regulations for the Implementation of the the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises

Chapter 1 General

Article 1 These Rules are formulated in accordance with the provisions of Article 29 of the Income Tax Law of the People's Republic of China for Enterprises wi th Foreign Investment and Foreign Enterprises (hereinafter referred to as the "Tax Law").

Article 2 Income from production and business operations mentioned in Article 1, Paragraph 1 and Paragraph 2 o f the Tax Law means income from production and business operations in manufacturing, mining, communications and transportation, construction and installation, agriculture, forestry, animal husbandry, fishing , water conservation, commerce, finance, service industries, exploration and exploitation, and in other trades.

Income from other sources mentioned in Article 1, Paragraph 1 and Paragraph 2 of the Tax law means profits (dividends), interest, rents, income from the transfer of property, income from the provision or transfer of patents, proprietary technology, i ncome from trademark rights and copyrights as well as other non-business income.

Article 3 "Enterprises with foreign investment" mentioned in Article 2, Paragraph 1 of the Tax Law and "foreign companies, enterprises and other economic organizations which have establishments or places in China and engage in production or business operations " mentioned in Article 2, Paragraph 2 of the Tax L aw are, unless otherwise especially specified, generally all referred to as "enterprises" in these Rules.

"Establishments or places" mentioned in Article 2, Paragraph 2 of the Tax Law refers to management organizations, business organizations, administrative organizations, and places for factories and the exploitation of natural resources, places for contracting of construction, installation, assembly and exploration work, places for the provision of labor services, and business agents.

Article 4 "Business agents" mentioned in Article 3, Paragrap h 2 of these Rules means companies, enterprises an d other economic organizations or individuals intrusted by foreign enterprises to engage as agents in any of the following:

(1)representing principals on a regular basis in t he arranging of purchases and signing of purchase contracts and the purchasing of commodities on com mission;

(2)entering into agency agreements or contracts wi th principals, storing on a regular basis products or commodities owned by principals, and delivering on behalf of principals such products or commodi ties to other parties; and

(3)having authority to represent principals on a regular basis in the signing of sales contracts or in the accepting of purchase orders.

Article 5 "Head office" mentioned in Article 3 of the Tax La w refers to the central organization which is established in China by and enterprise with foreign investment as a legal person pursuant to the laws of china and which is responsible for the management , operations and control over such enterprise.

Income from production and business operations and other income derived by the branches within or outside China of an enterprise with foreign investme nt shall be consolidated by the head office for purposes of the payment of income tax.

Article 6 Income derived from sources inside China mentioned in Article 3 of the Tax Law refers to:

(1)income from production and business operations derived by enterprises with foreign investment and foreign enterprises which have establishments or places in China, as well as profits (dividends), i nterest, rents, royalties and other income arising within or outside China actually connected with e stablishments or sites established in China by ent erprises with foreign jinvestment or foreign enter prises;

(2)the following income received by foreign enterp rises which have no establishments or sites in Chi na;

(a)profits(dividends) earned by enterprises in Chi na; (b)interest derived within China such as on deposi ts or loans, interest on bonds, interest on paymen ts made provisionally for other, and deferred paym ents; (c)rentals on property leased to and used by lesse es in China; (d)royalties such as those received from the provi sion of patents, proprietary technology, trademark s and copyrights for use in China; (e)gains from the transfer of property, such as ho uses, buildings , structures and attached faciliti es located in china and from the assigment of land -use rights within China; (f)other income derived from China and stipulated by the Ministry of Finance to be subject to tax.

Article 7 In respect of Chinese-foreign capital ventures tha t do not constitute legal persons, each partner th ere to may separately compute and pay income tax i n accordance with the relevant tax laws and regula tions of the state; income tax may, upon approval by the local tax authorities of an application sub mitted by such enterprises, be computed and paid o n a consolidated basis in accordance with the prov isions of the Tax Law.

Article 8 "Tax year" in Article 4 of the Tax Law begins on 1 January and ends on 31 December of the Gregorian Calendar.

Foreign enterprises that have difficulty computing taxable income in accordance with the tax year st ipulated in the Tax Law may, upon approval by the local tax authorities of an application submitted by such enterprises, use their own 12-month fiscal year as the tax year.

Enterprises commencing business operations in the middle of a tax year or actually operating for a p eriod of less than 12 months in any tax year due t o such factors as merger or shut-down shall use th e actual period of operations as the tax year.

Enterprises that undergo liquidation shall use the period of liquidation as the tax year.

Article 9 The compertent authority for tax affairs under the State Council mentioned in Article 8, Paragraph 3 and Article 19, Paragraph 3, Item(4) of the Tax L aw and Article 72 of these Rules refers to the Min istry of Finance and the State Administration of T axation

Chapter 2- Computation of Taxable Income

Article 10 The formula for the computation of taxable income mentioned in Article 4 of the Tax Law is as follow s:

(1)Manufacturing:

(a)taxable income = (profit on sales) + (profit fr om other operations) + (non-business income ) - (n on-business expenses); (b)profit on sales = (net sales) - (cost of produc ts sold) - (taxes on sales) - [ (selling expenses) + (administrative expenses) + (finance expenses) ]; (c)net sales = (gross sales) - [(sales returns) + (sales discounts and allowances) ]; (d)cost of products sold = (cost of products manuf actured for the period) + (inventory of finished p roducts at the beginning of the oeriod) - (invento ry of finished products at the end of the period); (e)cost of products manufactured for the period = (manufacturing costs for the period) + (inventory of semi-finished products and products in process at the beginning of the period) - (inventory of se mi-finished products and products in process at th e end of the period); (f)manufacturing costs for the period = (direct ma terials consumed in production for the period) + ( direct labor ) + (manufacturing expenses).

(2)Commerce:

(a)taxable income = (profit on sales) + (profit fr om other operations) + (non-business income) -(non -business expenses);

(b)profit on sales = )net sales) - (cost of sales) -[(selling expenses) + (administrative expenses) + (finance expenses)];

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

(d)cost of sales = (inventory of merchandise at th e beginning of the period) + [(purchase of merchan dise during the period) - (purchase returns) + (pu rchase discounts and allowances) -(purchasing expe nses)] - (inventory of merchandise at the end of t he period).

