General Regulations of P. R. China XIV

GUO WU YUAN LING [85] 1991.6.30
Chapter 1 General Rules

Article 1 These Rules were formulated in accordance with the provisions of Article 29 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").

Article 2 'Income from production and business' in Paragraphs 1 and 2 of Article 1 of the Tax Law, refers to income from production and business operations in manufacturing, mining, communications and transport, construction and installation, agriculture, forestry, animal husbandry, fishing , water conservation, commerce, finance, service industries, exploration and exploitation, and in other trades.

'Other income' from Paragraphs 1 and 2 of Article 1 of the Tax law refers to profits (dividends), interest, rental income, income from the transfer of property, income from the supply or transfer of patents, special technology, income from trademark rights and copyrights as well as other non-business income.

Article 3 'Enterprises with foreign investment' in Paragraph 1, Article 2 of the Tax Law, and 'foreign companies, enterprises and other economic organizations which have established organizations or sites within the borders of China and engage in production or business' in Paragraph 2, Article 2 of the Tax Law, are, unless otherwise particularly specified, all referred to as 'enterprises' in these Detailed Rules.

'Established organizations or sites' in Paragraph 2, Article 2 of the Tax Law, refers to management organizations, business organizations, administrative organizations, and sites for factories and the exploitation of natural resources, sites for undertaking construction, installation, assembly and exploration work, and sites for supplying labor services, and business agents.

Article 4 'Business agents' in Paragraph 2, Article 3 of these Detailed Rules refers to companies, enterprises and other economic organizations or individuals entrusted by foreign enterprises to engage as agents in any of the following ways:

A. To represent the principals on a regular basis in arranging purchases, signing purchase contracts and purchasing commodities on commission;

B. To enter into agency agreements or contracts with the principals to store, on a regular basis, products or commodities of the principals, and to deliver such products or commodities on behalf of principals, to other parties; and
C. To have authority to represent principals on a regular basis in signing sales contracts or in accepting purchase orders.

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

For Income Tax payment purposes, the head office of an enterprise with foreign investment shall consolidate all income form production and business and other income derived from its branches within or outside China.
Article 6 'Income derived from sources inside China' in Article 3 of the Tax Law refers to:

A. Income from production and business operations of enterprises with foreign investment and foreign enterprises which have established organizations or sites in China, as well as profits (dividends), interest, rental income, royalties and other income arising within or outside China which is actually connected with organizations or sites established in China by enterprises with foreign investment or foreign enterprises;

B. the following income received by foreign enterprises in China who have not established organizations or sites;

a. profits(dividends) earned by enterprises in China;
b. interest derived within China such as on deposits or loans, interest on bonds, interest on other provisional payments and deferred payments;
c. rental income derived from 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. incomes received from the transfer of property within the borders of China, such as houses, buildings, structures and attached facilities, and from the assignment of land-use rights, etc.;
f. other income derived from within the borders of on which tax is levied according to determination of the Ministry of Finance.

Article 7 Where Chinese-foreign contractual joint ventures do not have legal person status, each partner may separately calculate and pay Income Tax in accordance with relevant State tax laws and regulations; where such an enterprise submits an application which is approved by local tax authorities, Income Tax may be calculated and paid on a consolidated basis in accordance with the provisions of the Tax Law.

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

Where foreign enterprises have difficulty calculating taxable income in accordance with the tax year stipulated in the Tax Law, they may, after approval of their submitted application to the local tax authorities, use their own 12-month fiscal year for tax calculations.

Where enterprises commence operations in the middle of a tax year or actually operate for a period of less than 12 months in any tax year due to such factors as merger or shut-down, they shall use the actual period of operation as the tax year.
Enterprises that undergo liquidation shall use the period of liquidation as the tax year.

Article 9 The responsible authority for taxation affairs under the State Council referred to in Paragraph 3 of Article 8 and Item(4) in Paragraph 3 of Article 19 of the Tax Law and in Article 72 of these Rules, is the Ministry of Finance and the State Administration of Taxation

Chapter 2 Calculation of Taxable Income

Article 10 The formula for the calculation of taxable income referred to in Article 4 of the Tax Law is as follows:

A. 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) + (financial expenses)];
c. net sales = (gross sales) - [(sales returns) +(sales discounts and allowances) ];
d. cost of products sold = (cost of products manufactured in 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 in the period =(manufacturing costs for the period) + (inventory of semi-finished 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 = (materials directly consumed in production for the period) + (direct labor costs) + (manufacturing expenses).

