Circular on the Handling of Relevant Matters Following the Abolition of Several Preferential Tax Policies Previously Available to Foreign-invested Enterprises and Foreign Enterprises

(Issued by the State Administration of Taxation on February 27 2008.)

Guo Shui Fa [2008] No.23

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

Pursuant to the relevant provisions of the PRC Enterprise Income Tax Law and its Implementing Regulations, the PRC Law on the Administration of the Levy and Collection of Taxes and its Implementing Rules and the State Council, Circular on the Implementation of Transitional Preferential Enterprise Income Tax Policies (Guo Fa [2007] No.39), we hereby notify you on tax treatment issues following the abolition of several preferential tax policies previously applicable to foreign-invested enterprises and foreign enterprises as follows:

1. Treatment with respect to the previous tax refund policy for reinvestments by foreign investors in foreign-invested enterprises

If a foreign investor has directly reinvested the after-tax profit obtained from a foreign-invested enterprise into that enterprise to increase its registered capital or used it as a capital investment to establish another foreign-invested enterprise, and completed such reinvestment and the amendment of registration or registration procedures with the administration for industry and commerce before the end of 2007, it may be granted a reinvestment-related tax refund in accordance with the PRC Income Tax Law Concerning Foreign-invested Enterprises and Foreign Enterprises and related provisions. A tax refund shall not be granted where an early distribution of 2007 profit is reinvested before the end of 2007.

2. Treatment with respect to exemption of enterprise income tax on income such as interest and royalties derived in China by foreign enterprises

If a foreign enterprise derives income by transferring proprietary technology or providing a loan to China and if the relevant contract was executed before the end of 2007 and satisfies the tax exemption conditions set forth in the PRC Income Tax Law Concerning Foreign-invested Enterprises and Foreign Enterprises, it shall, subject to the approval of the tax authority, be granted a tax exemption, and shall be eligible for continued tax exemptions during the term of the contract. However, such exemption shall not apply to renewals, supplementary contracts or expanded terms. The competent tax authority shall duly carry out the follow-up administration of the performance of the contract and issue tax payment receipts in a timely manner.

3. Treatment with respect to foreign-invested enterprises entitled to fixed-term tax reductions/exemptions whose conditions change after 2008

If a foreign-invested enterprise enjoys a tax reduction or exemption for a fixed term as specified in the PRC Income Tax Law Concerning Foreign-invested Enterprises and Foreign Enterprises but, after 2008, the nature of its production or operations or its term of operation changes resulting in its no longer complying with the conditions set forth in the PRC Income Tax Law Concerning Foreign-invested Enterprises and Foreign Enterprises, it shall be required to repay the amount of the fixed-term tax reduction or exemption that it previously enjoyed (including that during the transition period) pursuant to the PRC Income Tax Law Concerning Foreign-invested Enterprises and Foreign Enterprises. When carrying out final settlement in respect of such enterprise each year, the competent tax authority shall review changes in the content of its business and term of operation, etc.