(3)Service trades:

(a)taxable income =(net business income) + (non-op erating income) - (non-operating expenses);

(b)net business income = (gross business income) - [(taxes on business income ) + (operating expenses ) + (administrative expenses) + (finance expenses) ].

(4)Other lines of business:

Computations shall be made with reference to the a bove formulas.

Article 11 The computation of taxable income of an enterprise shall, in principle, be on an accrual basis.

the following income from business operations of a n enterprise may be determined by stages and used as the basis for the computation of taxable income :

(1)where products or commodities are sold by insta llment payment methods, income from sales may be r ecognized according to the invoice date of the pro ducts or commodities to be delivered ; income from sales may also be recognized according to the dat e of payment to be made by the buyer as agreed upo n in the contract;

(2)where construction, installation and assembly p rojects, and provision of labor services extend be yond one year, income may be recognized according to the progress of th project or the amount of wor k completed;

(3)where the processing or manufacturing of heavy machinery, equipment and ships for other enterpris es extends beyond one year, income may be recogniz ed according to the progress of the project or amo unt of work completed.

Article 12 Where Chinese-foreign contractual joint ventures o perate on the basis of product sharing, the partne rs thereto shall be deemed to receive income at th e time of the division of the products; the amount of income shall be computed according to the pric e sold to third parties or with reference to preva iling market prices.

Where foreign enterprises are engaged in the coope rative exploration of petroleum resources, the par ther thereto shall be deemed to receive income at the time of the division of the crude oil; the amo unt of income shall be computed according to a pri ce which is adjusted periodically with reference t o the international market prices of crude oil of similar quality.

Article 13 In respect of income obtained by enterprises in th e from of non-monetary assets or rights and intere sts, such income shall be computed or appraised wi th reference to prevailing market prices.

Article 14 Exchange rate quoted by the State Administration o f Exchange Control mentioned in Article 21 of the Tax Law refers to the buying rate quoted by the St ate Administration of Exchange Control.

Article 15 In respect of income obtained by enterprises in fo reign currency, upon payment of income tax in quar terly installments in accordance with the provisio ns of Article 15 of the Tax Law, taxable income sh all be computed by converting the income into Renm inbi according to the exchange rate quotation of t he State Administratijon of Exchange Control on th e last day of the quarter. At the time of final se ttlement following the end of the year, no recompu tation and reconversion need be made in respect of income in a foreign currency for which tax has al ready been paid on a quarterly basis; only that po rtion of the foreign currency income of the entire year for which tax has not been paid shall, in re spect of the computation of taxable income, be con verted into Renminbi according to the exchange rat e quotation on the last day of the tax year.

Article 16 Where an enterprise is unable to provide complete and accurate certificates of costs and expenses an d is unable to correctly compute taxable income, t he local tax authorities shall determine the rate of profit and compute taxable income with referenc e to the profit level of other enterprises in the same or similar trade. Where an enterprise is unab le to provide complete and accurate certificates o f revenues and is unable to report income correctl y, the local tax authorities shall appraise and de termine taxable income by the use of such methods as cost(expense)plus reasonable profits.

Where the tax authorities would otherwise appraise and determine profit rates or revenues in accorda nce with the provisions of the preceding paragraph s, and where other treatment is provided by the la ws, regulations and rules, such other treatment sh all be applicable.

Article 17 Foreign air transportation and ocean shipping ente rprises engaged in international transport busines s shall use 5% of the gross revenues from passenge r and cargo transport and shipping services arisin g within China as taxable income.

Article 18 Where an enterprise with foreign investment invest s in another enterprise within China, the profit ( dividends )so obtained from the enterprise receivi ng such investment may be excluded from the taxabl e income of the enterprise; however, expenses and losses incurred in such above-mentioned investment s shall not be deducted from the taxable income of the enterprise.

Article 19 Unless otherwise stipulated by the state, the foll owing items shall not be itemized as costs, expens es or losses in the computation of taxable income.

(1)expenses in connection with the acquisition or construction of fixed assets; (2)expenses in connection with the transfer or dev elopment of intangible assets; (3)interest on capital; (4)various income tax payments; (5)fines for illegal business operations and losse s due to the confiscation of property; (6)surcharges and fines for overdue payment of tax es; (7)the portion of losses due to natural disasters or accidents for which there has been compensation ; (8)donations and contributions other than those us ed in China for public welfare or relief purposes; (9)royalties paid to the head office; (10)other expenses not related to production or bu siness operations;

Article 20 Reasonable administrative expenses paid by a forei gn enterprise with an establishment or place in Ch ina to the head office in connection with producti on or business operations of the establishment or site shall be permitted to itemized as expenses fo llowing agreement by the local tax authorities aft er an examination and verification of documents of proof issued by the head office in respect of the scope of the administrative expenses, total amoun ts, the basis and methods of allocation, which sha ll be provided together with an accompanying verif ication report of a certified public accountant.

Administrative expenses in connection with product ion and business operations shall be allocated rea sonably between enterprises with foreign investmen t and their branches.

Article 21 Reasonable interest payments incurred on loans in connection with production and business operations shall be permitted to be itemized as expenses fol lowing agreement by the local tax authorities afte r an examination and verification of documents of proof, which shall be provided by the enterprises in respect of the loans and interest payments.

Interest paid on loans used by enterprises for the purchase or construction of fixed assets or the t ransfer or development of intangible assets prior to the assets being put into use shall be included in the original value of the assets .

Reasonable interest mentioned in the first paragra ph of this Article refers to interest computed at a rate not higher than normal commercial lending r ates.

Article 22 Entertainment expenses incurred by enterprises in connection with production and business operations shall, when supported by authentic records or inv oices and vouchers, be permitted to be itemized as expenses subject to the following limits:

(1)Where annual net sales are 15 million yuan or l ess, not to exceed 0.5% of net sales; for that por tion of annual net sales that exceeds 15 million y uan, not to exceed 0.3% of that portion of net sal es.

