Circular on Issues Relevant to the Refund of Enterprise Income Tax in Connection with Re-investments by Foreign Investors

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

Guo Shui Han [2005] No.1093

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

As reported, after the occurrence of a transfer of their equity, certain foreign-invested enterprises have distributed profits, which were realized in years prior to the equity transfer, to the foreign investor that acquired the equity. We hereby notify you as follows on the issues of the handling of refunds of enterprise income tax in connection with re-investments by foreign investors of profits realized by enterprise before the acquisition of the equity by the foreign investors:

1. If a foreign investor that acquires equity in a foreign-invested enterprise through a transfer and, after the equity transfer, re-invests in China the profits realized by the foreign-invested enterprise prior to the foreign investor's acquisition of the equity and distributed to it by the foreign-invested enterprise, such re-invested profit shall not be deemed profit directly used for re-investment for the purpose of Article 80 of the Implementing Rules for the PRC Foreign-invested Enterprise and Foreign Enterprise Income Tax Law and shall not be eligible for the tax refund incentive for the re-investment of profits.

2. If a foreign investor acquires equity from either of the affiliated persons set forth below with whom it directly or indirectly holds 100% of the equity or by whom 100% of the equity is held, if the equity from the affiliated transferor was acquired at cost and if the foreign investor, after the equity transfer, re-invests in China the profits realized by foreign-invested enterprise prior to the foreign investor's acquisition of the equity and distributed to it by the foreign-invested enterprise, such re-invested profit shall not be subject to the restriction in Article 1 and shall be eligible for the tax refund incentive for the re-investment of profits:

(1) a foreign investor;

(2) a foreign-invested enterprise specializing in investment business which, pursuant to the provisions of the Ministry of Finance and State Administration of Taxation, Circular on Several Taxation Issues Concerning Foreign-invested Enterprises Engaged in the Investment Business (ref. Cai Shui Zi [1994] No.083), may be deemed a foreign investor eligible for the tax refund incentive for re-investment.

3. This Circular shall be effective as of the date of issue. No adjustments shall be made in accordance with this Circular for foreign investors who enjoyed the tax refund incentive for re-investment prior to this Circular.