B. 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 goods sold) - (taxes on sales) - [(selling expenses) + (administrative expenses) +(financial 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).

C. 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) + (financial expenses)].

D. Other Types of Business: Calculations shall be made by referring to the above formulas.

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

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

A. where products are sold by installment payments, income from sales may be itemized according to the invoice date when the products are delivered ; income from such sales may also be determined according to the date on which payment is made by the buyer, as agreed on in the contract;

B. where construction, installation and assembly projects, and provision of labor services extends beyond one year, income may be determined according to the progress of the project or the amount of work completed;

C. where the processing or manufacturing of heavy machinery, equipment and ships for other enterprises extends beyond one year, income may be determined according to the progress of the project or the amount of work completed.

Article 12 Where Chinese-foreign contractual joint ventures operate on a product sharing basis, the partners thereto shall be deemed to have received income at the time of the division of the products; the amount of income shall be calculated according to the price at which the products are sold to third parties or with reference to prevailing market prices.

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

Article 13 With respect to an enterprise's income which is in the form of non-monetary assets or rights and interests, such income shall be calculated or appraised with reference to prevailing market prices.

Article 14 'Exchange rate quoted by the State Administration of Exchange Control' in Article 21 of the Tax Law refers to the buying rate quoted by the State Administration of Foreign Exchange Control.

Article 15 For income earned by enterprises in foreign currency, where payment of Income Tax is made in quarterly installments in accordance with the provisions of Article 15 of the Tax Law, taxable income shall be calculated by converting the income into Renminbi according to the exchange rate quoted by the State Administration of Foreign Exchange Control on the last day of the quarter. At the time of final settlement after the end of the year, no recalculation and reconversion of foreign currency need be made for tax which 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 calculation 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 vouchers and documents for costs and expenses, and is unable to correctly calculate taxable income, the local tax authorities shall determine the profit rate and calculate 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.

Where the tax authorities would otherwise appraise and determine profit rates or revenues in accordance with the provisions of the preceding paragraphs, but where other stipulations are provided by laws, regulations and rules, such other stipulations will apply.

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

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

A. expenses connected with the acquisition or construction of fixed assets;
B. expenses connected with the transfer or development of intangible assets;
C. interest on capital;
D. various Income Tax payments;
E. fines for illegal business operations and losses due to the confiscation of property;
F. surcharges and fines for overdue payment of taxes;
G. that part of losses due to natural disasters or accidents for which there has been compensation;

H. donations and contributions other than those used in China for public welfare or relief purposes;

I. royalties paid to the head office;

J. other expenses not related to production or business operations;

Article 20 For foreign enterprises with an establishment or site in China, reasonable administrative expenses paid to the head office in connection with production or business operations of the establishment or site, may be itemized as expenses following agreement by the local tax authorities after examination and verification of documents issued by the enterprise's 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 itemized as expenses following agreement by the local tax authorities after examination and verification of documents with respect to loans and expenses, which shall be provided by the enterprises.

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' in Paragraph 1 of this Article refers to interest calculated 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 itemized as expenses subject to the following limits:

A. Where annual net sales are 15 million yuan or less, such expenses may not exceed 0.5% of net sales; for that portion of annual net sales that exceeds 15 million yuan, such expenses may not exceed 0.3% of that portion of net sales.

B. Where annual gross business income is 5 million yuan or less, such expenses may not exceed 1% of annual gross business income; for that portion of annual gross business income that exceeds 5 million yuan, such expenses may not exceed 0.5% of that portion of annual gross business income.

Article 23 Exchange gains or losses incurred by enterprises during pre-construction of 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 may be itemized as expenses following agreement by the local tax authorities after an examination and verification of the submitted wage scales, supporting documents and relevant materials.

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

Article 25 Where enterprises engaged in such businesses as credit and leasing operations, if there is actual requirements and following approval by the local tax authorities of a relevant submitted report, such enterprise may make yearly provisions for bad debts, the amount of which shall not exceed 3% of the year-end loan balances (not including inter-bank loans)or the amount of accounts receivable, bills receivable and other such receivables, and which may 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 loss in the current year; if the portion is less than the bad debt provisions of the previous year, the balance shall be included in taxable income of the current year.