(2)Where annual gross business income is 5 million yuan or less, not to exceed 1% of annual gross bu siness income; for that portion of annual gross bu siness income that exceeds 5 million yuan. not to exceed 0.5% of that portion of annual gross busine ss income.

Article 23 Exchange gains or losses incurred by enterprises d uring pre-construction of during production and bu siness operations shall, excipt as otherwise provi ded by the state, be appropriately itemized as gai ns or losses for that respective period.

Article 24 Salaries and wages, and benefits and allowances pa id by enterprises to employees shall be permitted to employees shall be permitted to be itemized as expenses following agreement by the local tax auth orities after an examination and verification of t he submission of wage scales and supporting docume nts and relevant materials.

Foreign social security premiums paid by enterpris es to employees working in China shall not be item ized as expenses.

Article 25 Enterprises engaged in such businesses as credit a nd leasing operations may, on the basis of actual requirements and following approval by the local t ax authorities of a report thereon, provide year-b y-year bad debt provisions, the amount of which sh all not exceed 3% of the amount of the year-end lo an balances(not including inter-bank loans)or the amount of accounts receivable, bills receivable an d other such receivables, to be deducted from taxa ble income of that year.

The portion of the actual bad debt losses incurred by an enterprise which exceeds the bad debt provi sions of the preceding year may be itemized as a l oss in the current year; the portion less than the bad debt provisions of the previous year shall be included in taxable income of the current year. Ba d debt losses mentioned in the preceding paragraph shall be subject to approval after examination an d verification by the local tax authorities.

Article 26 "Bad debt losses" mentioned in Article 25, Paragra ph 2 of these Rules refers to the following accoun ts receivable:

(1)due to the bankruptcy of the debtor, collection is still not possible after the use of the bankru ptcy assets for settlement;

(2)due to the death of the debtor, collection is s till not possible after use of the estate for repa yment;

(3)due to the failure of the debtor to fulfill rep ayment obligations for over 2 year, collection is still not possible.

Article 27 Accounts receivable already itemized as bad debt l osses which are recovered in full or in part by an enterprise in a subsequent year shall be included in taxable income of the year of recovery.

Article 28 Foreign enterprises with establishments or places in China may, except as otherwise provided by the state, deduct as expenses foreign income tax, whic h has been paid on profits (dividends ),interest, rents, royalties and other income received from ou tside China and actually connected with such estab lishments or sites .

Article 29 "Net assets or remaining property" mentioned in Ar ticle 18 of the Tax Law means the amount of all as sets or property following deduction of various li abilities and losses upon the liquidation of an en terprise.

Chapter 3- Tax Treatment for Assets

Article 30 Fixed assets of enterprises means houses, building s and structures, machinery, mechanical apparatus, means of transport and other such equipment, appl iances and tools related to production and busines s operations with a useful life of one year or mor e, Items not in the nature of major equipment whic h are used for production or business operations a nd which have a unit value of 2,000 yuan or less, or with a useful life of 2 years or less may be it emized as expenses on the basis of actual consumpt ion.

Article 31 The valuaion of fixed assets shall be based on ori ginal cost.

The original cost of purchased fixed assets shall be the purchase price plus transportation expenses , installation expenses and other related expense s incurred prior to the use of the assets.

The original cost of fixed assets manufactured or constructed by an enterprise itself shall be the a ctual expenses incurred in their manufacture or co nstruction.

The original cost of fixed assets treated as inves tments shall, giving consideration to the degree o f wear and tear of the fixed assets, be such reaso nable price as is specified in the contract, or a price appraised with reference to the relevant mar ket price plus the relevant expenses incurred prio r to the use thereof.

Article 32 Depreciation of fixed assets of an enterprise shal l be computed commencing with the month following the month in which they are first put into use , T he computation of depreciation shall cease in the month following the month in which the fixed asset s cease to be used.

All investments made during the development stage by enterprises engaged in the exploitation of oil resources shall, taking the oil(gas) field as a un it, be aggregated and treated as capital expenditu res; the computation of depreciation shall begin i n the month following the month in which the oil(g as) field commences commercial production.

Article 33 In respect of the computation of depreciation of f ixed assets, the salvage value shall first be esti mated and deducted from the original cost of the a sset, The salvage value shall not be less than 10% of the original value; any request for retaining a lower salvage value or no salvage value must be a pproved by the local tax authorities.

Article 34 Depreciation of fixed assets shall be computed usi ng the straight-line method. Where it is necesary to use any other method of depreciation, an applic ation may be filed by an enterprise which , follow ing examination and verification, shall be reporte d level-by-level to the State Administration of Ta xation for approval.

Article 35 The computation of the minimum useful life in resp ect of the depreciation of fixed assets is as foll ows:

(1)for houses and buildings-20 years;

(2)for railway rolling stock, boats ans ships, mac hery and other production equipment-10 years;

(3)for electronic equipment and means of transport , other than railway rolling stock and boats and s hips, as well as such fixtures, tools and furnishi ngs related to production and business operations -5 years.

Article 36 Depreciation of fixed assets in the nature of inve stments during the development stage and subsequen t stages of an enterprise engaged in the exploitat ion of oil resources may be computed on a consolid ated basis without retaining salvage value; the pr eiod of depreciation shall not be less than 6 year s.

Article 37 "Houses and buildings" mentioned in Article 35, It em (1) of these Rules means houses, buildings and attached structures used for production and busine ss operations, and living quarters and welfare fac ilities for employees, the scope of which is as fo llows:

houses, including factory buildings, business prem ises, office buildings, warehouses, residential bu ildings canteens, and other such buildings; buildi ngs, including towers, ponds, troughs, wells, rack s, sheds(not including temporary, simply construct ed structures such as work sheds and vehicle sheds ), fields, roads, bridges, platforms, piers, docks , culverts, gas stations, as well as pipes, smokes tacks, and enclosing walls that are detached from buildings, machinery and equipment.

Facilities attached to buildings and structures me an auxiliary facilities that are inseparable from buildings and structures and for which no separate value is computed, including for example, buildin g and structure ventilation and drainage systems, oil pipelines, communication and power lines, elev ators and sanitation equipment.

