Preferential Tax Policy (I)

1. The enterprise income tax (EIT) of manufactuing-type foreign-invested enterprises with a business term of more than 10 years is exempted for the first 2 years since the first profitable year, and collected at a rate of 50% thereof for the next three consecutive years ("three-year exemption and two-year reduction" for short hereinafter).

2. According to the provisions regulated by the State Council of the People's Republic of China, the EIT is collected at a rate of 15% for the following 3 years after the expiration of the "three-year exemption and two-year reduction period" for foreign-invested enterprises engaged in "encouraged" or "restricted B" industries specified in the Catalogue of Restricted Foreign Investment Industries jointly issued by State Development Planning Commission, State Economy & Trade Commission and the Ministry of Foreign Trade and Economic Cooperation.

3. The EIT is collected at a rate of 15% for the 3 years after the expiration of the three-year exemption and two-year reduction period for foreign-invested enterprises engaging in Hunan competitive industries which are approved by the State Council of the People's Republic of China.

4. Foreign-invested enterprises engaged in agriculture, forestry, animal husbandry or set in undeveloped remote areas, with their application and approval by State Administration of Taxation, shall enjoy a reduced rate of 15% ~30% for the following 10 years after the expiration of tax exemption and reduction terms in accordance with relevant tax laws and regulations.

5. Foreign-invested and export-oriented enterprises with an export product value more than 70% of the gross product value may enjoy a reduction of 50% in EIT after the expiration of the three-year exemption and two-year reduction period, on the condition that the reduced tax rate is not lower than 10%.

6. After the expiration of the three-year exemption and two-year reduction period,  technologically advanced enterprises  may enjoy a  tax reduction of 50% in EIT for 3 more years, on the condition that the reduced tax rate is not lower than 10%.

7. The foreign investors of foreign-invested enterprises reinvesting profits to increase registered capital or to run other enterpises with a business term of no less than 5 years, after application by the investor and approval by provincial, municipal bureaus of state tax, shall be refunded with 40% of the collected tax levied at the reinvested part. If the foreign investors reinvest to initiate and expand export-oriented enterprises or technologically advanced enterprises with a business term of no less than 5 years, they shall be refunded with 100% of the collected tax levied at the reinvested part.

8.  Foreign investors are exempted from income tax for the profits gained from foreign-invested enterprises.

9. The EIT is collected at a rate of 15% for foreign-invested enterprises, which are verified as Hi-Tech enterprises and set in the Hi-Tech Industrial Development Zone of Hunan Province approved by State Council of the People's Republic of China.

10. Foreign-invested enterprises in Changsha andYueyang enjoy the same preferential tax policies as for the costal economic open zones.
(1) The EIT of the manufacturing-type foreign-invested enterprises in Changsha andYueyang is collected at a reduced rate of 24%;
(2) The EIT of foreign-invested enterprises in Changsha andYueyang which belong to:
a.  technology-intensive or knowledge-intensive programs;
b.  programs with a total investment of more than USD $30 million and a long investment recovery period;
is collected at a reduced tax rate of 15% (whereas the approval of State Administration of Taxation is required).

11. The VAT paid by foreign-invested enterprises which engage in the encouraged industries specified in the Catalogue of Restricted Foreign Investment Industries approved by the State Council of the People's Republic of China and purchase China-made products within the total investment, shall be refunded in full amount and the EIT shall be offset in accordance with relevant laws and regulations. The imported equipments for self-use within the total investment are exempted from tariff and VAT in the import link (excluding products specified in Catalogue of Restricted Foreign Investment Industries).

12. Technology transfer to foreign-invested enterprises in Hunan Province by foreign enterprises is exempted from business tax. In case of the foreign-invested enterprises with advanced technology or favorable conditions, upon the approval of the taxation bureaus of State Council of the People's Republic of China, EIT is exempted. The income gained from technology transfer by foreign-invested enterprises is exempted from business tax.

13. For foreign-invested enterprises whose technology development cost increases by over 10% (including 10%) than the previous year, the costs shall be disbursed in real terms, and with the approval of provincial bureaus of state tax, thereof 50% of the actual value of the said total cost shall offset EIT in current year.