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

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

A. due to the bankruptcy of the debtor, collection is still not possible after the use of the bankruptcy assets for settlement;

B. due to the death of the debtor, collection is still not possible after use of the estate for repayment;

C. due to the failure of the debtor to fulfill repayment obligations for over 2 year, collection is still not possible.

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

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

Article 29 'Net assets or remaining property' in Article 18 of the Tax Law refers to the amount remaining after various liabilities and losses have been deducted from all assets or property , when an enterprise is liquidated.

Chapter 3 Tax Treatment for Assets

Article 30 'Fixed assets' of enterprises refers to houses, buildings and structures, machinery, mechanical 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 which are used for production or business operations but do not have the nature of major equipment , have a unit value of 2,000 yuan or less, or have a useful life of 2 years or less, may be itemized as expenses according to 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, after considering the degree of wear and tear of the fixed assets, be such a 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 of the assets.

Article 32 An enterprise shall calculate the depreciation of its fixed assets commencing with the month following the month in which they are first put into use. The calculation of depreciation shall cease in the month following the month in which the fixed assets cease to be used.

Where enterprises are engaged in the exploitation of oil resources, all investment made during the development stage shall be aggregated and treated as capital expenditure, taking the oil(gas) field as a unit; the calculation 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 calculation of depreciation of fixed assets, the salvage value shall first be estimated and deducted from the original cost of the asset, The salvage value shall not be less than 10% of the original value; any request for retaining a lower salvage value or no salvage value must be approved by the local tax authorities.

Article 34 Depreciation of fixed assets shall be calculated 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, shall be reported level-by-level to the State Administration of Taxation for approval.

Article 35 The calculation of the minimum useful life of fixed assets foe purpose of the depreciation is as follows:

A. for houses and buildings-20 years;

B. for railway rolling stock, boats and ships, machinery and other production equipment-10 years;

C. for electronic equipment and means of transport , other than railway rolling stock and boats and s hips, as well as such fixtures, tools and furnishings related to production and business operations -5 years.

Article 36 During the development stage and subsequent stages of an enterprise engaged in the exploitation of oil resources, depreciation of fixed assets in the nature of investments may be calculated on a consolidated basis without retaining salvage value; the period of depreciation shall not be less than 6 years.

Article 37 'Houses and buildings' in Article 35, Item (1) of these Rules refers to 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, smokes tacks, 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 calculated, 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 and vessels, machines, machinery and other production equipment referred to in Item(2 ) in Paragraph 1 of Article 35 of these Rules is as follows:

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

'ships and vessels' includes various types of motor ships as well as auxiliary facilities on ships and vessels for which no separate value is calculated;

'machines, machinery and other production equipment' includes various types of machines, machinery, machinery units, production lines, as well as auxiliary equipment such as various types of power, transport and conduction equipment.

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

'electronic equipment' refers to equipment of mainly integrated circuits, transistors, electron tubes, and other electronic components whose primary function is to bring into use the application o f electronic technology (including software) , including computers, computer-controlled robots, and digitally controlled or program-control systems;

'means of transport, other than railway rolling stock and ships and vessels' includes airplanes, automobiles, trains, tractors, motorcycles( motor boats), motorized sailboats, sailboats, and other means of transportation.

Article 40 When it is necessary, for special reasons, to shorten the useful life of fixed assets, an enterprise may submit an application to the local tax authorities who, following examination and verification, shall report level-by-level to the State Administration of Taxation for approval.

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

A. machinery and equipment subject to strong corrosion by acid or alkali and factory buildings and structures subject to constant shaking and vibration;

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

C. 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 submitted, calculate depreciation according to the remaining useful life.

Article 42 Where the value of fixed assets increases during the course of use of the fixed assets, due to expenditures on expansion, reconstruction and technical innovation, the value of the fixed assets shall be increased; where the period of use of t he fixed assets can be extended, the useful life shall be appropriately extended and the calculation of depreciation adjusted accordingly.

Article 43 Fixed assets which continue to be used after having been fully depreciated may not be further depreciated.

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

Article 45 The depreciation of fixed assets received as gifts by enterprises may be calculated on the basis of a 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 stipulated in the agreement or contract.