Article 38 The scope of railway rolling stock, ships and vess els, machines , machinery and other production equ ipment mentioned in Article 35, Paragaph 1, Item(2 ) of these Rules is as follows:

"railway rolling stock" includes various of locomo tives, passenger coaches, freight cars, as well as auxiliary facilities on rolling stock for which no separate value is computed;

"ships and vessels" includes various types of moto r ships as well as auxiliary facilities on ships a nd vessels for which no separate value is computed

"machines,machinery and other production equipment " includes various types of machines, machinery, m achinery units, production lines, as well as auxil iary equipment such as various types of power, tra nsport and conduction equipment.

Article 39 The scope of electronic equipment, means of transp ort other than railway rolling stock and ships men tioned in Article 35, Paragraph 1, Item(3) of thes e Rules is as follows:

"electronic equipment" means equipment comprising mainly integrated circuits, transistors, electron tubes, and other electronic components whose prima ry function is to bring into use the application o f electronic technology (including software) , inc luding computers , as well as computer-controlled robots, and digital-control or program-control sys tems;

"means of transport, other than railway rolling st ock and ships and vessels" includes airplanes, aut omobiles, trams, tractors, motor bikes(boats), mot orized sailboats, sailboats, and other means of tr ansport.

Article 40 Where, for special reasons it is necessary to shor ten the useful life of fixed assets, an applicatio n may be submitted by an enterprise to the local t ax authorities which following examination and ver ification shall be reported level-by-level to the State Administration of Taxation for approval.

Fixed assets which for special reasons as mentione d in the preceding paragraph require the useful li fe to be shortened include:

(1)machinery and equipment subject to strong corro sion by acid or alkali and factory buildings and s tructures subject to constant shaking and vibratio n;

(2)machinery and equipment operated continually ye ar-round for the purpose of raising the unilizatio n rate or increasing the intensity of use;

(3)fixed assets of a Chinese-foreign contractual j oint venture having a period of cooperation shorte r than the useful life specified in Article 35 of these Rules and which will be left with be left wi th the chinese party upon termination of the coope ration.

Article 41 Enterprises which acquire used fixed assets having a remaining useful life shorter than the useful l ife specified in Article 35 of these Rules may, fo llowing agreement by the local tax authorities aft er examination and verification of certifying docu ments so submitted, compute depreciation according to the remaining useful life.

Article 42 Where the value of fixed asets increases during th e course of ues of the fixed assets due to expendi tures in respect of expansion, reconstruction and technical innovation, the value of the fixed asset s shall be increased; where the period of use of t he fixed assets can be extended, the useful life s hall be appropriately extended and the computation of depreciation adjusted accordingly.

Article 43 No further depreciation shall be allowed in respec t of fixed assets which can be continued to be use d after having been fully depreciated.

Article 44 The balance of proceeds from the transfer or dispo sal of fixd assets by an enterprise shall. after d eduction of the undepreciated amount or the salvag e value and handing fees, be entered into the prof it and loss account year.

Article 45 Depreciation of fixed assets received as gifts by enterprises may be computed on the basis of reason able valuation.

Article 46 Patents, proprietary technology, trademarks, copyr ights, land use rights and other intangible assets of enterprises shall be appraised on the basis of the original value.

For alienated intangible assets, the original valu e shall be the actual amount paid based on a reaso nable price.

For self-developed intangible assets, the original value shall be the actual amount of expenditure i ncurred in the course of development.

For intangible assets used as investment, the orig inal value shall be such reasonable price as is st ipulated in the agreement or contract.

Article 47 The amortization of intangible assets shall be com puted using the straight-line method.

Intangible assets transferred or assigned or used as investments, where the useful life is stipualte d in the agreement or contract, may be amortized o ver the period of that useful life; the amortizati on period in respect of intangible assets for whic h no useful life has been stipulated or which have been developed internally shall not be less than 10 years.

Article 48 Reasonable exploration expenses incurred by enterp rises engaged in the exploitation of petroleum res ources may be amortized against income from oil(ga s) fields that have already commenced commercial p roduction. The amortization period shall not be le ss than one year.

Where operation of a contract filed owned by a for eign oil company is terminated due to failure to f ind commercially viable oil(gas),and where ownersh ip of the contract for the exploitation of petrole um (gas) resources is not continued and management organiztions or offices for carrying on operation s for the exploitation of petroleum (gas) resource s are no longer maintained in china , reasonable e xploration expenses already incurred in respect of the terminated contract field shall, upon examinat ion and confirmation and the issuance of certifica tion by the tax authorities, be permitted to be am ortized against production income of a newly owned contract field when the new contract for cooperat ive exploitation of oil(gas) resources is signed w ithin 10 years from the date of the termination of the old contract.

Article 49 Expenses incurred by enterprises during the organi zation period shall be amortized beginning with th e month following the month in which production an d business operations commence; the period of amor tization shall not be less than 5 years.

The period of organization mentioned in the preced ing paragraph means the period from the date of ap proval of the organization of the enterprises to t he enterprises to the date of commencement of prod uction and business operations(including trial pro duction and trial business operations).

Article 50 Inventories of merchandise, finished products, goo ds in process, semi-finished products, raw materia ls , and other such materials of enterprises shall be valued at cost.

Article 51 Enterprises may choose one of the following such m ethods: first-in, first-out; moving average; weigh ted average; or last-in, first-out as the method o f computing actual costs in respect of the deliver y or receipt and use of goods in stock.

Once a method of valuation has been adopted for us e, no change shall be made thereto. where a change in the method of valuation is indeed necessary, t he matter shall be reported to the local tax autho rities for approval prior to the commencement of t he next tax year.

Chapter 4- Business Dealings Between Associate d Enterprises

Article 52 "Associated enterprises" mentioned in Article 13 o f the Tax Law refers to companies enterprises and other economic units that have any of the followin g relationships with other enterprises.

(1)relationships in respect of existing direct or indirect ownership of or control over such matters as finances, business operations, or purchases an d sales;

(2)direct or indirect ownership of or control over it and another by a third party;

(3)any other relationship in respect of an associa tion of reciprocal interests.

Article 53 "Business transactions between independent enterpr ises" mentioned in Article 13 of the Tax Law means business dealings carried out between unassociate d and unassocitated and unrelated enterprises on t he basis of arm's length prices and common busines s practices.

