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RULES FOR THE IMPLEMENTATION OF THE INCOME TAX LAW FOR ENTERPRISES WITH FOREIGN INVESTMENT AND FOREIGN ENTERPRISES

Category  TAXATION Organ of Promulgation  The State Council Status of Effect  Amendment
Date of Promulgation  1991-06-30 Effective Date  1991-07-01  

Rules for the Implementation of the Income Tax Law of the People's Republic of China for Enterprises With Foreign Investment and Foreign Enterprises



Chapter I  General Provisions
Chapter II  Computation of Taxable Income
Chapter III  Tax Treatment for Assets
Chapter IV  Business Dealings Between Associated Enterprises
Chapter V  Withholding at Source
Chapter VI  Tax Preferences
Chapter VII  Tax Credits
Chapter VIII  Tax Administration
Chapter IX  Supplementary Provisions

(Promulgated by Decree No. 85 of the State Council of the People's

Republic of China on June 30, 1991, and effective as of July 1, 1991)
(Editor's Note: Application of the Regulation of Preferential Duties for Enterprises with
Foreign Investment engaged in Basis Infrastructure Projects> regulates,
from January First, 1999 to expand the scope of application of sub-
paragraph 3 of paragraph1 of Article 73, about imposition of enterprises
with foreign investment engaged in basis infrastructure projects, such as
energy resource and tran-sportation income tax at the reduced rate of 15%
after approved by StateTaxation Bureau to all over the country to carry
out.)
Chapter I  General Provisions

    Article 1  These Rules are formulated in accordance with the provisions
of Article 29 of the Income Tax Law of the People's Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises (hereinafter
referred to as the "Tax Law").

    Article 2  "Income from production and business operations" mentioned in
Article 1, paragraph 1 and paragraph 2 of the Tax Law means income from
production and business operations in manufacturing, mining, communications
and transportation, construction and installation, agriculture, forestry,
animal husbandry, fishery, water conservation, commerce, finance, service
industries, exploration and exploitation, and in other trades.

    "Income from other sources" mentioned in Article 1, paragraph 1 and
paragraph 2 of the Tax Law means profits (dividends), interest, rents, income
from the transfer of property, income from the provision or transfer of
patents, proprietary technology, income from trademark rights and copyrights
as well as other nonbusiness income.

    Article 3  "Enterprises with foreign investment" mentioned in Article 2,
paragraph 1 of the Tax Law and "foreign companies, enterprises and other
economic organizations which have establishments or places in China and
engage in production or business operations" mentioned in Article 2,
paragraph 2 of the Tax Law are, unless otherwise especially specified,
generally all referred to as "enterprises" in these Rules.

    "Establishments or places" mentioned in Article 2, paragraph 2 of the Tax
Law refers to management organizations, business organizations, administrative
organizations and places for factories and the exploitation of natural
resources, places for contracting of construction, installation, assembly,
and exploration work, places for the provision of labor services, and
business agents.

    Article 4  "Business agents" mentioned in Article 3, paragraph 2 of these
Rules means companies, enterprises and other economic organizations or
individuals entrusted by foreign enterprises to engage as agents in any of
the following:

    (1) representing principals on a regular basis in the arranging of
purchases and signing of purchase contracts and the purchasing of commodities
on commission;

    (2) entering into agency agreements or contracts with principals, storing
on a regular basis products or commodities owned by principals, and delivering
on behalf of principals such products or commodities to other parties; and

    (3) having authority to represent principals on a regular basis in
signing of sales contracts or in accepting of purchase orders.

    Article 5  "Head office" mentioned in Article 3 of the Tax Law refers to
the central organization which is established in China by an enterprise with
foreign investment as a legal person pursuant to the laws of China and which
is responsible for the management, operations and control over such
enterprise.

    Income from production and business operations and other income derived
by the branches within or outside China of an enterprise with foreign
investment shall be consolidated by the head office for purposes of the
payment of income tax.

    Article 6  "Income derived from sources inside China" mentioned in
Article 3 of the Tax Law refers to:

    (1) income from production and business operations derived by enterprises
with foreign investment and foreign enterprises which have establishments or
places in China, as well as profits (dividends), interest, rents, royalties
and other income arising within or outside China actually connected with
establishments or sites established in China by enterprises with foreign
investment or foreign enterprises;

    (2) the following income received by foreign enterprises which have no
establishments or sites in China:

    (a) profits (dividends) earned by enterprises in China;

    (b) interest derived within China such as on deposits or loans, interest
on bonds, interest on payments made provisionally for others, and deferred
payments;

    (c) rentals on property leased to and used by lessees in China;

    (d) royalties such as those received from the provision of patents,
proprietary technology, trademarks and copyrights for use in China;

    (e) gains from the transfer of property, such as houses, buildings,
structures and attached facilities located in China and from the assignment
of landuse rights within China;

    (f) other income derived from China and stipulated by the Ministry of
Finance to be subject to tax.

    Article 7  In respect of Chineseforeign contractual joint ventures that
do not constitute legal persons, each partner thereto may separately compute
and pay income tax in accordance with the relevant tax laws and regulations
of the State; income tax may, upon approval by the local tax authorities of
an application submitted by such enterprises, be computed and paid on a
consolidated basis in accordance with the provisions of the Tax Law.

    Article 8  "Tax year" mentioned in Article 4 of the Tax Law begins on
January 1 and ends on December 31 under the Gregorian Calendar.

    Foreign enterprises that have difficulty computing taxable income in
accordance with the tax year stipulated in the Tax Law may, upon approval by
the local tax authorities of an application submitted by such enterprises,
use their own 12month fiscal year as the tax year.

    Enterprises commencing business operations in the middle of a tax year or
actually operating for a period of less than 12 months in any tax year due to
such factors as merger or shutdown shall use the actual period of operations
as the tax year.

    Enterprises that undergo liquidation shall use the period of liquidation
as the tax year.

    Article 9  "The competent authority for tax affairs under the State
Council" mentioned in Article 8, paragraph 3 and Article 19, paragraph 3,
Item (4) of the Tax Law and Article 72 of these Rules refers to the Ministry
of Finance and the State Tax Bureau.
Chapter II  Computation of Taxable Income

    Article 10  "The formula for the computation of taxable income" mentioned
in Article 4 of the Tax Law is as follows:

    (1) Manufacturing:

    (a) taxable income = (profit on sales) + (profit from other operations) +
(non-business income) - (non-business expenses);

    (b) profit on sales = (net sales) - (cost of products sold) - (taxes on
sales) - [ (selling expenses) + (administrative expenses) +
(finance expenses) ];

    (c) net sales = (gross sales) - [ (sales returns) + (sales discounts and
allowances) ];

    (d) cost of products sold = (cost of products manufactured for the period)
+ (inventory of finished products at the beginning of the period) -
(inventory of finished products at the end of the period);

    (e) cost of products manufactured for the period = (manufacturing costs
for the period) + (inventory of semifinished products and products in process
at the beginning of the period) - (inventory of semi-finished products and
products in process at the end of the period);

    (f) manufacturing costs for the period = (direct materials consumed in
production for the period) + (direct labour) + (manufacturing expenses).