Article 47 The amortization of intangible assets shall be calculated 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 of intangible assets for which no useful life has been stipulated or which have been developed internally shall not be less than 10 years.

Article 48 Where enterprises are engaged in the exploitation of petroleum resources, reasonable exploration expenses incurred 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 filed 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 for the terminated contract field shall, upon examination and confirmation and the issuance of certification by the tax authorities, 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 10 years from the date of the termination of the old contract.

Article 49 Expenses incurred by enterprises during the organization period 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 5 years.

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

Article 50 An enterprise's inventories of merchandise, finished products, goods in process, semi-finished products, raw materials , and other such materials shall be valued at cost.

Article 51 When inventory goods are delivered or used, enterprises may choose one of the following such methods for valuing actual costs: first-in, first-out; moving average; weighted average; or last-in, first-out.

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 4 Business Dealings Between Associate d Enterprises

Article 52 'Associated enterprises' in Article 13 o f the Tax Law refers to companies, enterprises and other economic units that have any of the following relationships with other enterprises.

A. relationships of existing direct or indirect ownership of, or control over, such matters as finance, business operations, or purchases and sales;

B. direct or indirect ownership of, or control over, such enterprises and another, by a third party;

C. any other relationship involving association for reciprocal interests.

Article 53 'Business transactions between independent enterprises' in Article 13 of the Tax Law refers to 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 for business dealings between associated enterprises.

Article 54 Where prices of purchases 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 sequence of methods of determination:

A. based on prices of the same or similar business activities between independent enterprises.

B. based on the level of profits obtained from resale at unassociated and unrelated third party prices;

C. based on costs plus reasonable expenses and a reasonable profit margin;

D. based on any other reasonable method.

Article 55 Where interest paid or received for financing between an enterprise and an associated enterprise exceeds or is lower than the amount that which 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 similar business, adjustments may be made thereto by the local tax authorities with reference to normal rates of interest.

Article 56 Where labor service fees are paid or received by an enterprise for provision of labor services 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 labor 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 itemized as expenses.

Chapter 5 Withholding at Source

Article 59 'profits, interest, rents, royalties and other income' in Paragraph 1, Article 19 of the Tax Law shall, except as otherwise stipulated by the State, be calculated on the basis of gross income.

Gross royalties obtained from the provision of patents and proprietary technology include the drawing and information fees, technical service fees, personnel training fees and other related fees in relation to the provision of patents and proprietary technology.

Article 60 'Profit' mentioned in Article 19 of the Tax Law refers to income calculated according to the proportion of investment, equity rights, stockholding, or other non-debt profit-sharing rights.

Article 61 'Other income' referred to 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 or from the assignment of right to land use.

'Gains' mentioned in the preceding paragraph means the balance of the transfer proceeds after deduction of the original value of the said 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 Paragraph 2, Article 19 of the Tax Law refers to payments in cash, by remittances, or through transfer accounts, as well as payment made in the form of non-monetary assets or rights and interests for an equivalent amount of money.

Article 63 'Profits derived by an enterprise with foreign investment' referred to in Paragraph 3 Item (1), Article 19 of the Tax Law refers to the profit made by an enterprise with foreign investment after the deduction of payment of Income Tax or reduced Income Tax, or the profit which is exempted from income tax in accordance with the provisions of the Tax Law.

Article 64 'International financial organizations' mentioned in Paragraph 3, Item (2), Article 19 of the Tax Law refer to 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, etc..

Article 65 'Chinese State banks' mentioned in Item (2) and Item (3), Paragraph 3, Article 19 of the Tax Law refer to 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 reduction of or exemption from income tax on royalties as provided for in Item (4), Paragraph 3,Article 19 of the Tax Law is applicable to the following:

A. royalties obtained from the provision of the following 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 to nurture new varieties of fauna and flora and to produce high efficiency but low toxic agricultural chemicals;

c. technology to provide farming, forestry, fisheries and animal husbandry with scientific production and management, to preserve the ecological balance, and to increase the capability of fighting to natural calamities;

B. royalties obtained from the provision of proprietary technology to academies of science, colleges and universities, and other institutions of high learning, scientific research or scientific experimentation;

C. royalties obtained from the provision of proprietary technology for the exploitation of energy resources and the development of communications and transportation;