Enterprises have a duty to provide to the local ta x authorities relevant materials such as standard prices and charges in respect of business dealings between associated enterprises.

Article 54 Where prices in respect of purchase and sales tran sactions between an enterprise and its associated enterprises are not based on independent business dealings, adjustments may be made thereto by the local tax authorities according to the following a rrangements and methods of determination:

(1)based on prices of the same or similar business activities between independent enterprises.

(2)based on the level of profits obtained from res ales in respect of unassociated and unrelated thir d party prices;

(3)based on costs plus reasonable expenses and pro fit margin;

(4)based on any other reasonable method.

Article 55 Where interest paid or received in respect of acco mmodating financing between an enterprise and as a ssociated enterprise exceeds or is lower than the amoubt that would be agreed upon by unassociated a nd unrelated parties, or where the rate of interes t exceeds or is lower than the normal rate of inte rest in respect of similar business, adjustments m ay be made thereto by the local tax authorities wi th reference to normal rates of interest.

Article 56 Where labor service fees paid or received in respe ct of the provision of labor services by an enterp rise to an associated enterprise are not based on business dealings between independent enterprises, adjustments may be made thereto by the local tax authorities with reference to the normal fee stand ards of similar labor activities.

Article 57 Where the valuation or the receipt or payment of u sage fees in respect of such business dealings as the transfer of property or the granting of rights to the use of property between an enterprise and an associated enterprise is not based on business dealings between independent enterprises, adjustme nts may be made thereto by the local tax authoriti es with reference to amounts that would be agreed to by unassociated and unrelated parties.

Article 58 Management fees paid by an enterprise to an associ ated enterprise shall not be expensed.

Article 59 "Taxable income on profits, interest, rents, royalties and other income"mentioned in Article 19, paragraph 1 of the Tax Law shall, except asotherwise stipulated by the State, be computed on the basis of grossincome. Gross royalties obtained from the provision of patents andproprietary technology include fees for blueprint materials, technicalservices and personnel training, as well as other related fees.

Article 60 "Profits" mentioned in Article 19 of the Tax Law means income derived from the right to profits according to the proportion of investment, equity rights, stockholding, or other non-debt profit-sharing rights.

Article 61 "Other income" mentioned in Article 19 of the Tax Law includes gains from the transfer of property such as houses, buildings and structures and attached facilities within China and land-use rights. "Gains" mentioned in the preceding paragraph means the amount remainingfrom the receipt on transfer minus the original value of the property. Where foreign enterprises are unable to provide correct certification of the original value of the property, the original value of the propertyshall be determined by the local tax authorities according to the specific circumstances thereof.

Article 62 "The amount of payment" mentioned in Article 19, paragraph 2 of the Tax Law means cash payments, payment by remittances, and amounts paid by account transfers, as well as amounts in equivalent cash value paid in non-cash assets or rights and interests.

Article 63 "Profits obtained from an enterprise with foreign investment" mentioned in Article 19, paragraph 3, Item (1) of the Tax Law means income obtained from profits of an enterprise with foreign investment following the payment or the reduction of or exemption from income tax in accordance with the provisions of the Tax Law.

Article 64 "International finance organizations" mentioned in Article 19, paragraph 3, Item (2) of the Tax Law means financial institutions such as the International Monetary Fund, the World Bank, the Asian Development Bank, the International Development Association, and the International Fund for Agricultural Development.

Article 65 "Chinese State banks" mentioned in Article 19, paragraph 3, Item (2) and Item (3) of the Tax Law means the People's Bank of China, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the People's Construction Bank of China, the Bank of Communications of China, the Investment Bank of China, and other financial institutions authorized by the State Council to engage in credit businesses such as foreign exchange deposits and loans.

Article 66 The scope of the reduction of or exemption from income tax on royalties provided for in Article 19, paragraph 3, Item (4) of the Tax Law is as follows:

(1) royalties received in providing proprietary technology for the development of farming, forestry, animal husbandry and fisheries: (a) technology provided to improve soil and grasslands, develop barren mountainous regions and make full use of natural conditions; (b) technology provided for the supplying of new varieties of animals and plants and for the production of pesticides of high effectiveness and low toxicity; (c) technology provided such as to advance scientific production management in respect of farming, forestry, fisheries and animal husbandry, to preserve the ecological balance, and to strengthen resistance to natural calamities;

(2) royalties received in providing proprietary technology for scientific institutions, institutions of higher learning and other scientific research units to conduct or cooperate in carrying out scientific research or scientific experimentation;

(3) royalties received in providing proprietary technology for the development of energy resources and expansion of communications and transportation;

(4) royalties received in providing proprietary technology in respect of energy conservation and the prevention and control of environmental pollution;

(5) royalties received in providing the following proprietary technology in respect of the development of important fields of science and technology: (a) production technology for major and advanced mechanical and electrical equipment: (b) nuclear power technology; (c) production technology for large-scale integrated circuits; (d) production technology for photoelectric integrated circuits, microwave semi-conductors and microwave integrated circuits, and manufacturing technology for microwave electron tubes; (e) manufacturing technology for ultra-high speed computers and microprocessors; (f) optical telecommunications technology; (g) technology for long-distance, ultra-high voltage direct current power transmission; and (h) technology for the liquefaction, gasification and comprehensive utilization of coal.

Article 67 In respect of income of foreign enterprises engaged in China in construction, installation, assembly, and exploration contracting work, and provision of labour activities such as consulting, management and training, the tax authorities may designate the parties paying the contracted amounts and labour service fees as tax withholding agents.

Chapter VI Tax Preferences

Article 68 Pursuant to the provisions of Article 6 of the Tax Law, the granting of any necessary preferential treatment in respect of enterprise income tax to enterprises with foreign investment that are encouraged by the State shall be implemented in accordance with the provisions of the relevant laws and administrative rules and regulations of the State.

Article 69 "Special economic zones" mentioned in Article 7, paragraph 1 of the Tax Law means the special economic zones of Shenzhen, Zhuhai, Shantou and Xiamen and the Hainan Special Economic Zone established by law or established upon approval of the State Council; "economic and technological development zones" mentioned therein means the economic and technological development zones in the coastal port cities established upon approval of the State Council.

