Circular on the Criteria for the Recognition of Newly Established Enterprises that are Eligible for Preferential Enterprise Income Tax Policies

(Issued by the Ministry of Finance and the State Administration of Taxation on, and effective as of, January 9 2006.)

Cai Shui [2006] No.1

Finance departments (bureaux), offices of the State Administration of Taxation and local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans, the Finance Bureau of the Xinjiang Production and Construction Corps and financial controllers offices of the Ministry of Finance in the provinces, autonomous regions, municipalities directly under the central government and cities with independent development plans:

Together with the continuing socio-economic development and the progressive intensification of enterprise reform, the problem of insufficient clarity of the criteria for the recognition of newly established enterprises that are eligible for preferential enterprise income tax policies has arisen. After study, we hereby clarify a new the criteria for the recognition of newly established enterprises that are eligible for fixed periods of enterprise income tax reduction or exemption as follows:

1. Criteria for newly established enterprises that are eligible for fixed periods of enterprise income tax reduction or exemption

(1) Newly registered and established enterprises that have carried out establishment registration with the competent industry and commerce department in accordance with state laws, regulations and relevant provisions.

(2) In general, the aggregate amount of non-monetary assets, such as fixed assets, intangible assets, etc. forming part of the actual capital contributions of the equity investors (shareholders or other equity investors) in a newly established enterprise may not account for more than 25% of the enterprise's registered capital.

The registered capital of a newly established enterprise shall be the paid-in capital or share capital registered by the enterprise with the competent industry and commerce department. Non-monetary assets include fixed assets, such as buildings, machinery, equipment, etc., and intangible assets, such as patent rights, trademark rights, non-patented technology, etc. If the capital contribution made in the form of non-monetary assets by an equity investor, in a newly established enterprise, has been appraised by a qualified accounting firm (audit or tax), the appraised value shall serve as the amount of the capital contribution. If it has not been appraised, the taxpayer shall provide the market price of identical or similar assets on the day in question or the most recent month to the competent tax authority for verification.

2. If a newly established enterprise, in the aggregate, purchases non-monetary assets exceeding 25% of its registered capital from its equity investors and their affiliated parties during the period it is eligible for fixed periods of income tax reduction or exemption, it will cease to be eligible for the preferential treatment under the relevant tax reduction or exemption policy.

3. This Circular shall be effective as of the date of issue. The offices of the State Administration of Taxation and local taxation bureaux shall determine the specific scope of levy administration for newly established enterprises in accordance with the criteria for newly established enterprises set forth in this Circular. The scope of levy administration for those enterprises actually subject to the levy administration of the offices of the State Administration of Taxation and local taxation bureaux prior to the issue of this Circular, shall not be adjusted. Newly established enterprises whose eligibility for preferential income tax policies for newly established enterprises that has already been approved shall continue to be eligible therefor in accordance with provisions until the expiration thereof.

4. Article 6, Concept of Newly Established Enterprises, and the conditions for the recognition thereof of the State Administration of Taxation, Circular on Several Specific Enterprise Income Tax Issues (ref. Guo Shui Fa [1994] No.229) shall be repealed simultaneously.