D. royalties obtained from the provision of proprietary technology for energy conservation and the prevention and control of environmental pollution;

E. royalties obtained for the provision of the proprietary technology for the development of the following important fields of science and technology:

a. important advanced technology for the production of mechanical and electrical equipment:

b. nuclear power technology;

c. technology for production of large-scale integrated circuits;

d. technology for production of photoelectric integrated circuits, microwave semi-conductors and microwave integrated circuits, and microwave electron tubes;

e. technology for manufacturing of high speed electronic computers and microprocessors;

f. optical telecommunications technology;

g. technology for long-distance, ultra-high voltage direct current power transmission; and

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

Article 67 For incomes earned by foreign enterprises engaged in projects in China, such as construction, installation, assembly and exploration, and through provision of services such as consultation, management and training and other labour services, the tax authorities may appoint the payers of the contracted amounts and service fees to act as Income Tax withholding agents.

Chapter 6 Tax Preferences

Article 68 Pursuant to the provisions of Article 6 of the Tax Law, foreign investment enterprises encouraged by the State which request preferential treatment in relation to Enterprise Income Tax shall be implemented in accordance with the provisions of the relevant laws and administrative rules and regulations promulgated by the State.

Article 69 'Special Economic Zones' mentioned in Paragraph 1, Article 7 of the Tax Law refers to the Special Economic Zones in Shenzhen, Zhuhai, Shantou and Xiamen and the Hainan Special Economic Zone, specified by the relevant legislation or upon approval of the State Council; 'Economic and Technological Development Zones' mentioned therein refers to the economic and technological development zones in the coastal port cities, designated by the State Council.

Article 70 'Coastal Economic Open Zones' in Paragraph 2, Article 7 of the Tax Law refers to those cities, counties and districts designated as Coastal Economic Open Zones by the State Council.

Article 71 'Assessment of Enterprise Income Tax at the reduced rate of 15%' in Paragraph 1, Article 7 of the Tax Law shall be limited to income obtained by enterprises from production and business operations in the respective areas as specified in Paragraph 1,Article 7 of the Tax Law.

'Assessment of Enterprise Income Tax at the reduced rate of 24%' in Paragraph 2, Article 7 of the Tax Law shall be limited to income obtained by enterprises from production and business operations in the respective areas as specified in Paragraph 2, Article 7 of the Tax Law.

Article 72 'Enterprises with foreign investment of a production nature' in Paragraphs 1 and 2 of Article 7 and Paragraph 1 of Article 8 of the Tax Law refers to enterprises with foreign investment engaged in the following industries:

A. machine manufacturing and electronics industries;

B. energy industries (not including exploitation of oil and natural gas);

C. metallurgical, chemical and building material industries;

D. light, textiles and packaging industries;

E. medical equipment and pharmaceutical industries;

F. agriculture, forestry, animal husbandry, fisheries and water conservation;

G. construction industries;

H. communications and transportation industries (not including passenger transport);

I. development of science and technology, geological survey and industrial information consultancy that directly serve production and maintenance and repair service for production equipment and precision instruments;

J. other industries as specified by the responsible department for taxation affairs under the State Council.

Article 73 'Assessment of Enterprise Income Tax at the reduced rate of 15%' in Paragraph 3, Article 7 of the Tax Law applies to the following projects:

A. Enterprises with foreign investment of a production nature 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. technology-intensive or knowledge-intensive projects;

b. projects with foreign investments of over US $30 million and more, and with a long payback period;

c. energy, transportation and port construction projects;

B. Chinese-foreign equity joint ventures engaged in port and dock construction;

C. Foreign banks, branches of foreign banks, banks with Chinese and foreign joint investment, and other institutions established in the Special Economic Zones and other areas approved by the State Council with capital put in by the foreign investor or operating funds appropriated by the head offices of foreign banks to their branches, totaling US $10 million or more, and with the period of operation exceeding ten years or more;

D. Production-oriented enterprises with foreign investment established in Shanghai Pudong New Area, as well as enterprises with foreign investment engaged in energy and transport construction projects such as airports, ports, railways, highways and power stations;

E. Enterprises with foreign investment recognized as new and high technology enterprises established in New and High Technology Industrial Development Zones approved by the State Council, as well as enterprises with foreign investment recognized as new technology enterprises established in Beijing New Technology Industrial Development Experimental Zones;

F. 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 engaged in industries that fall under Item (1) of the preceding paragraph shall, after applying to the State Administration of Taxation for approval, pay Enterprise Income Tax at the reduced rate of 15%.