Article 70 "Coastal economic open zones" mentioned in Article 7, paragraph 2 of the Tax Law means those cities, counties and districts established as coastal economic open zones upon approval of the State Council.

Article 71 "Imposition of enterprise income tax at the reduced rate of 15%" mentioned in Article 7, paragraph 1 of the Tax Law shall be limited to income obtained by enterprises from production and business operations in the respective areas so specified in Article 7, paragraph 1 of the Tax Law. "Imposition of enterprise income tax at the reduced rate of 24%" mentioned in Article 7, paragraph 2 of the Tax Law shall be limited to income obtained by enterprises from production and business operations in the respective areas so specified in Article 7, paragraph 2 of the Tax Law.

Article 72 "Enterprises with foreign investment of a production nature" mentioned in Article 7, paragraph 1 and paragraph 2 and Article 8, paragraph 1 of the Tax Law means enterprises with foreign investment engaged in the following industries:

(1) machine manufacturing and electronics industries;

(2) energy resource industries (not including exploitation of oil and natural gas);

(3) metallurgical, chemical and building material industries;

(4) light industries, and textiles and packaging industries;

(5) medical equipment and pharmaceutical industries;

(6) agriculture, forestry, animal husbandry, fisheries and water conservation;

(7) construction industries;

(8) communications and transportation industries (not including passenger transport);

(9) development of science and technology, geological survey and industrial information consultancy directly for services in respect of production and services in respect of repair and maintenance of production equipment and precision instruments;

(10) other industries as specified by the tax authorities under the State Council.

Article 73 "Imposition of enterprise income tax at the reduced rate of 15%" mentioned in Article 7, paragraph 3 of the Tax Law applies to the following:

(1) production-oriented enterprises with foreign investment established in the coastal economic open zones, special economic zones and in the old urban districts of municipalities where economic and technological development zones are located and which are engaged in the following projects: (a) technology-intensive or knowledge-intensive projects; (b) projects with foreign investments of over US $ 30 million and having long periods for return on investment; (c) energy resource, transportation and port construction projects;

(2) Chinese-foreign equity joint ventures engaged in port and dock construction;

(3) financial institutions such as foreign capital banks and Chinese- foreign banks established in the special economic zones and other areas approved by the State Council, where the capital contribution of the foreign investor or the funds for business activities allocated by the head office bank to the branch bank exceeds US $ 10 million, and where the period of operations is ten years or more;

(4) production-oriented enterprises with foreign investment established in the Pudong New Area of Shanghai, as well as enterprises with foreign investment engaged in energy resource and transport construction projects such as airports, ports, railways, highways and power stations;

(5) enterprises with foreign investment recognized as high or new technology enterprises established in the State high or new technology industrial development zones designated by the State Council, as well as enterprises with foreign investment recognized as new technology enterprises established in the new technology industrial development experimental zone of the municipality of Beijing;

(6) enterprises with foreign investment engaged in projects encouraged by the State and established in other areas stipulated by the State Council. Enterprises with foreign investment in projects listed in Item (1) of the preceding paragraph shall, following approval by the State Tax Bureau of an application submitted by such enterprises, be subject to enterprises income tax at the reduced tax rate of 15%.

Article 74 "The period of business operations" mentioned in Article 8, paragraph 1 of the Tax Law means the period commencing on the date an enterprise with foreign investment actually begins production or business operations (including trial production and trial business operations) and ending on the date the enterprise ceases production or business operations. Enterprises with foreign investment that pursuant to the provisions of Article 8, paragraph 1 of the Tax Law may enjoy treatment in respect of reductions of or exemptions from enterprise income tax shall submit to the local tax authorities for examination and verification such circumstances as the lines of business in which engaged, names of major products, and the period of operations decided upon. No treatment in respect of reductions of or exemptions from enterprise income tax shall be enjoyed without examination and verification and agreement thereof.

Article 75 "The relevant provisions promulgated by the State Council before the entry into force of this Law" mentioned in Article 8, paragraph 2 of the Tax Law means the following provisions in respect of exemptions from or reductions of enterprise income tax promulgated or approved for promulgation by the State Council:

(1) Chinese-foreign equity joint ventures engaged in port and dock construction where the period of operations is 15 years or more shall, following application by the enterprise and approval thereof by the tax authorities of provinces, autonomous regions, or municipalities directly under the Central Government of the location and commencing with the first profit-making year, be exempt from enterprise income tax from the first year to the fifth year and subject to enterprise income tax at a rate reduced by one half for the sixth year through the tenth year.

(2) Enterprises with foreign investment established in the Hainan Special Economic Zone and engaged in infrastructure facility projects such as airports, harbours, docks, highways, railways, power stations, coal mines and water conservation, and enterprises with foreign investment engaged in the development of and operations in agriculture where the period of operations is 15 years or more shall, following application by the enterprise and approval thereof by the tax authorities of Hainan Province and commencing with the first profit-making year, be exempt from enterprise income tax from the first year to the fifth year and subject to enterprise income tax at a rate reduced by one half for the sixth year through the tenth year.

(3) Enterprises with foreign investment established in the Pudong New Area of Shanghai and engaged in construction projects such as airports, ports, railways, highways and power stations where the period of operations is 15 years or more shall, following application by the enterprise and approval thereof by the tax authorities of the municipality of Shanghai and commencing with the first profit-making year, be exempt from enterprise income tax from the first year to the fifth year and subject to enterprise income tax at a rate reduced by one half for the sixth year through the tenth year.

(4) Enterprises with foreign investment established in the special economic zones and engaged in service-oriented industries where the amount of the foreign investment exceeds US $ 5 million and the period of operations is ten years or more shall, following application by the enterprise and approval thereof by the tax authorities of the special economic zone and commencing with the first profit-making year, be exempt from enterprise income tax in the first year and subject to enterprise income tax at a rate reduced by one half for the second and third years.

