Tax Issues Relevant to Engagement in the Business of Financial Asset Disposal by Foreign-invested Enterprises and Foreign Enterprises Circular

(Issued by the State Administration of Taxation on January 7 2003.)

Offices of the State Administration of Taxation and Local Taxation Bureaux of all provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans:

Pursuant to the relevant provisions of the PRC Foreign-invested Enterprise and Foreign Enterprise Income Tax Law and its implementing rules and the PRC Business Tax Tentative Regulations and their implementing rules, we inform you, as follows, on issues relevant to the tax treatment of engagement in the business of Chinese financial asset disposal by foreign-invested enterprises and foreign enterprises:

1. Foreign-invested enterprises and foreign enterprises (Enterprises) shall submit value-added tax, business tax and enterprise income tax returns on the revenue from their engagement in the business of disposing of Chinese financial assets, and shall pay the said taxes, in accordance with tax laws and this Circular.

2. The term "business of disposing of financial assets" means an Enterprise's acquisition of equity, claims, physical assets or the entire assets (comprising a combination of the aforementioned assets) of another enterprise in China (Replacement Assets) from a financial asset management company in China (such acquisition being achieved by means of purchase of such assets; by means of receiving an injection of such assets in exchange for equity; or by other means), followed by the disposal of such Replacement Assets by way of assignment, recovery, replacement or sale, etc. and the obtaining of corresponding remuneration therefor.

An Enterprise may dispose of financial assets by any of the following methods:

(1) recovering or assigning claims;

(2) swapping its claims for equity;

(3) disposing of physical assets the disposal rights in which are owned by the Enterprise;

(4) selling or assigning equity holdings;

(5) returning Replacement Assets; or

(6) disposing of Replacement Assets by other means.

3. When an Enterprise obtains Replacement Assets, the price actually paid at the time of purchase thereof, or the value appraised at the time of injection thereof in exchange for equity, shall be the original value. The classification of Replacement Assets shall depend on the subject matter of evaluation at the time the assets were obtained. The said subject matter may be a single asset in the form of an individually evaluated equity holding in, claim against or physical asset of an enterprise, or be a bundle of several assets evaluated collectively.

If an enterprise reclassifies or rebundles some or all of the Replacement Assets it has acquired, it may determine the original value of a single Replacement Asset or a bundle of Replacement Assets on the basis of the reclassification or rebundling, provided that the original value of the reclassified or rebundled Replacement Asset(s) does/do not exceed the original value of the Replacement Asset(s) at the time they were acquired by the enterprise.

4. Business tax and value-added tax on Replacement Assets disposed of by an Enterprise shall be levied or exempted in accordance with the following provisions:

(1) business tax shall not be levied on the disposal of Replacement Assets that were in the form of claims;

(2) revenue derived from the disposal of Replacement Assets that were in the form of equity (including disposals by way of debt for equity swaps) shall not be subject to business tax;

(3) revenue derived from the disposal of physical Replacement Assets owned by the Enterprise shall be subject to business tax if such assets are immovables; if such assets are goods, the revenue shall be subject to value-added tax in accordance with the Value-added Tax Regulations and relevant provisions.

5. Enterprise income tax shall be calculated and paid on the net gain derived by an Enterprise from the disposal of Replacement Assets, the net gain being the revenue derived less the original value of, expenses related to, and loss in respect of the assets.

If an Enterprise disposes of Replacement Assets in stages or in batches, once the revenue it derives from the disposal of the assets exceeds the original value of the relevant single Replacement Asset or the bundled Replacement Assets, it shall enter that portion exceeding the original value as taxable income for that period and calculate and pay enterprise income tax thereon.

A loss incurred by an Enterprise in disposing of a single Replacement Asset or a bundle of Replacement Assets may be deducted from the Enterprise's taxable income for the relevant period. A loss on bundled assets may only be calculated after the entire bundle has been completely disposed of.

6. A foreign enterprise with no establishment or site in China shall file returns and pay its taxes itself or cause them to be filed and paid by an agent in China appointed by it. It may opt to pay its payable enterprise income tax in the place where the enterprise to which a Replacement Asset belongs is located. The place of payment of its payable business tax or value-added tax shall be determined in accordance with relevant provisions.