    (2) Commerce:

    (a) taxable income = (profit on sales) + (profit from other operations) +
(non-business income) - (non-business expenses);

    (b) profit on sales = (net sales) - (cost of sales) - (taxes on sales) -
[ (selling expenses) + (administrative expenses) + (finance expenses) ];

    (c) net sales = (gross sales) - [ (sales returns) + (sales discounts and
allowances) ];

    (d) cost of sales = (inventory of merchandise at the beginning of the
period) + { (purchase of merchandise during the period) -
[ (purchase returns) + (purchase discounts and allowances) ] +
(purchasing expenses) } - (inventory of merchandise at the end of the period).

    (3) Service trades:

    (a) taxable income = (net business income) + (non-operating income) -
(non-operating expenses);

    (b) net business income = (gross business income) - [ (taxes on business
income) + (operating expenses) + (administrative expenses) +
(finance expenses) ].

    (4) Other lines of business:

    Computations shall be made with reference to the above formulas.

    Article 11  The computation of taxable income of an enterprise shall, in
principle, be on an accrual basis.

    The following income from business operations of an enterprise may be
determined by stages and used as the basis for the computation of taxable
income:

    (1) Where products or commodities are sold by instalment payment methods,
income from sales may be recognized according to the invoice date of the
products or commodities to be delivered; income from sales may also be
recognized according to the date of payment to be made by the buyer as agreed
upon in the contract;

    (2) Where construction, installation and assembly projects, and provision
of labour services extend beyond one year, income may be recognized according
to the progress of the project or the amount of work completed;

    (3) Where the processing or manufacturing of heavy machinery, equipments
and ships for other enterprises extends beyond one year, income may be
recognized according to the progress of the project or amount of work
completed.

    Article 12  Where Chinese-foreign contractual joint ventures operate on
the basis of productsharing, the partners thereto shall be deemed to receive
income at the time of the division of the products; the amount of income
shall be computed according to the price sold to third party or with
reference to prevailing market prices.

    Where foreign enterprises are engaged in the cooperative exploration of
petroleum resources, the partners thereto shall be deemed to receive income
at the time of the division of the crude oil; the amount of income shall be
computed according to a price which is adjusted periodically with reference
to the international market prices of crude oil of similar quality.

    Article 13  In respect of income obtained by enterprises in the form of
non-monetary assets or rights and interests, such income shall be computed or
appraised with reference to prevailing market prices.

    Article 14  "Exchange rate quoted by the State exchange control
authorities" mentioned in Article 21 of the Tax Law refers to the buying rate
quoted by the State Administration of Exchange Control.

    Article 15  In respect of income obtained by enterprises in foreign
currency, upon payment of income tax in quarterly instalments in accordance
with the provisions of Article 15 of the Tax Law, taxable income shall be
computed by converting the income into Renminbi according to the exchange
rate quotation on the last day of the quarter. At the time of final
settlement following the end of the year, no recomputation and reconversion
need be made in respect of income in a foreign currency for which tax has
already been paid on a quarterly basis; only that portion of the foreign
currency income of the entire year for which tax has not been paid shall, in
respect of the computation of taxable income, be converted into Renminbi
according to the exchange rate quotation on the last day of the tax year.

    Article 16  Where an enterprise is unable to provide complete and
accurate certificates of costs and expenses and is unable to correctly
compute taxable income, the local tax authorities shall determine the rate of
profit and compute taxable income with reference to the profit level of other
enterprises in the same or similar trade. Where an enterprise is unable to
provide complete and accurate certificates of revenues and is unable to
report income correctly, the local tax authorities shall appraise and
determine taxable income by the use of such methods as cost (expense) plus
reasonable profits.

    When the tax authorities appraise and determine profit rates or revenues
in accordance with the provisions of the preceding paragraph, and where other
treatment is provided by the laws, regulations and rules, such other
treatment shall be applicable.

    Article 17  Foreign air transportation and ocean shipping enterprises
engaged in international transport business shall use 5% of the gross
revenues from passenger and cargo transport and shipping services arising
within China as taxable income.

    Article 18  Where an enterprise with foreign investment invests in
another enterprise within China, the profits (dividends) so obtained from the
enterprise receiving such investment may be excluded from taxable income of
the enterprise; however, expenses and losses incurred in such abovementioned
investments shall not be deducted from taxable income of the enterprise.

    Article 19  Unless otherwise stipulated by the State, the following items
shall not be itemized as costs, expenses or losses in the computation of
taxable income:

    (1) expenses in connection with the acquisition or construction of fixed
assets;

    (2) expenses in connection with the transfer or development of intangible
assets;

    (3) interest on capital;

    (4) various income tax payments;

    (5) fines for illegal business operations and losses due to the
confiscation of property;

    (6) surcharges and fines for overdue payment of taxes;

    (7) the portion of losses due to natural disasters or accidents for which
there has been compensation;

    (8) donations and contributions other than those used in China for public
welfare or relief purposes;

    (9) royalties paid to the head office;

    (10) other expenses not related to production or business operations.

    Article 20  Reasonable administrative expenses paid by a foreign
enterprise with an establishment or site in China to the head office in
connection with production or business operations of the establishment or
site shall be permitted to be itemized as expenses following agreement by the
local tax authorities after an examination and verification of documents of
proof issued by the head office in respect of the scope of the administrative
expenses, total amounts, the basis and methods of allocation, which shall be
provided together with an accompanying verification report of a certified
public accountant.

    Administrative expenses in connection with production and business
operations shall be allocated reasonably between enterprises with foreign
investment and their branches.

    Article 21  Reasonable interest payments incurred on loans in
connection with production and business operations shall be permitted to be
itemized as expenses following agreement by the local tax authorities after
an examination and verification of documents of proof, which shall be
provided by the enterprises in respect of the loans and interest payments.

    Interest paid on loans used by enterprises for the purchase or
construction of fixed assets or the transfer or development of intangible
assets prior to  the assets being put into use shall be included in the
original value of the assets.

    "Reasonable interest" mentioned in the first paragraph of this Article
refers to interest computed at a rate not higher than normal commercial
lending rates.

    Article 22  Entertainment expenses incurred by enterprises in connection
with production and business operations shall, when supported by authentic
records or invoices and vouchers, be permitted to be itemized as expenses
subject to the following limits:

    (1) Where annual net sales are 15 million yuan (RMB) or less, not to
exceed 0.5% of net sales; for that portion of annual net sales that exceeds
15 million yuan (RMB), not to exceed 0.3% of that portion of net sales.

    (2) Where annual gross business income is 5 million yuan (RMB) or less,
not to exceed 1% of annual gross business income; for that portion of annual
gross business income that exceeds 5 million yuan (RMB), not to exceed 0.5%
of that portion of annual gross business income.

    Article 23  Exchange gains or losses incurred by enterprises during
preconstruction or during production and business operations shall, except as
otherwise provided by the State, be appropriately itemized as gains or losses
for that respective period.

    Article 24  Salaries and wages, and benefits and allowances paid by
enterprises to employees shall be permitted to be itemized as expenses
following agreement by the local tax authorities after an examination and
verification of the submission of wage scales and supporting documents and
relevant materials.

    Foreign social security premiums paid by enterprises to employees working
in China shall not be itemized as expenses.

    Article 25  Enterprises engaged in such businesses as credit and leasing
operations may, on the basis of actual requirements and following approval by
the local tax authorities of a report thereon, provide year-by-year bad debt
provisions, the amount of which shall not exceed 3% of the amount of the
year-end loan balances (not including inter-bank loans) or the amount of
accounts receivable, bills receivable and other such receivables, to be
deducted from taxable income of that year.