(5) Financial institutions such as foreign capital banks and Chinese- foreign banks established in the special economic zones and other areas approved by the State Council where the capital contribution of the foreign investor or the funds for business activities allocated by the head office bank to the branch bank exceeds US $ 10 million and the period of operations is ten years or more shall, following application by the enterprise and approval thereof by the local tax authorities and commencing with the first profit-making year, be exempt from enterprise income tax in the first year and subject to enterprise income tax at a rate reduced by one half for the second and third years.

(6) Chinese-foreign equity joint ventures recognized as high or new technology enterprises and established in the State high or new technology industrial development zones designated by the State Council where the period of operations is ten years or more shall, following application by the enterprise and approval thereof by the local tax authorities and commencing with the first profit-making year, be exempt from enterprise income tax in the first year and second year. Enterprises with foreign investment established in the special economic zones and the economic and technological development zones shall be governed by the preferential tax provisions of the special economic zones and the economic and technological development zones. Enterprises with foreign investment established in the new technology industrial development experimental zone of the municipality of Beijing shall be governed by the preferential tax provisions of the new technology industrial development experimental zone of the municipality of Beijing.

(7) Export-oriented enterprises invested in and operated by foreign businesses for which in any year the output value of all export products amounts to 70% or more of the output value of the products of the enterprise for that year may pay enterprise income tax at the tax rate specified in the Tax Law reduced by one half after the period of enterprise income tax exemptions or reductions has expired in accordance with the provisions of the Tax Law. However, export-oriented enterprises in the special economic zones and economic and technological development zones and other such enterprises subject to enterprise income tax at the tax rate of 15% that qualify under the above-mentioned conditions shall pay enterprise income tax at the tax rate of 10%.

(8) Advanced technology enterprises invested in and operated by foreign businesses which remain advanced technology enterprises after the period of enterprise income tax exemptions or reductions has expired in accordance with the provisions of the Tax Law may continue to pay for an additional three years enterprise income tax at the tax rate specified in the Tax Law reduced by one half.

(9) Implementation of other provisions in respect of exemptions from or reductions of enterprise income tax promulgated or approved for promulgation by the State Council. Enterprises with foreign investment shall, in applying for exemptions from or reductions of enterprise income tax in accordance with the provisions of Item (6), Item (7), or Item (8) of the preceding paragraph, submit relevant documents of proof issued by departments in respect of the examination, verification and confirmation, the application shall be subjected to approval by the local tax authorities after examination and verification.

Article 76 "The first profit-making year" mentioned in Article 8, paragraph 1 of the Tax Law and in Article 75 of these Rules means the first tax year in which profits are obtained by an enterprise following commencement of production or business operations. Where an enterprise suffers losses during the early stages after establishment, such losses may be made up by the income of the following tax year in accordance with the provisions of Article 11 of the Tax Law. The first profit-making year shall be the year in which profits are obtained after such losses are made up. The period for exemptions from or reductions of enterprise income tax specified in the first paragraph of Article 8 of the Tax Law and Article 75 of these Rules shall be computed continuously commencing with the year in which the enterprise begins to make profits. The computation shall not be deferred because of losses incurred in any of the subsequent years.

Article 77 Enterprises with foreign investment which commence operations in the middle of a year and earn profits may, where the actual period of operations is less than six months, choose to use the following year as the period in which to begin the computation of tax exemptions or tax reductions; however, income tax shall be paid in accordance with the Tax Law on profits earned during the year.

Article 78 Unless otherwise provided by the State Council, the preferential tax provisions of Article 8, paragraph 1 of the Tax Law shall not apply to enterprises engaged in the exploitation of such natural resources as petroleum, natural gas, rare metals and precious metals.

Article 79 Enterprises with foreign investment that have received exemptions from or reductions of enterprise income tax pursuant to the provisions of Article 8, paragraph 1 of the Tax Law and Article 75 of these Rules shall, where the actual period of operations is less than the period stipulated therein, except in the case of major losses sustained due to natural disasters or unforeseen accidents, make up the amount of the exemptions from or reductions of enterprise income tax.

Article 80 "Direct reinvestment" mentioned in Article 10 of the Tax Law refers to profits received from an enterprise with foreign investment by foreign investor of that enterprise which prior to receipt are directly used to increase registered capital, or which following receipt are directly used to organize another enterprise with foreign investment. Foreign investors shall, in computing the amount of tax refundable in accordance with the provisions of Article 10 of the Tax Law, provide certificates confirming the use of the reinvested profits for the year; the local tax authorities shall adopt any reasonable method for the reckoning and determination thereof where certificates cannot be provided. Foreign investors shall, in respect of the application for a refund of tax, submit within one year of the date of the actual investment of the reinvested amount a record of the reinvested amount and a certificate for the investment period of the increased capital or contributed capital to the tax authorities in the place where the taxes were originally paid.

Article 81 "Other preferential provisions of the State Council" mentioned in Article10 of the Tax Law refers to direct reinvestment in China by foreigninvestors for the organization and expansion of export-orientedenterprises or advanced technology enterprises, as well as profits offoreign investors earned from enterprises established in the HainanSpecial Economic Zone that are directly reinvested in the Hainan Special Economic Zone in infrastructure projects and agriculture development enterprises and for which the entire portion of enterprise income tax that has already been paid on the reinvested amount may, in accordance with the provisions of the State Council, be refunded. Foreign investors that apply for a refund of tax on reinvestments in accordance with the provisions of the preceding paragraph shall, in addition to completing the requirements pursuant to Article 80, paragraph 2 and paragraph 3 of these Rules, submit certificates issued by the examining, verifying and confirming departments confirming the organization and expansion of export-oriented enterprises or advanced technology enterprises. Enterprises in which foreign investors have reinvested in respect of the organization or expansion thereof which within three years of commencing production or operations have not achieved the standards in respect of export-oriented enterprises or have not continued to be confirmed as advanced technology enterprises shall repay 60% of the amount of tax refunded.

