Laws of the People's Republic of China

The State Administration of Taxation

Measures for the Handling of Income Taxes in the Debt Restructuring of Enterprises

Decree [2003] No.6 of State Administration of Taxation

January 23, 2003

Article 1

In order to strengthen the administration of income tax in the debt restructuring of enterprises, and to prevent the loss of tax revenue, these Measures are enacted in accordance with the Provisional Regulations of the People's Republic of China on Enterprise Income Tax and the implementation rules thereof.

Article 2

Debt restructuring as used in these Measures refers to all the mattes involving modification of debt terms between the creditor (enterprise) and the debtor (enterprise).

Article 3

Debt restructuring can be done in any or all of the following methods:

1)

Paying off the debts by cash lower than the assessable cost of the debts;

2)

Paying off the debts by non-cash assets;

3)

Transferring the debts to capital, including debt-equity swap of state-owned enterprises;

4)

Modifying other debt terms, such as extending the repayment period, extending the repayment period and collecting extra interests, extending the repayment period and reducing the capital or interest of the debts etc;

5)

Mixed restructuring by combining two or more of the aforesaid methods.

Article 4

Where the debtor (enterprise) pays off the debts by non-cash assets, except that the enterprise is restructured or there are otherwise liquidation provisions, the handling of income tax shall be divided into two economic operations, namely, the transferring of the non-cash assets at fair value, and the paying off of debts with the amount equivalent to the fair value of the non-cash assets. The debtor (enterprise) shall confirm the transfer income (or loss) of the relevant assets; for the non-assets acquired by the creditor (enterprise), the assessable cost shall be determined according to the fair value of the relevant assets (including the taxes relating to the transfer of assets), and thus to calculate the expenses for depreciation of fixed assets, the expenses for amortization of intangible assets or the sale cost carried forward etc that shall be deducted before payment of the enterprise income tax.

Article 5

In the debt restructuring of transferring debts to capital, except that the enterprise is restructured or there are otherwise liquidation provisions, the debtor (enterprise) shall confirm the balance between the book value of the restructured debts and the fair value of the equity enjoyed by the creditor for giving up the creditor's rights as the income of debts restructuring, and include that income in the taxable income of the current period. The creditor (enterprise) shall confirm the fair value of the equity it enjoyed as the assessable cost of the investment.

Article 6

In the debt restructuring in which the creditor's concessions to the debtor include paying off the debts by cash or non-cash assets lower than the assessable cost of the debts etc, the debtor shall confirm the balance between the assessable cost of the restructured debts and the amount of the cash paid or the fair value of the non-cash assets as the income of debt restructuring, and include that income in the taxable income of the current period. The creditor shall confirm the balance between the assessable cost of the restructured debts and the cash or fair value of the non-cash assets received as the loss of debt restructuring of the current period to offset the taxable income.

Article 7

In the debt restructuring by modifying other debt terms, the debtor shall write down the assessable cost of the restructured debts to future payable amount, and the amount written down shall be confirmed as the income of debt restructuring of the current period. The creditor shall write down the assessable cost of the credits to future receivable amount, and the amount written down shall be confirmed as the loss of debt restructuring of the current period.

Article 8

If an enterprise's income of asset transfer or of debt restructuring confirmed as a result of paying off debts by non-case assets or of the creditor's concessions is of considerably large amount, and it is really difficult to pay the tax once-off, the tax may be evenly included in the payable income of each year within a period no longer than 5 tax years.

Article 9

In debt restructuring between associated parties that include such concession terms as one party shall transfer profits to the other party, if there are reasonable business needs and any of the following conditions is met, the tax may be handled respectively pursuant to Articles 4 to 8 of these Measures upon approval of the tax authorities:

1)

As supported by a court ruling;

2)

There is an agreement of consent all of the creditors;

3)

In case of approved debt-equity swap of state-owned enterprise.

Article 10

If the debt restructuring including concession terms between associated parties is not in conformity with the conditions provided in Article 9 of these Measures, the creditor may not, as a general principle, confirm the concession as restructuring loss, but as donation, and the debtor shall confirm the donation income. If the debtor is a shareholder of the creditor, the concession of the creditor shall be assumed as the distribution to the shareholders by the enterprise, and be handled according to Item 2) of Article 1 of the Notice of the State Administration of Taxation on Several Issues of Income Tax on Equity Investment of Enterprises (GuoShuiFa [2002] No.118).

Article 11

The fair value as used in these Measures refers to the fair purchase value of the transactions between independent enterprises.

Article 12

These Measures shall enter into force on March 1, 2003.