    The portion of the actual bad debt losses incurred by an enterprise which
exceeds the bad debt provisions of the preceding year may be itemized as a
loss in the current year; the portion less than the bad debt provisions of
the previous year shall be included in taxable income of the current year.

    Bad debt losses mentioned in the preceding paragraph shall be subject to
approval after examination and verification by the local tax authorities.

    Article 26  "Bad debt losses" mentioned in Article 25, paragraph 2 of
these Rules refers to the following accounts receivable:

    (1) due to the bankruptcy of the debtor, collection is still not possible
after the use of the bankruptcy assets for settlement;

    (2) due to the death of the debtor, collection is still not possible
after the use of the estate for repayment;

    (3) due to the failure of the debtor to fulfil repayment obligations for
over two years, collection is still not possible.

    Article 27  Accounts receivable already itemized as bad debt losses which
are recovered in full or in part by an enterprise in a subsequent year shall
be included in taxable income of the year of recovery.

    Article 28  Foreign enterprises with establishments or places in China
may, except as otherwise provided by the State, deduct as expenses foreign
income tax, which has been paid on profits (dividends), interest, rents,
royalties and other income received from outside China and actually connected
with such establishments or places.

    Article 29  "Net assets or remaining property" mentioned in Article 18 of
the Tax Law means the amount of all assets or property following deduction of
various liabilities and losses upon the liquidation of an enterprise.
Chapter III  Tax Treatment for Assets

    Article 30  "Fixed assets of enterprises" means houses, buildings and
structures, machinery, machanical apparatus, means of transport and other
such equipment, appliances and tools related to production and business
operations with a useful life of one year or more. Items not in the nature of
major equipment which are used for production or business operations and
which have a unit value of 2000 yuan (RMB) or less, or with a useful life of
two years or less may be itemized as expenses on the basis of actual
consumption.

    Article 31  The valuation of fixed assets shall be based on original cost.

    The original cost of purchased fixed assets shall be the purchase price
plus transportation expenses, installation expenses and other related
expenses incurred prior to the use of the assets.

    The original cost of fixed assets manufactured or constructed by an
enterprise itself shall be the actual expenses incurred in their manufacture
or construction.

    The original cost of fixed assets treated as investments shall, giving
consideration to the degree of wear and tear of the fixed assets, be such
reasonable price as is specified in the contract, or a price appraised with
reference to the relevant market price plus the relevant expenses incurred
prior to the use thereof.

    Article 32  Depreciation of fixed assets of an enterprise shall be
computed commencing with the month following the month in which they are
first put into use. The computation of depreciation shall cease in the month
following the month in which the fixed assets cease to be used.

    All investments made during the development stage by enterprises engaged
in the exploitation of oil resources shall, taking the oil (gas) field as a
unit, be aggregated and treated as capital expenditures; the computation of
depreciation shall begin in the month following the month in which the
oil (gas) field commences commercial production.

    Article 33  In respect of the computation of depreciation of fixed
assets, the salvage value shall first be estimated and deducted from the
original cost of the assets. The salvage value shall not be less than 10% of
the original value; any request for retaining a lower salvage value or not
salvage value must be approved by the local tax authorities.

    Article 34  Depreciation of fixed assets shall be computed using the
straight-line method. Where it is necessary to use any other method of
depreciation, an application may be filed by an enterprise which, following
examination and verification by the local tax authorities, shall be reported
level-by-level to the State Tax Bureau for approval.

    Article 35  The computation of the minimum useful life in respect of the
depreciation of fixed assets is as follows:

    (1) for houses and buildings: 20 years;

    (2) for railway rolling stock, ships, machinery, mechanical apparatus,
and other production equipment: 10 years;

    (3) for electronic equipment and means of transport other than railway
rolling stock and ships, as well as as such fixtures, tools and furnishings
related to production and business operations: 5 years.

    Article 36  Depreciation of fixed assets in the nature of investments
during the development stage and subsequent stages of an enterprise engaged
in the exploitation of oil resources may be computed on a consolidated basis
without retaining salvage value; the period of depreciation shall not be less
than six years.

    Article 37  "Houses and buildings" mentioned in Article 35, Item (1) of
these Rules means houses, buildings and attached structures used for
production and business operations, and living quarters and welfare
facilities for employees, the scope of which is as follows:

    -- houses, including factory buildings, business premises, office
buildings, warehouses, residential buildings, canteens, and other such
buildings;

    -- buildings, including towers, ponds, troughs, wells, racks, sheds (not
including temporary, simply constructed structures such as work sheds and
vehicle sheds), fields, roads, bridges, platforms, piers, docks, culverts,
gas stations as well as pipes, smokestacks, and enclosing walls that are
detached from buildings, machinery and equipment;

    Facilities attached to buildings and structures mean auxiliary facilities
that are inseparable from buildings and structures and for which no separate
value is computed, including, for example, building and structure ventilation
and drainage systems, oil pipelines, communication and power lines, elevators
and sanitation equipment.

    Article 38  The scope of railway rolling stock, ships, machinery,
mechanical apparatus and other production equipment mentioned in Article 35,
Item (2) of these Rules is as follows:

    -- "railway rolling stock" includes various types of locomotives,
passenger coaches, freight cars, as well as auxiliary facilities on rolling
stock for which no separate value is computed;

    -- "ships" includes various types of motor ships as well as auxiliary
facilities on ships for which no separate value is computed;

    -- "machinery, mechanical apparatus and other production equipment"
includes various types of machinery, mechanical apparatus, machinery units,
production lines, as well as auxiliary equipment such as various types of
power, transport and conduction equipment.

    Article 39  The scope of electronic equipment, means of transport other
than railway rolling stock and ships mentioned in Article 35, Item (3) of
these Rules is as follows:

    -- "electronic equipment" means equipment comprising mainly integrated
circuits, transistors, electron tubes and other electronic components whose
primary functions are to bring into use the application of electronic
technology (including software), including computers as well as
computercontrolled robots, and digitalcontrol or programcontrol systems.

    -- "means of transport other than railway rolling stock and ships"
includes airplanes, automobiles, trams, tractors, motor bikes (boats),
motorized sailboats, sailboats, and other means of transport.

    Article 40  Where, for special reasons, it is necessary to shorten the
useful life of fixed assets, an application may be submitted by an enterprise
to the local tax authorities which following examination and verification
shall be reported level-by-level to the State Tax Bureau for approval.

    Fixed assets which for special reasons as mentioned in the preceding
paragraph require the useful life to be shortened include:

    (1) machinery and equipment subject to strong corrosion by acid or alkali
and factory buildings and structures subject to constant shaking and
vibration;

    (2) machinery and equipment operated continually year-round for the
purpose of raising the utilization rate or increasing the intensity of use;

    (3) fixed assets of a Chinese-foreign contractual joint venture having a
period of cooperation shorter than the useful life specified in Article 35 of
these Rules and which will be left with the Chinese party upon termination of
the cooperation.

    Article 41  Enterprises which acquire used fixed assets having a
remaining useful life shorter than the useful life specified in Article 35 of
these Rules may, following agreement by the local tax authorities after
examination and verification of certifying documents so submitted, compute
depreciation according to the remaining useful life.