Article 82 "Tax refunds on reinvestments" mentioned in Article 10 of the Tax Law and Article 81, paragraph 1 of these Rules shall be computed according to the following formula: Amount of tax refund = Reinvestment amount v [1 - (originally applicable enterprise income tax rate + local income tax rate)] X originally applicable enterprise income tax rate X tax refund rate

Chapter VII Tax Credits

Article 83 "Income tax already paid abroad" mentioned in Article 12 of the Tax Law means income tax actually paid abroad by an enterprise with foreign investment on income from sources outside China and does not include taxes paid for which compensation is later received or assumed by other parties.

Article 84 "The amount of tax payable computed on income from sources outside China in accordance with the provisions of this Law" mentioned in Article 12 of the Tax Law means the amount of tax payable computed on taxable income arising from income from abroad of enterprises with foreign investment, following the deduction of costs, expenses and losses allowable in accordance with the relevant provisions of the Tax Law and these Rules attributable to that income. The limit of the amount of tax payable that can be deducted shall be computed on a country-by-country basis; the method of computation is as follows: Limit on deduction Total amount of tax Amount of of tax payable on = payable on domestic * income from income from abroad income and foreign sources income from ---------------- abroad computed Total domestic in accordance with income and the Tax Law income from abroad

Article 85 Where the amount of income tax actually paid abroad on income from sources from abroad by enterprises with foreign investment is less than the deductible limit resulting from computation based on the provisions of Article 84 of these Rules, the actual amount of income tax paid abroad may be deducted from the amount of tax payable; where the deductible limit is exceeded, the portion in excess shall not be deducted from tax and shall not be itemized as an expense, however, the portion not exceeding the limit thereof may be used as a deduction against following year's taxes; the time limit for such supplemental deductions shall not exceed five years.

Article 86 The provisions of Article 83 to Article 85 of these Rules shall apply only to enterprises with foreign investment with head offices established within China. Enterprises with foreign investment that deduct taxes in accordance with the provisions of Article 12 of the Tax Law shall provide the original tax payment certificates signed and issued by the foreign tax authorities in respect of the same year; copies or tax payment certificates of different years shall not be used as tax deduction certificates.

Chapter VIII Tax Administration

Article 87 Enterprises shall, within 30 days of completing business registration, complete tax registration with the local tax authorities. Enterprises with foreign investment that establish or terminate branch offices outside China shall, within 30 days of the date of establishment or termination thereof, complete with the local tax authorities procedures in respect of tax registration, amendments to the registration, or cancellation of the registration. Enterprises that complete registrations in the preceding paragraph shall, in accordance with the provisions, present relevant documents,licenses and materials.

Article 88 Enterprises that undergo important registration changes such as changes of address, restructurings, mergers, spin-offs, terminations, as well as changes in the amount of capital and scope of business shall, within 30 days of the completion of the change in business registration or prior to the cancellation of registration, complete the change in registration or cancellation of registration with the local tax authorities with the relevant documents.

Article 89 Foreign enterprises which establish two or more business organizations in China may use one of the selected business organizations in respect of the consolidated filing and payment of income tax. However, the business organization so selected shall meet the following conditions: (1) assumption of supervisory and management responsibility over the business operations of the other respective business organizations; (2) maintenance of complete account records and certificates which accurately reflect the income, cost, expense and profit and loss situations of the respective business organizations.

Article 90 In respect of foreign enterprises which in accordance with the provisions of Article 89 of these Rules consolidate the filing and payment of income tax, the business organization so selected thereunder shall submit an application for approval according to the following provisions after examination and verification thereof by the local tax authorities:

(1) consolidated filing and payment of income tax in respect of business organizations located in the same province, autonomous region, or municipality directly under the Central Government shall be subject to approval by the tax authorities of the province, autonomous region or municipality directly under the Central Government;

(2) consolidated filing and payment of income tax in respect of business organizations located in two or more provinces, autonomous regions, or municipalities directly under the Central Government shall be subject to approval by the State Tax Bureau. Following approval for the filing and payment of tax on a consolidated basis by foreign enterprises, such circumstances as the establishment of additional business organizations, mergers, change of address, termination of operations, or shutdowns shall, prior to such event, be reported to the local tax authorities by the business organization responsible for the filing and payment of tax on a consolidated basis. Any change in respect of the business organization filing and paying tax on a consolidated basis shall be dealt with in accordance with the provisions of the preceding paragraph.

Article 91 Where business organizations related to foreign enterprises that file and pay income tax on a consolidated basis apply different tax rates in respect of the payment of tax, the amount of taxable income of the respective business organizations shall be separately computed on a reasonable basis and income tax shall be paid on the basis of the different tax rates. Where the respective business organizations mentioned in the preceding paragraph have losses and profits, tax shall be paid on the profit remaining after the offsetting of losses against profits according to the tax rate applicable to the profit-making business organization. A business organization which incurs losses shall offset losses using profits of the subsequent year of the business organization; tax shall be paid on the profit remaining after the offsetting of such losses according to the tax rate applicable to the business organization; tax paid on the offsetting amounts shall be based on the tax rate applicable to the business organization that offsets the losses incurred by the other business organization.

Article 92 Notwithstanding the provisions of Article 91 of these Rules, where a business organization responsible for filings and payment of tax on a consolidated basis is unable to compute separately and reasonably the taxable income of the respective business organizations, the local tax authorities may make a reasonable apportionment among the respective business organizations of the gross taxable income based on the proportion of business revenues, the proportion of cost and expenses, the proportion of capital assets, and the proportion of the number of staff or salaries and wages.

Article 93 Enterprises with foreign investment which establish branch offices in China shall complete consolidated filings and payment of income tax with reference to the provisions of Article 91 and Article 92 of these Rules.

Article 94 Enterprises that pay taxes in advance on a quarterly basis in accordance with the provisions of Article 15 of the Tax Law shall pay in advance on the basis of actual quarterly profits; where difficulty exists in paying in advance on the basis of actual quarterly profits, the advanced quarterly payment of tax may be made according to one-fourth of the taxable income of the previous year or any other method approved by the local tax authorities.

Article 95 Enterprises, whether realizing profits or losses in a tax years, shall file income tax returns and final statements of account with the local tax authorities within the time limit prescribed in Article 16 of the Tax Law, and unless otherwise provided by the State, shall include when filing the final accounting statement an audit statement of a certified public accountant registered in China. Where, for special reaso