PRC Enterprise Income Tax Law

(Promulgated on March 16 2007 and effective as of January 1 2008.)

PRC President's Order (No.63 of the 10th NPC)

PART ONE: GENERAL PROVISIONS

Article 1: Enterprises and other organizations that obtain income in the People's Republic of China (hereinafter collectively referred to as "Enterprises") are payers of Enterprise income tax and shall pay Enterprise income tax in accordance herewith.

This Law shall not apply to Enterprises wholly owned by individuals or partnerships.

Article 2: Enterprises are divided into tax-resident Enterprises and non-tax-resident Enterprises.

For the purposes of this Law, the term "tax-resident Enterprise" means an Enterprise that is established in China in accordance with the law or an Enterprise that is established in accordance with the law of a foreign country (or region) but whose actual management organization is in China.

For the purposes of this Law, the term "non-tax-resident Enterprise" means an Enterprise that is established in accordance with the law of a foreign country (or region) and whose actual management organization is not in China but has an establishment in China, or, although it does not have an establishment in China, it has China-sourced income.

Article 3: A tax-resident Enterprise shall pay Enterprise income tax on both its China-sourced and foreign-sourced income.

If a non-tax-resident Enterprise has an establishment in China, it shall pay Enterprise income tax on the China-sourced income of its establishment and on its income derived abroad that is actually connected with its establishment.

If a non-tax-resident Enterprise does not have an establishment in China, or if it has an establishment in China but its income is not actually connected with such establishment, it shall pay Enterprise income tax on that of its income sourced in China.

Article 4: The Enterprise income tax rate shall be 25%.

The tax rate applicable to the income obtained by a non-tax-resident Enterprise specified in the third paragraph of Article 3 hereof shall be 20%.

PART TWO: TAXABLE INCOME

Article 5: An Enterprise's taxable income is the balance derived from subtracting from its total revenue each year its non-taxable revenue, tax exempt revenue, deductions and losses from previous years that it is permitted to make up.

Article 6: An Enterprise's monetary and non-monetary revenue from various sources is its total revenue, which includes:

(1) revenue from the sale of goods;

(2) revenue from the provision of services;

(3) revenue from the transfer of property;

(4) returns on equity investments, such as dividends, bonuses, etc.;

(5) interest income;

(6) rental income;

(7) revenue from royalties;

(8) revenue from donations; and

(9) other revenue.

Article 7: The following revenue that forms part of the total revenue is non-taxable revenue:

(1) fiscal allocations;

(2) administrative charges and government funds collected in accordance with the law and subject to fiscal management; and

(3) other non-taxable revenue specified by the State Council.

Article 8: Expenditures, including costs, expenses, taxes, losses and other expenditures, actually and reasonably incurred by an Enterprise in connection with the revenue obtained by it may be deducted when calculating taxable income.

Article 9: That portion of expenditures incurred in the form of charitable donations by an Enterprise that falls within 12% of its total profit for the year may be deducted when calculating taxable income.

Article 10: The following expenditures may not be deducted when calculating taxable income:

(1) amounts paid out to investors as returns on equity investments, such as dividends, bonuses, etc.;

(2) Enterprise income tax payments;

(3) fines for late payment of taxes;

(4) losses incurred as a result of confiscations of property and fines;

(5) expenditures incurred in the form of donations other than those specified in Article 9 hereof;

(6) sponsorship expenditures;

(7) expenditures on reserves that have not be approved; and

(8) other expenditures not connected with the revenue obtained.

Article 11: When calculating taxable income, an Enterprise shall be permitted to deduct the depreciation on its fixed assets that is calculated in accordance with relevant provisions.

Depreciation of the following fixed assets may not be calculated for deduction purposes:

(1) fixed assets, other than premises and buildings, that have yet to be put to use;

(2) fixed assets leased under an operating lease arrangement;

(3) fixed assets leased out under a lease-financing arrangement;

(4) fixed assets that have been fully depreciated but continue to be used;

(5) fixed assets unrelated to business activities;

(6) land that is valuated separately and booked as a fixed asset; and

(7) other fixed assets for which depreciation may not be calculated for deduction purposes.

Article 12: When calculating taxable income, an Enterprise shall be permitted to deduct the amortization charge for intangible assets calculated in accordance with relevant provisions.

An amortization charge for the following intangible assets may not be calculated for deduction purposes:

(1) self-developed intangible assets the expenditures on which have already been deducted when calculating taxable income;

(2) self-created goodwill;

(3) intangible assets unrelated to business activities; and

(4) other intangible assets for which the amortization charge may not be calculated for deduction purposes.