    Article 42  Where expenditures incur during the course of the use of
fixed assets due to increased value caused by expansion, replacement,
reconstruction and technical innovation of fixed assets, the original value
of fixed assets shall be increased; where the period of use of fixed assets
can be extended, the useful life shall be appropriately extended and the
computation of depreciation adjusted accordingly.

    Article 43  No further depreciation shall be allowed in respect of fixed
assets which can be continued to be used after having been fully depreciated.

    Article 44  The balance of proceeds from the transfer or disposal of
fixed assets by an enterprise shall, after deduction of the undepreciated
amount or the salvage value and handling fees, be entered into the profit and
loss account for the current year.

    Article 45  Depreciation of fixed assets received as gifts by enterprises
may be computed on the basis of reasonable valuation.

    Article 46  Patents, proprietary technology, trademarks, copyrights,
land-use rights and other intangible assets of enterprises shall be appraised
on the basis of the original value.

    For alienated intangible assets, the original value shall be the actual
amount paid based on a reasonable price.

    For self-developed intangible assets, the original value shall be the
actual amount of expenditure incurred in the course of development.

    For intangible assets used as investment, the original value shall be
such reasonable price as is stipulated in the agreement or contract.

    Article 47  The amortization of intangible assets shall be computed using
the straight-line method.

  Intangible assets transferred or assigned or used as investments, where the
useful life is stipulated in the agreement or contract, may be amortized over
the period of that useful life; the amortization period in respect of
intangible assets for which no useful life has been stipulated or which have
been developed internally shall not be less than ten years.

    Article 48  Reasonable exploration expenses incurred by enterprises
engaged in the exploitation of petroleum resources may be amortized against
income from oil (gas) fields that have already commenced commercial
production. The amortization period shall not be less than one year.

    Where operation of a contract field owned by a foreign oil company is
terminated due to failure to find commercially viable oil (gas), and where
ownership of the contract for the exploitation of petroleum (gas) resources
is not continued and management organizations or offices for carrying on
operations for the exploitation of petroleum (gas) resources are no longer
maintained in China, reasonable exploration expenses already incurred in
respect of the terminated contract field shall, upon examination and
confirmation and the issuance of certification by the tax authorities, be
permitted to be amortized against production income of a newly owned contract
field when the new contract for cooperative exploitation of oil (gas)
resources is signed within ten years from the date of the termination of the
old contract.

    Article 49  Expenses incurred by enterprises during the period of
organization shall be amortized beginning with the month following the month
in which production and business operations commence; the period of
amortization shall not be less than five years.

    The period of organization mentioned in the preceding paragraph means the
period from the date of approval of the organization of the enterprise to the
date of commencement of production and business operations (including trial
production and trial business operations).

    Article 50  Inventories of merchandise, finished products, goods in
process, semi-finished products, raw materials, and other such materials of
enterprises shall be valued at cost.

    Article 51  Enterprises may choose one of the following such methods:
first-in, first-out; moving average; weighted average or last-in, first-out
as the method of computing actual costs in respect of the delivery or receipt
and use of goods in stock.

    Once a method of valuation has been adopted for use, no change shall be
made thereto. Where a change in the method of valuation is indeed necessary,
the matter shall be reported to the local tax authorities for approval prior
to the commencement of the next tax year.
Chapter IV  Business Dealings Between Associated Enterprises

    Article 52  "Associated enterprises" mentioned in Article 13 of the Tax
Law refers to companies, enterprises and other economic units that have any
of the following relationships with other enterprises:

    (1) relationships in respect of existing direct or indirect ownership of
or control over such matters as finances, business operations or purchases
and sales;

    (2) direct or indirect ownership of or control over it and another by a
third party;

    (3) any other relationship in respect of an association of reciprocal
interests.

    Article 53  "Business transactions between independent enterprises"
mentioned in Article 13 of the Tax Law means business dealings carried out
between unassociated and unrelated enterprises on the basis of arm's length
prices and common business practices.

    Enterprises have a duty to provide to the local tax authorities relevant
materials such as standard prices and charges in respect of business dealings
with their associated enterprises.

    Article 54  Where prices in respect of purchase and sales transactions
between an enterprise and its associated enterprises are not based on
independent business dealings, adjustments may be made thereto by the local
tax authorities according to the following arrangements and methods of
determination:

    (1) based on prices of the same or similar business activities between
independent enterprises;

    (2) based on the level of profits obtained from resales in respect of
unassociated and unrelated third party prices;

    (3) based on costs plus reasonable expenses and profit margin;

    (4) based on any other reasonable method.

    Article 55  Where interest paid or received in respect of accommodating
financing between an enterprise and an associated enterprise exceeds or is
lower than the amount that would be agreed upon by unassociated and unrelated
parties, or where the rate of interest exceeds or is lower than the normal
rate of interest in respect of similar business, adjustments may be made
thereto by the local tax authorities with reference to normal rates of
interest.

    Article 56  Where labour service fees paid or received in respect of the
provision of labour services by an enterprise to an associated enterprise are
not based on business dealings between independent enterprises, adjustments
may be made thereto by the local tax authorities with reference to the normal
fee standards of similar labour activities.

    Article 57  Where the valuation or the receipt or payment of usage fees
in respect of such business dealings as the transfer of property or the
granting of rights to the use of property between an enterprise and an
associated enterprise is not based on business dealings between independent
enterprises, adjustments may be made thereto by the local tax authorities
with reference to amounts that would be agreed to by unassociated and
unrelated parties.

    Article 58  Management fees paid by an enterprise to an associated
enterprise shall not be expensed.
Chapter V  Withholding at Source

    Article 59  "Taxable income on profits, interest, rents, royalties and
other income" mentioned in Article 19, paragraph 1 of the Tax Law shall,
except as otherwise stipulated by the State, be computed on the basis of
gross income. Gross royalties obtained from the provision of patents and
proprietary technology include fees for blueprint materials, technical
services and personnel training, as well as other related fees.

    Article 60  "Profits" mentioned in Article 19 of the Tax Law means income
derived from the right to profits according to the proportion of investment,
equity rights, stockholding, or other non-debt profitsharing rights.

    Article 61  "Other income" mentioned in Article 19 of the Tax Law
includes gains from the transfer of property such as houses, buildings and
structures and attached facilities within China and land-use rights.

    "Gains" mentioned in the preceding paragraph means the amount remaining
from the receipt on transfer minus the original value of the property. Where
foreign enterprises are unable to provide correct certification of the
original value of the property, the original value of the property shall be
determined by the local tax authorities according to the specific
circumstances thereof.

    Article 62  "The amount of payment" mentioned in Article 19, paragraph 2
of the Tax Law means cash payments, payment by remittances, and amounts paid
by account transfers, as well as amounts in equivalent cash value paid in
noncash assets or rights and interests.

    Article 63  "Profits obtained from an enterprise with foreign investment"
mentioned in Article 19, paragraph 3, Item (1) of the Tax Law means income
obtained from profits of an enterprise with foreign investment following the
payment or the reduction of or exemption from income tax in accordance with
the provisions of the Tax Law.

    Article 64  "International finance organizations" mentioned in Article 19,
paragraph 3, Item (2) of the Tax Law means financial institutions such as the
International Monetary Fund, the World Bank, the Asian Development Bank, the
International Development Association, and the International Fund for
Agricultural Development.

