Circular on Issues Concerning the Enterprise Income Tax Policy for Technology Transfers by Tax-resident Enterprises

(Issued by the Ministry of Finance and the State Administration of Taxation on December 31 2010 and effective as of January 1 2008.)

Cai Shui [2010] No.111

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 and the Finance Bureau of the Xinjiang Production and Construction Corp:

Pursuant to relevant provisions of the PRC Enterprise Income Tax Law (the Tax Law) and the Implementing Regulations for the PRC Enterprise Income Tax Law (Order of the State Council No.512; the “Implementing Regulations”), we hereby notify you on issues relevant to the reduction or exemption of enterprise income tax on eligible technology transfer income as follows:

1. The scope of technology transfers includes the transfer by tax-resident enterprises of proprietary technology, copyrights in computer software, rights in layout-designs of integrated circuits, new varieties of plants, new biopharmaceutical products and other technologies as determined by the Ministry of Finance and the State Administration of Taxation.

The term “proprietary technology” means inventions, utility models and industrial designs (that are not merely a simple modification of the pattern on a product) to which exclusive rights are granted by law.

2. For the purposes of this Circular, the term “technology transfer” means the act whereby a tax-resident enterprise transfers ownership of, or grants a global exclusive licence of at least five years for, a technology satisfying Article 1 hereof that it owns.

3. A technology transfer contract shall be entered into for a technology transfer. A domestic technology transfer shall require the recognition and registration of the science and technology department at the provincial level or above and a cross-border technology transfer shall require the recognition and registration of the commerce department at the provincial level or above. Where a transfer involves technology that was created with government financial support, the examination and approval of the science and technology department at the provincial level and above shall be required.

The export of technology by a tax-resident enterprise shall be examined by the relevant department in accordance with the List of Technologies the Export from China of Which is Prohibited or Restricted (Order of the Ministry of Commerce and the Ministry of Science and Technology No.12 of 2008) issued by the Ministry of Commerce and the Ministry of Science and Technology. A tax-resident enterprise shall not be eligible for tax breaks in the form of a reduction or exemption of enterprise income tax on a technology transfer for income derived from the transfer of technology the export of which is prohibited or restricted.

4. A tax-resident enterprise shall not be eligible for tax breaks in the form of a reduction or exemption of enterprise income tax on a technology transfer for income derived from a transfer of technology to an affiliated person in which its direct or indirect equity holding totals 100%.

5. This Circular shall be effective as of January 1 2008.