Article 74 'The period of operation' in Paragraph 1, Article 8 of the Tax Law refers to the period starting from the date when an enterprise with foreign investment actually goes into production or business operations (including trial production and trial business operations) to the date the enterprise terminates its production and operation.

An enterprises with foreign investment applying for exemption from and reduction in Enterprise Income Tax according to the provisions of Paragraph 1,Article 8 of the Tax Law shall file with the local tax authorities its line of business, the names of major products, and the period of operations. 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' in Paragraph 2, Article 8 of the Tax Law refers to the following provisions in respect of exemptions from or reductions of Enterprise Income Tax promulgated or approved for promulgation by the State Council:

A. Chinese-foreign equity joint ventures engaged in port and dock construction and with the operation period exceeding 15 years or more shall, upon the approval of their applications by the tax authorities at the level of province, autonomous regions, or municipalities directly under the State Council, in which the enterprises are located, enjoy the exemption from Enterprise Income Tax from the first profit-making year to the fifth year, and reduction in Enterprise Income Tax by 50% from the sixth year to the tenth year.

B. Enterprises with foreign investment established in the Hainan Special Economic Zone and engaged in construction of such infrastructure projects as airports, harbours, docks, highways, railways, highways, power stations, coal mines and water conservation, etc., or in the development and operation of agriculture, and with the operation period exceeding 15 years or more shall, upon approval of their applications by Hainan Provincial Tax Authorities, enjoy the exemption from Enterprise Income Tax from the first profit-making year to the fifth year, and reduction in Enterprise Income Tax by 50% from the sixth year to the tenth year.

C. Enterprises with foreign investment established in Shanghai Pudong New Area and engaged in construction of such energy and transportation projects as airports, ports, railways, railways, highways and power stations etc., upon approval of their applications by Shanghai Municipal Tax Authorities, enjoy the exemption from Enterprise Income Tax from the first profit-making year to the fifth year, and reduction in Enterprise Income Tax by 50% from the sixth year to the tenth year.

D. Enterprises with foreign investment established in the Special Economic Zones and engaged in service-oriented industries, and the foreign investment exceeding US $5 million and the operation period exceeding ten years or more shall, upon approval of their applications by the relevant Tax Authorities of Special Economic Zones, enjoy the exemption from Enterprise Income Tax from the first profit-making year, and reduction in Enterprise Income Tax by 50% from the second and third year.

E. Foreign banks, branches of foreign banks, banks with Chinese and foreign joint investment, and other institutions established in the Special Economic Zones and other areas approved by the State Council with capital put in by the foreign investor or operating funds appropriated by the head offices of foreign banks to their branches, totaling US $10 million or more, and with the period of operation exceeding ten years or more shall, upon approval of their applications by the relevant Tax Authorities, enjoy the exemption from Enterprise Income Tax from the first profit-making year, and reduction in Enterprise Income Tax by 50% from the second and third year.

F. Chinese-foreign equity joint ventures recognized as new and high technology enterprises and established in the new and high technology industrial development zones approved by the State Council, with the operation period exceeding ten years or more shall, upon approval of their applications by the local tax authorities, enjoy the exemption from Enterprise Income Tax from the first and second profit-making years. For enterprises with foreign investment established in the Special Economic Zones and the Economic and Technological Development Zones, the preferential tax provisions of the Special Economic Zones and the Economic and Technological Development Zones shall remain applicable. For enterprises with foreign investment established in Beijing New Technology Industrial Development Experimental Zones, the preferential tax provisions of Beijing New Technology Industrial Development Experimental Zones shall be applicable.

G. Export-oriented enterprises with foreign investment may, upon the expiration of tax exemption and reduction period as provided for in the Tax Law, enjoy a further 50% reduction in Enterprise Income Tax based on the rate stipulated by the Tax Law, if the value of their exported products of the year exceeds 70% of the total value of their products of the year. But for the Special Economic Zones and the Economic and Technological Development Zones and other exported-oriented enterprises where Enterprise Income Tax has already been reduced to 15% and the above-mentioned requirements are met, Enterprise Income Tax shall be levied at 10%.