    Article 65  "Chinese State banks" mentioned in Article 19, paragraph 3,
Item (2) and Item (3) of the Tax Law means the People's Bank of China, the
Industrial and Commercial Bank of China, the Agricultural Bank of China, the
Bank of China, the People's Construction Bank of China, the Bank of
Communications of China, the Investment Bank of China, and other financial
institutions authorized by the State Council to engage in credit businesses
such as foreign exchange deposits and loans.

    Article 66  The scope of the reduction of or exemption from income tax on
royalties provided for in Article 19, paragraph 3, Item (4) of the Tax Law is
as follows:

    (1) royalties received in providing proprietary technology for the
development of farming, forestry, animal husbandry and fisheries:

    (a) technology provided to improve soil and grasslands, develop barren
mountainous regions and make full use of natural conditions;

    (b) technology provided for the supplying of new varieties of animals and
plants and for the production of pesticides of high effectiveness and low
toxicity;

    (c) technology provided such as to advance scientific production
management in respect of farming, forestry, fisheries and animal husbandry,
to preserve the ecological balance, and to strengthen resistance to natural
calamities;

    (2) royalties received in providing proprietary technology for scientific
institutions, institutions of higher learning and other scientific research
units to conduct or cooperate in carrying out scientific research or
scientific experimentation;

    (3) royalties received in providing proprietary technology for the
development of energy resources and expansion of communications and
transportation;

    (4) royalties received in providing proprietary technology in respect of
energy conservation and the prevention and control of environmental pollution;

    (5) royalties received in providing the following proprietary technology
in respect of the development of important fields of science and technology:

    (a) production technology for major and advanced mechanical and
electrical equipment;

    (b) nuclear power technology;

    (c) production technology for large-scale integrated circuits;

    (d) production technology for photoelectric integrated circuits,
microwave semi-conductors and microwave integrated circuits, and
manufacturing technology for microwave electron tubes;

    (e) manufacturing technology for ultra-high speed computers and
microprocessors;

    (f) optical telecommunications technology;

    (g) technology for longdistance, ultra-high voltage direct current power
transmission; and

    (h) technology for the liquefaction, gasification and comprehensive
utilization of coal.

    Article 67  In respect of income of foreign enterprises engaged in China
in construction, installation, assembly, and exploration contracting work,
and provision of labour activities such as consulting, management and
training, the tax authorities may designate the parties paying the contracted
amounts and labour service fees as tax withholding agents.
Chapter VI  Tax Preferences

    Article 68  Pursuant to the provisions of Article 6 of the Tax Law, the
granting of any necessary preferential treatment in respect of enterprise
income tax to enterprises with foreign investment that are encouraged by the
State shall be implemented in accordance with the provisions of the relevant
laws and administrative rules and regulations of the State.

    Article 69  "Special economic zones" mentioned in Article 7, paragraph 1
of the Tax Law means the special economic zones of Shenzhen, Zhuhai, Shantou
and Xiamen and the Hainan Special Economic Zone established by law or
established upon approval of the State Council; economic and technological
development zones mentioned therein means the economic and technological
development zones in the coastal port cities established upon approval of the
State Council.

    Article 70  "Coastal economic open zones" mentioned in Article 7,
paragraph 2 of the Tax Law means those cities, counties and districts
established as coastal economic open zones upon approval of the State Council.

    Article 71  "Imposition of enterprise income tax at the reduced rate
of 15%" mentioned in Article 7, paragraph 1 of the Tax Law shall be limited
to income obtained by enterprises from production and business operations in
the respective areas so specified in Article 7, paragraph 1 of the Tax Law.

    "Imposition of enterprise income tax at the reduced rate of 24%" mentioned
in Article 7, paragraph 2 of the Tax Law shall be limited to income obtained
by enterprises from production and business operations in the respective
areas so specified in Article 7, paragraph 2 of the Tax Law.

    Article 72  "Enterprises with foreign investment of a production nature"
mentioned in Article 7, paragraph 1 and paragraph 2 and Article 8,
paragraph 1 of the Tax Law means enterprises with foreign investment engaged
in the following industries:

    (1) machine manufacturing and electronics industries;

    (2) energy resource industries (not including exploitation of oil and
natural gas);

    (3) metallurgical, chemical and building material industries;

    (4) light industries, and textiles and packaging industries;

    (5) medical equipment and pharmaceutical industries;

    (6) agriculture, forestry, animal husbandry, fisheries and water
conservation;

    (7) construction industries;

    (8) communications and transportation industries (not including passenger
transport);

    (9) development of science and technology, geological survey and
industrial information consultancy directly for services in respect of
production and services in respect of repair and maintenance of production
equipment and precision instruments;

    (10) other industries as specified by the tax authorities under the State
Council.

    Article 73  "Imposition of enterprise income tax at the reduced rate of
15%" mentioned in Article 7, paragraph 3 of the Tax Law applies to the
following:

    (1) productionoriented enterprises with foreign investment established in
the coastal economic open zones, special economic zones and in the old urban
districts of municipalities where economic and technological development
zones are located and which are engaged in the following projects:

    (a) technologyintensive or knowledgeintensive projects;

    (b) projects with foreign investments of over US $30 million and having
long periods for return on investment;

    (c) energy resource, transportation and port construction projects;(
Editor's note: The Document of the State Council, Council Concerning the Scope of Application of the Stipulation for the En-
largement of Preferential tax to enterprises with foreign investment engaged
in infrastructure of energy resources and transportation>, promulgated by
No.[1999]36 of the State Council on July 2, 1999 stipulates: "To enlarge
the First Item of the First Paragraph of Article 73 in mentation of the Income Tax Law of the People's Republic of China for Enter-
prises With Foreign Investment and Foreign Enterprises>, about "production-
oriented enterprises with foreign investment engaged in infrastructure pro-
jects, such as energy resources, transportation shall, following approval
by the State Tax Bureau of an application submitted by such enterprises,
be subject to enterprises income tax at the reduced tax rate of 15%" to en-
force all over the country.

    (2) Chineseforeign equity joint ventures engaged in port and dock
construction;

    (3) financial institutions such as foreign capital banks and
Chineseforeign banks established in the special economic zones and other
areas approved by the State Council, where the capital contribution of the
foreign investor or the funds for business activities allocated by the head
office bank to the branch bank exceeds US $10 million, and where the period
of operations is ten years or more;

    (4) production-oriented enterprises with foreign investment established
in the Pudong New Area of Shanghai, as well as enterprises with foreign
investment engaged in energy resource and transport construction projects
such as airports, ports, railways, highways and power stations;

    (5) enterprises with foreign investment recognized as high or new
technology enterprises established in the State high or new technology
industrial development zones designated by the State Council, as well as
enterprises with foreign investment recognized as new technology enterprises
established in the new technology industrial development experimental zone of
the municipality of Beijing;

    (6) enterprises with foreign investment engaged in projects encouraged by
the State and established in other areas stipulated by the State Council.
Enterprises with foreign investment in projects listed in Item(1) of the
preceding paragraph shall, following approval by the State Tax Bureau of an
application submitted by such enterprises, be subject to enterprises income
tax at the reduced tax rate of 15%.

    Article 74  "The period of business operations" mentioned in Article 8,
paragraph 1 of the Tax Law means the period commencing on the date an
enterprise with foreign investment actually begins production or business
operations (including trial production and trial business operations) and
ending on the date the enterprise ceases production or business operations.