Article 13: When calculating taxable income, an Enterprise may deduct the following expenditures that are treated as long-term deferred charges and are amortized in accordance with relevant provisions:

(1) expenditures on alterations to fixed assets that have been fully depreciated;

(2) expenditures on alterations to leased fixed assets;

(3) expenditures on the overhaul of fixed assets; and

(4) other expenditures that shall be treated as long-term deferred charges.

Article 14: While assets are invested in a third party, an Enterprise may not deduct the costs of such invested assets when calculating its taxable income.

Article 15: When an Enterprise uses or sells inventory, it shall be permitted to deduct the costs of such inventory calculated in accordance with relevant provisions when calculating its taxable income.

Article 16: When an Enterprise transfers assets, it shall be permitted to deduct the net value of such assets when calculating its taxable income.

Article 17: When an Enterprise calculates and pays Enterprise income tax on a consolidated basis, the losses of its offshore business establishments may not be set off against the profits of its onshore business establishments.

Article 18: If an Enterprise incurs a loss in a tax year, it shall be permitted to carry the same over to subsequent years and use the income of subsequent years to make good such losses, but such losses may not be carried forward for more than five years.

Article 19: A non-tax-resident Enterprise that obtains the income specified in the third paragraph of Article 3 hereof shall calculate its taxable income by the following methods:

(1) it shall treat the entirety of its revenue from returns on equity investments, such as dividends, bonuses, etc., and from interest, rental and royalty income as taxable income;

(2) for income derived from the transfer of property, it shall treat the balance derived from subtracting the net value of the property from the entire proceeds of the transfer as taxable income; and

(3) for other income, it shall calculate its taxable income with reference to the foregoing two items.

Article 20: The specific measures for the revenue specified in this Part, the specific scope and standards for deductions and the tax treatment of assets shall be specified by the State Council's departments in charge of finance and tax.

Article 21: If an Enterprise's methods for financial and accounting treatment are inconsistent with tax laws and administrative regulations, it shall, when calculating its taxable income, do so in accordance with the tax laws and administrative regulations.

PART THREE: TAX PAYABLE

Article 22: The balance derived from multiplying an Enterprise's taxable income by the applicable tax rate and subtracting any tax amount reduced, exempted or set off in accordance with the provisions on preferential tax treatment hereof is its tax payable.

Article 23: The income tax paid abroad by an Enterprise on the income set forth below may be set off against its tax payable for the period in question; the limit on such set off shall be limited to the tax payable on such income calculated in accordance with the provisions hereof; any portion exceeding the set-off limit may be set off during the subsequent five years against the balance remaining after setting off the set off amount for the year against the set off limit for that year:

(1) the foreign-sourced taxable income of a tax-resident Enterprise; and

(2) for a non-tax-resident Enterprise that has an establishment in China, the taxable income derived abroad that is actually connected with such establishment.

Article 24: If returns on equity investments, such as dividends, bonuses, etc., sourced from abroad are distributed to a tax-resident Enterprise by a foreign enterprise that such tax-resident Enterprise directly or indirectly controls, that portion of the income tax actually paid abroad by the foreign enterprise that is attributable to such type of income may be treated as foreign income tax that the tax-resident Enterprise is permitted to set off, and be set off up to the set-off limit specified in Article 23 hereof.

PART FOUR: PREFERENTIAL TAX TREATMENTS

Article 25: The state offers preferential Enterprise income tax treatment to industries and projects that it strongly supports or whose development it encourages.

Article 26: The following revenue of Enterprises is tax-free revenue:

(1) revenue from sovereign bond coupons;

(2) returns paid between tax-resident Enterprises on equity investments, such as dividends, bonuses, etc., that satisfy the criteria;

(3) returns on equity investments, such as dividends, bonuses, etc., obtained by a non-tax-resident Enterprise with establishments in China from a tax-resident Enterprise, and which returns are actually connected with such establishments; and

(4) revenue of a non-profit organization that satisfies the criteria.

Article 27: Enterprise income tax on the following income of an Enterprise may be exempted or reduced:

(1) income derived from engaging in agricultural, forestry, animal husbandry and fisheries projects;

(2) income derived from the investment in and operation of basic infrastructure projects strongly supported by the state;

(3) income derived from engaging in environmental protection, energy conservation and water conservation projects that meet the criteria;

(4) income from technology transfers that meet the criteria; and

(5) the income specified in the third paragraph of Article 3 hereof.

Article 28: Enterprise income tax on small low-profit Enterprises that meet the criteria shall be levied at the reduced rate of 20%.

Enterprise income tax on high and new technology Enterprises that the state needs to strongly support shall be levied at the reduced rate of 15%.

