Laws of the People's Republic of China

The Ministry of Finance, the State Administration of Taxation

Circular of the Ministry of Finance and the State Administration of Taxation on Enterprise Income Tax Preferential Polices to Be Enjoyed by Enterprises with Foreign Investment Which Increase Investments

CaiShui [2002] No.56

June 1, 2002

The financial departments (bureaus) and state taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and municipalities separately listed on the State plan, the local taxation bureaus of Guangdong and Hai'nan, Local Taxation Bureau of Shenzhen, the Financial Bureau of Xinjiang Army Corps of Production and Construction:

For a period of time , it has been reported in many regions whether enterprises with foreign investment may, if increasing investments to enlarge the orperational scale beyond the original contract , enjoy and calculate separately the proceeds of the time income tax perferential treatment from such increased investment items, provided for in Article 8 of the Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises (hereinafter referred to as the Tax Law) in contrast with the Circular of the Ministry of Finance and the State Administration of Taxation on Several Provisions concerning the Issue of Levy of the Income Tax from Chinese-Foreign Equity Joint Ventures, Chinese-Foreign Cooperative Production Enterprises and Wholly Foreign-Owned Enterprises (CaiShuiWaiZi [1986] No.102). After study, we hereby, in accordance with the relevant provisions in the Tax Law and the detailed rules for its implementation, give our notice as follows concerning the issue of enterprises with foreign investment enjoying the income tax perferential treatment due to their increase of investment items with a view to encouraging large transnational companies to invest in China, improving the efficiency of China's utilization of foreign investments and further improving the tax preferential polices::

I.

For any enterprise with foreign investment which engages in the encouraged category of projects in the Catalogue for the Guidance of Foreign Investment Industries approved by the State Council and meets any of the following conditions, the investor may, with regard to the proceeds from investment items beyond the original contract, separately calculate and enjoy the regularly reduced or exempted enterprise income tax preferential treatment provided for in Paragraphs 1 and 2 of Article 8 of the Tax Law:

(1)

the newly increased amount of registered capital due to the increase of investment is no less than 60 million USD;

(2)

the newly increased amount of registered capital due to the increase of investment is no less than 150 million USD, and also no less than 50% of the enterprise' original registered capital.

The execution of the above tax preferences must be based upon the application of the enterprise involved and the approval of the taxation organ at the provincial level. Each taxation organ at the provincial level shall submit the information on its approval to the Ministry of Finance and the State Administration of Taxation for record.

II.

An enterprise with foreign investment shall distinguish its production and operation of the increased investment items from the production and operation of the original investments, and shall separately set up account books and documents, and accurately calculate the respective taxable income. Where an enterprise with foreign investment fails to reasonably calculate the respective taxable income, the taxation organ may reasonably divide the respective taxable income on the basis of such proportion as income, assets, etc. of the enterprise.

III.

This Circular shall enter into force as of January 1, 2002. Where the investments increased by an enterprise with foreign investment before January 1, 2002 meet the conditions in this Circular, the enterprise may, among the years for tax reduction and exemption as determined in the Tax Law, enjoy the preferential treatment for the years after January 1, 2002, and the tax amount levied before January 1, 2002 shall not be refunded.