    Enterprises with foreign investment that pursuant to the provisions of
Article 8, paragraph 1 of the Tax Law may enjoy treatment in respect of
reductions of or exemptions from enterprise income tax shall submit to the
local tax authorities for examination and verification such circumstances as
the lines of business in which engaged, names of major products, and the
period of operations decided upon. No treatment in respect of reductions of
or exemptions from enterprise income tax shall be enjoyed without examination
and verification and agreement thereof.

    Article 75  "The relevant provisions promulgated by the State Council
before the entry into force of this Law" mentioned in Article 8, paragraph 2
of the Tax Law means the following provisions in respect of exemptions from
or reductions of enterprise income tax promulgated or approved for
promulgation by the State Council:

    (1) Chineseforeign equity joint ventures engaged in port and dock
construction where the period of operations is 15 years or more shall,
following application by the enterprise and approval thereof by the tax
authorities of provinces, autonomous regions, or municipalities directly
under the Central Government of the location and commencing with the first
profit-making year, be exempt from enterprise income tax from the first year
to the fifth year and subject to enterprise income tax at a rate reduced by
one half for the sixth year through the tenth year.  

    (2) Enterprises with foreign investment established in the Hainan Special
Economic Zone and engaged in infrastructure facility projects such as
airports, harbours, docks, highways, railways, power stations, coal mines and
water conservation, and enterprises with foreign investment engaged in the
development of and operations in agriculture where the period of operations
is 15 years or more shall, following application by the enterprise and
approval thereof by the tax authorities of Hainan Province and commencing
with the first profitmaking year, be exempt from enterprise income tax from
the first year to the fifth year and subject to enterprise income tax at a
rate reduced by one half for the sixth year through the tenth year.

    (3) Enterprises with foreign investment established in the Pudong New
Area of Shanghai and engaged in construction projects such as airports,
ports, railways, highways and power stations where the period of operations
is 15 years or more shall, following application by the enterprise and
approval thereof by the tax authorities of the municipality of Shanghai and
commencing with the first profitmaking year, be exempt from enterprise income
tax from the first year to the fifth year and subject to enterprise income
tax at a rate reduced by one half for the sixth year through the tenth year.

    (4) Enterprises with foreign investment established in the special
economic zones and engaged in serviceoriented industries where the amount of
the foreign investment exceeds US $5 million and the period of operations is
ten years or more shall, following application by the enterprise and approval
thereof by the tax authorities of the special economic zone and commencing
with the first profitmaking year, be exempt from enterprise income tax in the
first year and subject to enterprise income tax at a rate reduced by one half
for the second and third years.

    (5) Financial institutions such as foreign capital banks and
Chineseforeign banks established in the special economic zones and other
areas approved by the State Council where the capital contribution of the
foreign investor or the funds for business activities allocated by the head
office bank to the branch bank exceeds US $10 million and the period of
operations is ten years or more shall, following application by the
enterprise and approval thereof by the local tax authorities and commencing
with the first profitmaking year, be exempt from enterprise income tax in the
first year and subject to enterprise income tax at a rate reduced by one half
for the second and third years.

    (6) Chineseforeign equity joint ventures recognized as high or new
technology enterprises and established in the State high or new technology
industrial development zones designated by the State Council where the period
of operations is ten years or more shall, following application by the
enterprise and approval thereof by the local tax authorities and commencing
with the first profitmaking year, be exempt from enterprise income tax in the
first year and second year. Enterprises with foreign investment established
in the special economic zones and the economic and technological development
zones shall be governed by the preferential tax provisions of the special
economic zones and the economic and technological development zones.
Enterprises with foreign investment established in the new technology
industrial development experimental zone of the municipality of Beijing shall
be governed by the preferential tax provisions of the new technology
industrial development experimental zone of the municipality of Beijing.

    (7) Export-oriented enterprises invested in and operated by foreign
businesses for which in any year the output value of all export products
amounts to 70% or more of the output value of the products of the enterprise
for that year may pay enterprise income tax at the tax rate specified in the
Tax Law reduced by one half after the period of enterprise income tax
exemptions or reductions has expired in accordance with the provisions of the
Tax Law. However, exportoriented enterprises in the special economic zones
and economic and technological development zones and other such enterprises
subject to enterprise income tax at the tax rate of 15% that qualify under
the above-mentioned conditions shall pay enterprise income tax at the tax
rate of 10%.

    (8) Advanced technology enterprises invested in and operated by foreign
businesses which remain advanced technology enterprises after the period of
enterprise income tax exemptions or reductions has expired in accordance with
the provisions of the Tax Law may continue to pay for an additional three
years enterprise income tax at the tax rate specified in the Tax Law reduced
by one half.

    (9) Implementation of other provisions in respect of exemptions from or
reductions of enterprise income tax promulgated or approved for promulgation
by the State Council.

    Enterprises with foreign investment shall, in applying for exemptions
from or reductions of enterprise income tax in accordance with the provisions
of Item (6), Item (7), or Item (8) of the preceding paragraph, submit
relevant documents of proof issued by departments in respect of the
examination, verification and confirmation, the application shall be
subjected to approval by the local tax authorities after examination and
verification.

    Article 76  "The first profit-making year" mentioned in Article 8,
paragraph 1 of the Tax Law and in Article 75 of these Rules means the first
tax year in which profits are obtained by an enterprise following
commencement of production or business operations. Where an enterprise
suffers losses during the early stages after establishment, such losses may
be made up by the income of the following tax year in accordance with the
provisions of Article 11 of the Tax Law. The first profit-making year shall
be the year in which profits are obtained after such losses are made up.

    The period for exemptions from or reductions of enterprise income tax
specified in the first paragraph of Article 8 of the Tax Law and Article 75
of these Rules shall be computed continuously commencing with the year in
which the enterprise begins to make profits. The computation shall not be
deferred because of losses incurred in any of the subsequent years.

    Article 77  Enterprises with foreign investment which commence operations
in the middle of a year and earn profits may, where the actual period of
operations is less than six months, choose to use the following year as the
period in which to begin the computation of tax exemptions or tax reductions;
however, income tax shall be paid in accordance with the Tax Law on profits
earned during the year.

    Article 78  Unless otherwise provided by the State Council, the
preferential tax provisions of Article 8, paragraph 1 of the Tax Law shall
not apply to enterprises engaged in the exploitation of such natural
resources as petroleum, natural gas, rare metals and precious metals.

    Article 79  Enterprises with foreign investment that have received
exemptions from or reductions of enterprise income tax pursuant to the
provisions of Article 8, paragraph 1 of the Tax Law and Article 75 of these
Rules shall, where the actual period of operations is less than the period
stipulated therein, except in the case of major losses sustained due to
natural disasters or unforeseen accidents, make up the amount of the
exemptions from or reductions of enterprise income tax.

    Article 80  "Direct reinvestment" mentioned in Article 10 of the Tax Law
refers to profits received from an enterprise with foreign investment by
foreign investor of that enterprise which prior to receipt are directly used
to increase registered capital, or which following receipt are directly used
to organize another enterprise with foreign investment.

    Foreign investors shall, in computing the amount of tax refundable in
accordance with the provisions of Article 10 of the Tax Law, provide
certificates confirming the use of the reinvested profits for the year; the
local tax authorities shall adopt any reasonable method for the reckoning and
determination thereof where certificates cannot be provided.