Article 29: The authorities of ethnic autonomous areas may decide to reduce or exempt the portion of the Enterprise income tax payable by Enterprises in their jurisdiction that is allocated locally. If an autonomous prefecture or county decides to offer such reduction or exemption, it must report the same to the people's government of the province, autonomous region or municipality directly under the central government for approval.

Article 30: The following expenditures of an Enterprise shall be eligible for super-deduction when calculating taxable income:

(1) research and development expenses incurred in developing a new technology, new product or new process; and

(2) wages paid to employ disabled persons and other job seekers whose employment the state encourages.

Article 31: A venture investment Enterprise that engages in venture investments that the state needs to strongly support or encourages may deduct a certain percentage of its investments from its taxable income.

Article 32: If an Enterprise genuinely needs to accelerate the depreciation of its fixed assets due to technological progress or other such reason, it may shorten the depreciable life thereof or adopt the accelerated depreciation method.

Article 33: The revenue derived from the production of products that comply with state industrial policy by an Enterprise that utilizes resources in an integrated manner may be calculated at a reduced rate when calculating taxable income.

Article 34: The investment by an Enterprise in the purchase of specialized equipment used for environmental protection, energy or water conservation, work safety, etc., may be set off against its tax at a certain percentage.

Article 35: The specific measures for the preferential tax treatments specified herein shall be specified by the State Council.

Article 36: Based on national economic and social development needs or due to a contingency or other such reason that materially affects the business activities of Enterprises, the State Council may formulate targeted Enterprise income tax preferential policies and submit the same to the Standing Committee of the National People's Congress for the record.

PART FIVE: WITHHOLDING AT SOURCE

Article 37: The income tax payable on the income specified in the third paragraph of Article 3 hereof obtained by a non-tax-resident Enterprise shall be withheld at source, with the payer of such income serving as the withholding agent. The tax amount shall be withheld by the withholding agent from the amount paid or due payable each time such amount is paid or becomes due payable.

Article 38: With respect to the income tax payable by a non-tax-resident Enterprise on the income derived by it in China for project works or services provided, the tax authority may designate the payer of the project moneys or service fee as the withholding agent.

Article 39: If a withholding agent fails to withhold income tax that it is required to withhold in accordance with Article 37 or 38 hereof, or is unable to perform its withholding obligation, such tax shall be paid by the taxpayer in the place from which the income arose. If the taxpayer fails to pay the same in accordance with the law, the tax authority may seek payment of the tax payable by such taxpayer from the amount payable to such taxpayer by the payer under another revenue item in China.

Article 40: Each tax amount withheld by a withholding agent shall be paid into the national treasury within seven days from the date on which the same was withheld and an Enterprise income tax withholding report shall be submitted to the tax authority of the place where the withholding agent is located.

PART SIX: SPECIAL TAX ADJUSTMENTS

Article 41: If the business transactions between an Enterprise and an affiliated party are not conducted at arm's length, thus reducing the taxable revenue or income of the Enterprise or its affiliated party, the tax authority has the right to adjust such taxable revenue or income by reasonable means.

The costs incurred by an Enterprise and an affiliated party in jointly developing or acquiring an intangible asset or jointly providing or receiving a service shall be shared in accordance with the principle of arm's length transactions when calculating taxable income.

Article 42: An Enterprise may provide to the tax authority the pricing principles and calculation method for the business transactions with its affiliated parties. After the tax authority consults and confirms the same with the Enterprise, a pre-agreed pricing arrangement may be reached.

Article 43: When filing its annual Enterprise income tax returns with the tax authority, an Enterprise shall include a report on the business transactions with its affiliated parties during the year.

When the tax authority conducts an affiliated transaction investigation, the Enterprise, its affiliated parties and other enterprises connected to the affiliated transaction investigation shall provide relevant information in accordance with relevant provisions.

Article 44: If an Enterprise does not provide information on the business transactions with its affiliated parties or provides false or incomplete information that fails to genuinely reflect its affiliated transactions, the tax authority has the right to determine its taxable income in accordance with the law.

Article 45: If an Enterprise controlled by a tax-resident Enterprise or by a tax-resident Enterprise and a Chinese resident and established in a country (or region) with an actual tax burden markedly lower than the tax rate specified in the first paragraph of Article 4 hereof does not distribute profits or reduces its distribution of profits other than due to reasonable business needs, that portion of the aforementioned profit that should belong to the tax-resident Enterprise shall be counted as part of its revenue for the period in question.

Article 46: If the ratio of the debt investments to equity investments received by an Enterprise from an affiliated party exceeds the specified standard, the interest expenditures incurred thereon may not be deducted when calculating taxable income.

Article 47: If an Enterprise implements another arrangement that does not have a reasonable commercial objective and that reduces its taxable revenue or income, the tax authority has the right to adjust such taxable revenue or income by reasonable means.

