Laws of the People's Republic of China

To the tax bureaus of various provinces, municipalities and autonomous regions, the tax bureaus of various cities with independent planning and various sub-bureaus of the Offshore Oil Tax Administration:

In accordance with the stipulations of the Circular of the State Administration of Taxation on the Shareholding System Pilot Enterprises Applicable Taxation Legal Question, a document Coded Guo Shui Fa [1993] No. 087, we hereby clarify as follows the taxation policy question related to shareholding enterprises which pay various taxes in light of the external tax law:

I. The taxation handling of asset revaluation and variable-value

(1) With regard to enterprise with foreign investment which are reorganized or merged with other enterprises into shareholding enterprises, and the original enterprise with foreign investment which have cancelled registration with the administrative department for industry and commerce, their changed value of subscribed shares used as investment and their book value shall be included in gains and losses of the original enterprise with foreign investment, and on the basis of which enterprise income tax is calculated and paid.

(2) If the original enterprise with foreign investment has conducted taxation handling in accordance with the stipulations of the above clause, the newly organized shareholding enterprise may reevaluate the assets of the original enterprise with foreign investment and affirm their value and enter it as investment into the account book and, on the basis of which calculate the depreciation or amortization of the assets; if the original enterprise with foreign investment has not conducted taxation handling in accordance with the stipulations of the above clause, that changed value of the assets of the original enterprise with foreign investment, which is reassessed by the newly organized shareholding enterprise, shall be readjusted in light of the method stipulated in Clause (3) of this Article.

(3) If the shareholding enterprise sells shares to society or increases the issuance of shares and carries out reevaluation of various assets in accordance with related stipulations, the changed value, when the enterprise declares payment of enterprise income tax, shall not be included in the enterprise gains and losses and the book value of the enterprise assets shall not thereby be readjusted. If the enterprise has made account readjustment in its account book of the changed value of the reevaluated assets and has calulated and drawn depreciation or amortization in accordance with the readjusted number of the account book, or has charged to cost and expenses by other methods, the enterprise shall, while declaring annual tax payment, make readjustment by the following methods:

(1) Making yearly readjustments as things really are. The current cost and expense which are counted more or less than what they should be by the method of depreciation or amortization in each tax-paying year resulting from the changed value of the reevaluation of assets made by the enterprise shall be readjusted in the current cost and expense column of the yearly tax-paying declaration form, the taxable amount of income shall be increased or decreased correspondingly.

(2) Comprehensive readjustments. For the part of change resulting from the reassessment of the enterprise assets, readjustments may be made to the current cost and expense items declared for annual tax payment on an average 10-year period basis without distinguishing the asset projects, the taxable amount of income shall be increased or decreased correspondingly.

The enterprise may choose either one of the above-mentioned two methods and report to local competent tax authorities for use after receiving approval. When declaring for annual tax payment, the enterprise shall send related calculating materials together to local competent tax authorities for examination and approval.

II. Questions concerning enjoying regular preferential income tax reduction and exemption

(1) The regrouping of enterprise with foreign investment or merging with other enterprises into shareholding enterprises. When the original enterprise with foreign investment which have performed the procedures for cancellation of registration with the administrative department for industry and commerce, the newly organized shareholding enterprise which simultaneously conform with the following conditions may enjoy regular preferential tax reduction and exemption in accordance with the stipulations of Article 8 of the Income Tax Law on enterprise with foreign investment and Foreign Enterprises (hereinafter referred to as Tax Law).

(1) The original enterprise with foreign investment has carried out tax handling of its reassessed assets in accordance with the stipulations of Clause (1) of Article 1 of this Circular.

(2) The original enterprise with foreign investment whose actual operational period has not reached the operational time limit for enjoying related regular preferential tax reduction and exemption as stipulated in the Tax Law, but it has repaid the already exempted and reduced enterprise income tax.

If it does not meet the above conditions, the newly organized shareholding enterprise shall not re-enjoy the regular preferential tax reduction and exemption as stipulated in Article 8 of the Tax Law. But if the original enterprise with foreign investment which has not started or the period has not expired for enjoying regular preferential tax reduction and exemption in accordance with the stipulations of Article 8 of the Tax Law, the newly organized shareholding enterprise may continue to enjoy the above-mentioned preferential tax treatment till expiration of the period in accordance with the stipulation of the Tax Law.

(2) The shareholding enterprise established by a enterprise with foreign investment or a foreign investor who invests in the capacity of a shareholder may enjoy regular preferential reduction and exemption of enterprise income tax in accordance with the stipulations of Article 8 of the Tax Law.

III. Tax handling related to the issuance of stocks at a premium

For an enterprise which issues stocks, the part of premium resulting from the price of the stock issued being higher than the face value of the stocks is regarded as the rights and interests of the enterprise shareholder, and not as business profits on which enterprise income tax is to be levied; during enterprise liquidation, this part shall not included in the taxable liquidation income.

IV. Questions concerning the treatment of applicable reinvestment tax reimbursement

In the case of a foreign investor who uses the profits (dividends) gained from a enterprise with foreign investment or a shareholding enterprise to buy shares (including secondary shares) of the enterprise, or shares of any other enterprise, it is not applicable to the preferential regulations concerning the refunding of tax as set in the Tax Law.