    Foreign investors shall, in respect of the application for a refund of
tax, submit within one year of the date of the actual investment of the
reinvested amount a record of the reinvested amount and a certificate for the
investment period of the increased capital or contributed capital to the tax
authorities in the place where the taxes were originally paid.

    Article 81  "Other preferential provisions of the State Council" mentioned
in Article 10 of the Tax Law refers to direct reinvestment in China by
foreign investors for the organization and expansion of exportoriented
enterprises or advanced technology enterprises, as well as profits of foreign
investors earned from enterprises established in the Hainan Special Economic
Zone that are directly reinvested in the Hainan Special Economic Zone in
infrastructure projects and agriculture development enterprises and for which
the entire portion of enterprise income tax that has already been paid on the
reinvested amount may, in accordance with the provisions of the State
Council, be refunded.

    Foreign investors that apply for a refund of tax on reinvestments in
accordance with the provisions of the preceding paragraph shall, in addition
to completing the requirements pursuant to Article 80, paragraph 2 and
paragraph 3 of these Rules, submit certificates issued by the examining,
verifying and confirming departments confirming the organization and
expansion of export-oriented enterprises or advanced technology enterprises.

    Enterprises in which foreign investors have reinvested in respect of the
organization or expansion thereof which within three years of commencing
production or operations have not achieved the standards in respect of
exportoriented enterprises or have not continued to be confirmed as advanced
technology enterprises shall repay 60% of the amount of tax refunded.

    Article 82  "Tax refunds on reinvestments" mentioned in Article 10 of the
Tax Law and Article 81, paragraph 1 of these Rules shall be computed
according to the following formula:

    Amount of tax refund = Reinvestment amount / [ 1-(originally applicable
enterprise income tax rate + local income tax rate) ] * originally applicable
enterprise income tax rate * tax refund rate
Chapter VII  Tax Credits

    Article 83  "Income tax already paid abroad" mentioned in Article 12 of
the Tax Law means income tax actually paid abroad by an enterprise with
foreign investment on income from sources outside China and does not include
taxes paid for which compensation is later received or assumed by other
parties.

    Article 84  "The amount of tax payable computed on income from sources
outside China in accordance with the provisions of this Law" mentioned in
Article 12 of the Tax Law means the amount of tax payable computed on taxable
income arising from income from abroad of enterprises with foreign
investment, following the deduction of costs, expenses and losses allowable
in accordance with the relevant provisions of the Tax Law and these Rules
attributable to that income. The limit of the amount of tax payable that can
be deducted shall be computed on a country-by-country basis; the method of
computation is as follows:

        Limit on deduction    (Total amount of tax     (Amount of income

        of tax payable on  =  payable  on domestic  *   from foreign

        income from abroad    income and                sources) / (Total

                              income from               domestic

                              abroad computed          income and

                              in accordance with       income from

                              the Tax  Law)            abroad)

    Article 85  Where the amount of income tax actually paid abroad on income
from sources from abroad by enterprises with foreign investment is less than
the deductible limit resulting from computation based on the provisions of
Article 84 of these Rules, the actual amount of income tax paid abroad may be
deducted from the amount of tax payable; where the deductible limit is
exceeded, the portion in excess shall not be deducted from tax and shall not
be itemized as an expense, however, the portion not exceeding the limit
thereof may be used as a deduction against following year's taxes; the time
limit for such supplemental deductions shall not exceed five years.

    Article 86  The provisions of Article 83 to Article 85 of these Rules
shall apply only to enterprises with foreign investment with head offices
established within China. Enterprises with foreign investment that deduct
taxes in accordance with the provisions of Article 12 of the Tax Law shall
provide the original tax payment certificates signed and issued by the
foreign tax authorities in respect of the same year; copies or tax payment
certificates of different years shall not be used as tax deduction
certificates.
Chapter VIII  Tax Administration

    Article 87  Enterprises shall, within 30 days of completing business
registration, complete tax registration with the local tax authorities.
Enterprises with foreign investment that establish or terminate branch
offices outside China shall, within 30 days of the date of establishment or
termination thereof, complete with the local tax authorities procedures in
respect of tax registration, amendments to the registration, or cancellation
of the registration.

    Enterprises that complete registrations in the preceding paragraph shall,
in accordance with the provisions, present relevant documents, licenses and
materials.

    Article 88  Enterprises that undergo important registration changes such
as changes of address, restructurings, mergers, spin-offs, terminations, as
well as changes in the amount of capital and scope of business shall, within
30 days of the completion of the change in business registration or prior to
the cancellation of registration, complete the change in registration or
cancellation of registration with the local tax authorities with the relevant
documents.

    Article 89  Foreign enterprises which establish two or more business
organizations in China may use one of the selected business organizations in
respect of the consolidated filing and payment of income tax. However, the
business organization so selected shall meet the following conditions:

    (1) assumption of supervisory and management responsibility over the
business operations of the other respective business organizations;

    (2) maintenance of complete account records and certificates which
accurately reflect the income, cost, expense and profit and loss situations
of the respective business organizations.

    Article 90  In respect of foreign enterprises which in accordance with
the provisions of Article 89 of these Rules consolidate the filing and
payment of income tax, the business organization so selected thereunder shall
submit an application for approval according to the following provisions
after examination and verification thereof by the local tax authorities:

    (1) consolidated filing and payment of income tax in respect of business
organizations located in the same province, autonomous region, or
municipality directly under the Central Government shall be subject to
approval by the tax authorities of the province, autonomous region or
municipality directly under the Central Government;

    (2) consolidated filing and payment of income tax in respect of business
organizations located in two or more provinces, autonomous regions, or
municipalities directly under the Central Government shall be subject to
approval by the State Tax Bureau.

    Following approval for the filing and payment of tax on a consolidated
basis by foreign enterprises, such circumstances as the establishment of
additional business organizations, mergers, change of address, termination of
operations, or shutdowns shall, prior to such event, be reported to the local
tax authorities by the business organization responsible for the filing and
payment of tax on a consolidated basis. Any change in respect of the business
organization filing and paying tax on a consolidated basis shall be dealt
with in accordance with the provisions of the preceding paragraph.

    Article 91  Where business organizations related to foreign enterprises
that file and pay income tax on a consolidated basis apply different tax
rates in respect of the payment of tax, the amount of taxable income of the
respective business organizations shall be separately computed on a
reasonable basis and income tax shall be paid on the basis of the different
tax rates.

    Where the respective business organizations mentioned in the preceding
paragraph have losses and profits, tax shall be paid on the profit remaining
after the offsetting of losses against profits according to the tax rate
applicable to the profitmaking business organization. A business organization
which incurs losses shall offset losses using profits of the subsequent year
of the business organization; tax shall be paid on the profit remaining after
the offsetting of such losses according to the tax rate applicable to the
business organization; tax paid on the offsetting amounts shall be based on
the tax rate applicable to the business organization that offsets the losses
incurred by the other business organization.

    Article 92  Notwithstanding the provisions of Article 91 of these Rules,
where a business organization responsible for filings and payment of tax on
a consolidated basis is unable to compute separately and reasonably the
taxable income of the respective business organizations, the local tax
authorities may make a reasonable apportionment among the respective business
organizations of the gross taxable income based on the proportion of business
revenues, the proportion of cost and expenses, the proportion of capital
assets, and the proportion of the number of staff or salaries and wages.

