Procedures for the Examination and Approval of Enterprise Income Tax Reductions and Exemptions for Technology Imports Circular

(Issued by the State Administration of Taxation and the Ministry of Commerce on, and effective as of, March 17 2005.)

Guo Shui Fa [2005] No.45

Offices of the State Administration of Taxation and commerce departments of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, local taxation bureaux of Guangdong and Hainan Province and Shenzhen City and the competent commerce departments of the provinces, autonomous regions, municipalities directly under the central government, cities with independent development plans and Xinjiang Production and Construction Corps:

With a view to encouraging technology imports and standardizing the procedure for tax reductions and exemptions, we hereby further clarify the provisions on the procedure for the examination and approval of the reduction and exemption of enterprise income tax in connection with licensing fees for technology imports as follows:

1. The term "technology import" means the act of transferring technology from abroad to China by way of trade, investment or economic and technical cooperation. Foreign enterprises are eligible for reductions and exemptions of enterprise income tax in connection with technology import contracts that comply with the provisions.

2. If a foreign investor seeks an income tax reduction or exemption in respect of licensing fees obtained for proprietary technology that falls under Item (4) of the third paragraph of Article 19 of the PRC Foreign-invested Enterprise and Foreign Enterprise Income Tax Law and Article 66 of its Implementing Rules, and that which is deemed advanced or provided on preferential terms, shall submit the matter by level to the State Administration of Taxation for approval.

3. A foreign investor that wishes to apply for an income tax reduction or exemption may entrust the technology import transferee to carry out the relevant procedures. The transferee shall first apply to the competent department that registered the technology import contract to carry out the procedures for a Letter of Recommendation for the Reduction or Exemption of Enterprise Income Tax. Letters of Recommendation are divided into two types, Type A and Type B (for the format of which see Annex 1 and Annex 2). If the technology import contract serves as an appendix to the contract for/articles of association of a foreign-invested enterprise, the application shall be for a Type B Letter of Recommendation. In all other cases, the application shall be for an Type A Letter of Recommendation. When applying, the following materials shall be provided:

(1) a duplicate of the technology import contract;

(2) the Technology Import Contract Registration Certificate;

(3) the data sheet for the technology import contract;

(4) the foreign enterprise's letter of application for an exemption or reduction of enterprise income tax;

(5) the power of attorney with which the foreign enterprise appoints the transferee to carry out the tax reduction or exemption procedures; and

(6) the letter of application for the tax reduction or exemption submitted by the transferee.

If the technology transfer contract serves as an appendix to the contract for/articles of association of the foreign-invested enterprise, the approval document for the contract/articles of association and the Foreign-invested Enterprise Approval Certificate or Approval Certificate for a Taiwan, Hong Kong or Macao-invested Enterprise shall substitute for the Technology Import Contract Registration Certificate specified in the preceding paragraph and an application made to the original contract/articles of association examination and approval authority for a Letter of Recommendation for the Reduction or Exemption of Enterprise Income Tax (Type B).

4. Once the transferee has carried out the procedures for a Letter of Recommendation for the Reduction or Exemption of Enterprise Income Tax, it shall also submit the other materials specified in Article 3 hereof and carry out the relevant tax reduction and exemption procedures with the tax department.

5. When issuing the Letter of Recommendation, the commerce department shall conduct a stringent examination in accordance with the PRC Foreign-invested Enterprise and Foreign Enterprise Income Tax Law and its Implementing Rules. A technology import contract shall not be deemed to satisfy "preferential terms" as specified in tax laws and, in principle, a Letter of Recommendation may not be issued if:

(1) the contract is for the import of technology in the restricted category;

(2) the contract contains provisions that violate the PRC Administration of Technology Import and Export Regulations, such as strict restrictive conditions, etc.; or

(3) payment of the licensing fee is provided for in the form of a royalty whose rate exceeds 5%.

If such technology is genuinely advanced and there is a need to issue a Letter of Recommendation, a special explanation shall be included.

6. In the event that the State Administration of Taxation has doubts concerning a Letter of Recommendation issued by the commerce department of a province, autonomous region, municipality directly under the central government or city with independent development plans, it may submit it to the Ministry of Commerce for review.

7. The Ministry of Commerce is in charge of uniformly designing the form of Letters of Recommendation. Local commerce departments may visit the law and regulation section of the Science and Technology Department of the Ministry of Commerce to download the form.

8. This Circular shall be implemented as of the date of issuance.

Annexes: Letter of Recommendation for the Reduction or Exemption of Enterprise Income Tax (Type A)

Letter of Recommendation for the Reduction or Exemption of Enterprise Income Tax (Type B)