Article 48: If the tax authority makes a tax adjustment in accordance with this Part, necessitating the collection of an additional tax amount, it shall collect such additional tax amount and impose interest thereon in accordance with State Council provisions.

PART SEVEN: ADMINISTRATION OF LEVY AND COLLECTION

Article 49: The administration of the levy and collection of Enterprise income tax shall, in addition to being carried out in accordance herewith, be carried out in accordance with the PRC Law on the Administration of the Levy and Collection of Taxes.

Article 50: Unless otherwise provided in tax laws and administrative regulations, a tax-resident Enterprise shall pay tax in the place where it is registered. However, if its place of registration is overseas, it shall pay tax in the place where its actual management organization is located.

If a tax-resident Enterprise establishes in China a business establishment without legal personality, it shall consolidate its calculation and payment of Enterprise income tax.

Article 51: If a non-tax-resident Enterprise obtains the income specified in the second paragraph of Article 3 hereof, it shall pay tax in the place where its establishment is located. If a non-tax-resident Enterprise has two or more establishments in China, it may, subject to the review and approval of the tax authority, opt to have its primary establishment consolidate the payment of Enterprise income tax.

If a non-tax-resident Enterprise obtains the income specified in the third paragraph of Article 3 hereof, tax shall be paid in the place where its withholding agent is located.

Article 52: Unless otherwise provided by the State Council, separate Enterprises may not consolidate their payments of Enterprise income tax.

Article 53: Enterprise income tax shall be calculated per tax year. A tax year runs from January 1 to December 31 of the Gregorian calendar.

If an Enterprise commences its operations or terminates its business activities during a tax year, resulting in the actual period of operations during such tax year of less than 12 months, its actual period of operations shall be treated as a tax year.

If an Enterprise is liquidated in accordance with the law, the liquidation period shall be treated as a tax year.

Article 54: Enterprise income tax shall be paid in advance each month or each quarter.

An Enterprise shall file its returns for the advance payment of Enterprise income tax with and pay its tax in advance to the tax authority within 15 days from date of the end of the month or quarter.

Within five months from the date of the end of a year, an Enterprise shall file its annual Enterprise income tax returns with the tax authority and calculate and settle the tax payable by it or the tax refundable to it.

When an Enterprise files its Enterprise income tax returns, it shall include its financial accounting reports and other relevant information in accordance with relevant provisions.

Article 55: If an Enterprise terminates its business activities during a year, it shall carry out the procedures for the calculation and payment of Enterprise income tax for the period in question with the tax authority within 60 days from the date of actual termination of its operations.

Before the Enterprise carries out de-registration procedures, it shall report the amount of proceeds from its liquidation to the tax authority and pay Enterprise income tax in accordance with the law.

Article 56: Enterprise income tax payable in accordance herewith shall be calculated in renminbi. If income is calculated in a currency other than renminbi, it shall be translated into, and tax paid in, renminbi.

PART EIGHT: SUPPLEMENTARY PROVISIONS

Article 57: Enterprises that were approved and established prior to the promulgation hereof and that, in accordance with then effective tax laws and administrative regulations, enjoy a special reduced tax rate shall, in accordance with the provisions of the State Council, progressively transition to the tax rate specified herein during the five years following the implementation hereof. Those Enterprises that enjoy a fixed-term tax exemption or tax reduction shall, in accordance with the provisions of the State Council, continue to enjoy such exemption or reduction after the implementation hereof until the expiration of the term of such exemption or reduction. However, if an Enterprise has not enjoyed such preferential treatment because it has not yet achieved profitability, the term of such preferential treatment shall commence to count from the year in which this Law is implemented.

High and new technology Enterprises that the state needs to strongly support and that are newly established in specific areas established by law for the development of foreign economic cooperation and technological exchanges or in areas that the State Council has specified to implement the special policies of the aforementioned areas shall be eligible for transitional preferential tax policies. The specific measures therefor shall be specified by the State Council.

Other encouraged Enterprises determined by the state shall be eligible for tax exemptions and reductions in accordance with State Council provisions.

Article 58: In the event that a tax agreement entered into by the government of the People's Republic of China with the government of a foreign country contains provisions different from those hereof, the provisions of such agreement shall prevail.

Article 59: The State Council shall formulate implementing regulations based hereon.

Article 60: This Law shall be effective as of January 1 2008. The PRC Income Tax Law on Foreign-invested Enterprises and Foreign Enterprises adopted at the 4th Session of the 7th National People's Congress on April 9 1991 and the PRC Tentative Regulations on Enterprise Income Tax promulgated by the State Council on December 13 1993 shall be repealed simultaneously.