14. Software products developed and sold by general VAT taxpayers are levied at a legal VAT rate of 17% prior to 2010, and an instant refunding upon payment of VAT is implemented for the part with the actual VAT burden over 3%.

15. Integrate circuit products (including mono-crystal line silicon chips) developed and sold by general VAT taxpayers are levied at a legal VAT rate of 17% prior to 2010, and an instant refunding upon payment of VAT is implemented for the part with the actual VAT burden over 6%.

16.  Production-type foreign-invested enterprises engaging in such infrastructure projects as energy projects or transportation (freight) shall enjoy an EIT at a reduced rate of 15% upon their application and approval by the State Administration of Taxation.

17. Upon the examination and approval of finance and taxation bureaus above the provincial level, all the fixed assets of Sino-Foreign Joint Ventures agreed by the Chinese and foreign cooperators, shall remain the property of Chinese part after the expiration of the cooperation contract, whereas the cooperation contract shall specify the measures of investment recovery in advance in the cooperation contracts for the foreign part.

18. Production-type foreign-invested enterprises with independent import & export right for selfmanufactured products shall enjoy the "tax exemption/offset/refund policy" of China (except for non-refunded products stipulated by the state).

19. "Royalties" gained by foreign investors for providing special technologies for science research, energy exploitation, transportation development, agriculture/forestry/husbandry production, or major technology development, upon the approval of the State Administration of Taxation, shall be collected at a reduced EIT rate of 10% thereof, whereas those with advanced technologies or favorable conditions are exempted from income tax.

20. Domestic-funded enterprises and foreign-invested enterprises engaged in the encouraged industries by the state in Xiangxi Autonomous Prefecture of Hunan Province are collected at a reduced EIT rate of 15% from 2001 to 2010. Since the profitable year, EIT is exempted for the first 2 years and collected at a rate of 50% thereof for the following three consecutive years for foreign-invested enterprises engaged in newly established industries such as transportation, electricity, water conservancy, postal services, broadcast television, etc. with a business term of more than 10 years.

21. Interest and rent income of foreign enterprises is exempted from taxation. Foreign enterprises without institutes or organizations set up in China are exempted from business tax for the rental income gained from leasing tangible properties as well as the interest income.

22. Foreign enterprises and foreign people are exempted from taxation for technology transfer. Incomes gained from compensated transfer of property or use rights of patents or non-patent technologies, or from the relevant technology consultation and technology services, are exempted from business tax upon the approval of State Administration of Taxation.

23. Software fees are tax-free. Additional charges on relevant softwares contained in goods leased to Chinese enterprises by foreign enterprises such as postal and communications equipments, computers, etc. shall be deemed as rental income of above-mentioned goods and thus exempted from business tax.

24. Tax deduction regarding foreign financing. The expense of foreign exchange loan interest of foreign financing organizations shall be deducted from payable turnovers. Interest expense of foreign exchange (or RMB) loans in China shall not be deducted. (CSZ [1999] No. 183).

25. Urban real estate tax: non-business real estate purchased by foreign individuals (including overseas Chinese and people from HK, Macao, Taiwan) is temporarily exempted from urban real estate tax.

26. Income gained from additional investments other than under the original contract by foreign-invested enterprises engaged in the encouraged industries specified in the Catalogue of Restricted Foreign Investment Industries approved by the State Council of the People's Republic of China is allowed for separate calculation and enjoys regular EIT exemption & reduction policies in accordance with relevant tax laws and either of the two conditions below:
(1)Enterprises with newly registered capital reaching or exceeding USD $60 million based on additional investment;
(2)Enterprises with newly registered capital reaching or exceeding USD $15 million, which reaches or exceeds 50% of the original registered capital based on additional investment.

Notes:

1. Foreign-invested enterprises engaged in the State encouraged industries refer to enterprises with encouraged industries specified in the Catalogue of Restricted Foreign Investment Industries and Foreign Invested Superior Industry Contents In Middle and Western China as major business, whereas the corresponding income accounts for more than 70% of enterprise revenue thereof.

2. The above-mentioned foreign investors or foreign cooperators that enjoy preferential tax policy include investors or cooperators from Taiwan, Hong Kong, Macao and the overseas Chinese.