    Article 93  Enterprises with foreign investment which establish branch
offices in China shall complete consolidated filings and payment of income
tax with reference to the provisions of Article 91 and Article 92 of these
Rules.

    Article 94  Enterprises that pay taxes in advance on a quarterly basis in
accordance with the provisions of Article 15 of the Tax Law shall pay in
advance on the basis of actual quarterly profits; where difficulty exists in
paying in advance on the basis of actual quarterly profits, the advanced
quarterly payment of tax may be made according to onefourth of the taxable
income of the previous year or any other method approved by the local tax
authorities.

    Article 95  Enterprises, whether realizing profits or losses in a tax
years, shall file income tax returns and final statements of account with the
local tax authorities within the time limit prescribed in Article 16 of the
Tax Law, and unless otherwise provided by the State, shall include when
filing the final accounting statement an audit statement of a certified
public accountant registered in China.

    Where, for special reasons, an enterprise cannot file an income tax
return and final accounting statement within the period prescribed in the Tax
Law, an application shall be submitted within the filing period and, upon
approval of the local tax authorities, the filing period may be extended
appropriately.

    Article 96  Final accounting statements submitted by branches or business
organizations to head offices or business organizations that file and pay
income tax on a consolidated basis, shall be submitted at the same time to
the local tax authorities.

    Article 97  Enterprises that are merged, spun off, or terminated during
the year shall, within 60 days of the termination of production or business
operations, complete with the local tax authorities procedures for the
settlement of any liability for and payment of income tax, with refunds for
overpayments or supplementary payments for deficiencies.

    Article 98  Enterprises which must complete procedures for tax refunds in
the case of overpayments of tax may, where income in foreign currency has
already been converted into Renminbi according to the foreign exchange rate,
convert the amount of the tax in Renminbi to be refunded into foreign
currency according to the exchange rate in effect when the tax was originally
paid, and then reconvert this amount of foreign currency into Renminbi
according to the foreign exchange rate at the date of issuance of the tax
refund certificate. Where it is necessary to complete procedures for
supplementary tax payments in the case of underpayments of tax, the amount of
supplementary tax payments shall be converted into Renminbi according to the
foreign exchange rate at the date of issuance of the certificate for
supplementary tax payments.

    Article 99  Enterprises with foreign investment that undergo liquidation
shall, prior to the completion of the cancellation of business registration,
complete the filing of income tax returns with he local tax authorities.

    Article 100  Except as otherwise provided by the State, enterprises shall
maintain in China accounting vouchers, books and statements that support the
correct computation of taxable income.

    Accounting vouchers, books and statements, and reports of enterprises
shall be completed in the Chinese language or completed in both the Chinese
language and a foreign language.

    Enterprises that use electronic computers for purposes of book-keeping
shall treat the accounting records in computer storage or in printed form as
account books. All records on magnetic tape and diskette that have not been
printed out shall be completely retained.

    Accounting vouchers, books and statements, and reports of enterprises
shall be retained for at least 15 years.

    Article 101  Invoices and certificates of receipts of enterprises shall
be subjected to approval by the local tax authorities prior to printing and
use.

    Administrative measures in respect of the printing and use of invoices
and certificates of receipts of enterprises shall be formulated by the State
Tax Bureau.

    Article 102  All enterprise income tax returns and certificates of tax
payments shall be printed by the State Tax Bureau.

    Article 103  If the final day of the period for payment of tax and the
period for filing of a tax return falls on a Sunday or a legal holiday, the
day following the holiday shall be used as the last day of the period.

    Article 104  Tax authorities may pay withholding agents as specified in
Article 19, paragraph 2 of the Tax Law and Article 67 of these Rules a
handling fee based on a certain proportion of the amount of tax withheld; the
specific methods shall be formulated by the State Tax Bureau.

    Article 105  Local tax authorities may, according to the seriousness of
the case, impose a fine of 5,000 yuan (RMB) or less on taxpayers or
withholding agents that refuse to accept examination by the tax authorities
in accordance with the relevant provisions or that refuse to pay late payment
penalties within the time limit prescribed by the tax authorities.

    Article 106  The tax authorities may, according to the seriousness of the
case, impose a fine of 5,000 yuan (RMB) or less on an enterprise which
violates the provisions of Article 87; Article 90, paragraph 2; Article 95;
Article 96; Article 97; Article 99; Article 100 and Article 101 of these
Rules.

    Article 107  "Tax evasion" mentioned in Article 25 of the Tax Law means
the illegal actions of a taxpayer who has intentionally violated the
provisions of the Tax Law such as by: falsifying, altering or destroying
account books, receipts or accounting vouchers; falsely itemizing or
overstating costs and expenses; concealing or understating taxable income or
receipts; or avoiding taxes or fraudulently recovering taxes already paid.

    Article 108  The tax authorities shall, in punishing taxpayers or
withholding agents in accordance with the provisions of the Tax Law and these
Rules, serve notice of contravention.

    Article 109  Any entity or individual shall have the right to report
a failure to comply with the Tax Law and the violators thereof. The tax
authorities shall maintain confidentiality for informants and award them in
accordance with the relevant provisions herein.
Chapter IX  Supplementary Provisions

    Article 110  Enterprises with foreign investment which completed business
registration prior to the promulgation of the Tax Law may, in respect of the
payment of income tax in accordance with the provisions of the Tax Law and
where the liability for tax is higher than that prior to the entry into force
of the Tax Law, use the original applicable tax rate during the approved
period of operations. Where there is no established period of operations,
income tax may be paid using the original applicable tax rate for five years
commencing on the date of the entry into force of the Tax Law. However, in
respect of the above-mentioned period, if during a tax year the tax liability
is higher than that stipulated in the Tax Law, income tax shall be paid
commencing with that tax year according to the tax rate stipulated in the Tax
Law.

    Article 111  Preferential treatment in terms of exemptions from and
reductions of enterprise income tax enjoyed pursuant to the laws and
administrative rules and regulations prior to the entry  into force of the
Tax Law by enterprises with foreign investment which completed business
registration prior to the promulgation of the Tax Law may continue to remain
in effect until the termination of the period of exemptions and reductions.

    Enterprises with foreign investment which completed business registration
prior to the promulgation of the Tax Law but which have not earned profits or
have earned profits for less than five years may, in accordance with the
provisions of Article 8, paragraph 1 of the Tax Law, be granted a
corresponding period of treatment in respect of exemptions from or reductions
of enterprise income tax.

    Article 112  Enterprises with foreign investment which completed business
registration after the promulgation of the Tax Law but prior to the entry
into force of the Tax Law may refer to the provisions of Article 110 and
Article 111 of these Rules for implementation herein.

    Article 113  The Ministry of Finance and the State Tax Bureau shall be
responsible for the interpretation of these Rules.

    Article 114  These Rules shall come into force on the effective date of
the Income Tax Law of the People's Republic of China for Enterprises with
Foreign Investment and Foreign Enterprises. The Detailed Rules for the
Implementation of the Income Tax Law of the People's Republic of China
Concerning Chinese-Foreign Equity Joint Ventures and the Detailed Rules for
the Implementation of the Income Tax Law of the People's Republic of China
for Foreign Enterprises shall be abrogated at the same time.



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