Supplementary Circular on Such Issues as the Approach to Implementing the Criteria for Recognizing Newly Established Enterprises for the Purpose of the Payment of Enterprise Income Tax

(Issued by the State Administration of Taxation on July 13 2006.)

Guo Shui Fa [2006] No.103

Offices of the State Administration of Taxation and local taxation bureaux of the provinces, autonomous regions, municipalities directly under the central government and municipalities with independent development plans:

Following the issuance of the Ministry of Finance and State Administration of Taxation, Circular on the Criteria for the Recognition of Newly Established Enterprises that are Eligible for Preferential Enterprise Income Tax Policies (Cai Shui [2006] No.1; hereinafter, the Circular), authorities of various regions have reported that greater detail was required with respect to the implementation thereof. After study, we hereby notify you on relevant issues as follows:

1. The criteria for the recognition of newly established enterprises specified in the Circular apply to all Chinese-invested enterprises, regardless of whether or not they are eligible for the preferential income tax policies.

2. From the date of issuance of the Circular, determination of the authority for the levy administration of enterprises that carry out establishment registration procedures with the competent administration for industry and commerce in accordance with state laws and regulations, but do not satisfy the criteria for recognition as a newly established enterprise shall be based on the investment percentages (including monetary and non-monetary investments) of the equity investors in the enterprise's registered capital. Namely, in enterprises that have carried out establishment registration procedures but do not satisfy the criteria for a newly established enterprise, if the investment percentage of the investors thereof that are enterprises originally subject to the levy administration of the State Administration of Taxation is greater than that of the enterprises subject to the levy administration of the local taxation bureau, the office of the State Administration of Taxation of the place where the enterprise is located shall be responsible for the levy and administration of the income tax on such enterprise, otherwise the local taxation bureau of the place where such enterprise is located shall be responsible for levy and administration. If the investment percentages of the enterprises subject to the levy and administration of the State Administration of Taxation and of the local taxation bureau are identical, the local taxation bureau of the place where such enterprise is located shall be responsible for levy and administration. If all of the enterprise's equity investors are natural persons, the local taxation bureau of the place where such enterprise is located shall be responsible for levy and administration.

3. A newly established (sub-)branch without legal personality of an existing enterprise shall not be deemed a newly established enterprise, regardless of how great a percentage of its investment is accounted for by monetary investments, and its income tax levy and administration authority shall be dependent on the tax authority in charge of the existing enterprise.

(1) If such establishment does not satisfy the conditions for independent accounting, the tax authority in charge of the existing enterprise shall be responsible for levy and administration.

(2) If such establishment satisfies the conditions for independent accounting, the tax authority in charge shall be determined depending on the circumstances. If the tax authority in charge of the existing enterprise is the State Administration of Taxation, the office of the State Administration of Taxation of the place where such establishment is located shall be responsible for levy and administration. If the tax authority in charge of the existing enterprise is the local taxation bureau, the local taxation bureau of the place where such establishment is located shall be responsible for levy and administration.

4. If an enterprise that has carried out establishment registration procedures purchases, leases or takes possession without consideration of non-monetary assets from equity investors or affiliated parties at the time of its establishment or during the time it enjoys the fixed period of income tax reduction or exemption for newly established enterprises and the percentage of such assets in the aggregate accounts for more than 25% of its registered capital, it shall not be eligible for the preferential income tax policies for newly established enterprises. Its levy and administration authority shall be determined in accordance with Article 2 hereof.

5. The tax authority in charge may, based on the principle of materiality, handle matters as follows:

(1) if a qualified newly established enterprise utilizes transfer pricing or other such method to transfer profits from an affiliated enterprise, such profits shall not be eligible for the preferential income tax policies for newly established enterprises;

(2) if the business and key personnel of a qualified newly established enterprise are transferred from the existing enterprise, none of its income shall be eligible for the preferential income tax policies for newly established enterprises.

6. For the purposes of the Circular and this document, the term "non-monetary assets" means inventory, fixed assets, intangible assets, bond investments that will not be held until maturity, long-term investments, etc.

7. Enterprises established prior to the date of issuance of the Circular and that, in accordance with former provisions, were eligible for fixed periods of enterprise income tax reduction and exemption shall be eligible therefor until the expiration thereof in accordance with the former provisions.