H. Technologically advanced enterprises with foreign investment may, upon the expiration of the Enterprise Income Tax exemption and reduction period as stipulated by the Tax Law, enjoy a further 50% reduction in Enterprise Income Tax for three years based on the rate stipulated by the Tax Law, if they remain technologically advanced enterprises..

I. Other provisions related to exemptions from or reductions of Enterprise Income Tax will be promulgated or have been approved for promulgation by the State Council.

Enterprises with foreign investment shall, in applying for exemptions from or reductions of Enterprise Income Tax pursuant to the provisions of Item (6), Item (7), or Item (8) of the preceding paragraph, submit relevant documents of proof issued by departments responsible for the examination and confirmation by the local tax authorities.

Article 76 'The first profit-making year' in Paragraph 1, Article 8 of the Tax Law and in Article 75 of these Rules refers to the first profit-making tax year after an enterprise goes into production or business operations. An enterprise sustaining losses in the initial stage of its operation may carry them over and make them up in subsequent years in accordance with the provisions of Article 11 of the Tax Law. The first profit-making year shall be the year in which the enterprise begins to make profits after the losses are made up.

The period for exemptions from or reductions of Enterprise Income Tax, specified in Paragraph 1, Article 8 of the Tax Law and Article 75 of these Rules, shall be calculated continuously from the first profit making year and shall not be deferred due to losses incurred during the period.

Article 77 For an enterprise with foreign investment which goes into operation in the middle of a year, if it makes profits in the same year while the actual period of operations is less than six months, it may choose to take the following year as the period to start enjoying exemption from or reduction in Enterprise Income Tax. However, Income Tax shall be levied in accordance with the Tax Law on profits earned by the enterprise in that year.

Article 78 Unless otherwise provided by the State Council, the preferential tax provisions of Paragraph 1, Article 8 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 enjoyed exemptions from or reductions of enterprise income tax pursuant to the provisions of Paragraph 1, Article 8 of the Tax Law and Article 75 of these Rules shall, but whose actual operation falls short of the stipulated period, shall repay the exempted and reduced Enterprise Income Tax, except for those having sustained huge losses caused by natural disaters or accidents.

Article 80 'Reinvest its share of profit directly' in Article 10 of the Tax Law refers to the profits earned by a foreign investor before being drawn from an enterprise with foreign investment shall be used directly to increase registered capital, or to make direct capital investment in another Chinese-foreign joint venture after such profits are appropriated.

In assessing the refundable tax amount in accordance with the provisions of Article 10 of the Tax Law, the said foreign investor shall provide supporting documents certifying the attributable year in which the profits was reinvested; where no supporting documents can be provided, the local tax authorities shall determine the year using the appropriate methods.

Foreign investors shall, within one year from the date the funds are actually invested, apply to the original tax collecting authorities for tax refund and submit a document certifying the amount and duration of the added or new capital investment.

Article 81 'Where regulations of the State Council provide otherwise in respect of preferential treatment, such provisions shall apply' in Article10 of the Tax Law refers to the case in which a foreign investor, who make direct reinvestment in establishing or expanding an export-oriented enterprise or a technologically advanced enterprise in China or who reinvests profit from an enterprise in Hainan Special Economic Zone directly into enterprises engaged in infrastructure and agricultural development in Hainan Special Economic Zone , may get a full refund of Enterprise Income Tax paid on the reinvested amount, according to the relevant regulations of the State Council.

In applying for a tax refund on reinvestment in accordance with the provisions of the preceding paragraph, the said foreign investor shall, besides going through the procedures provided in Paragraphs 2 and 3, Article 80 of these Rules, submit documents issued by the relevant examination and confirmation departments, certifying the relevant newly established or expanded enterprise as being an export-oriented enterprises or technologically advanced enterprise.

Where a newly established or expanded enterprise, in which foreign investors make reinvestment, fails to meet the standards of an export-oriented enterprise, or is no longer recognized as a technologically advanced enterprise within three years after it goes into production or operation, the foreign investor shall pay back 60% of the tax refunded.

Article 82 'Refund of the Income Tax paid on the reinvested amount' in Article 10 of the Tax Law and Paragraph 1, Article 81 of these Rules shall be calculated according to the following formula:

Tax refundable = Reinvested amount % [1 - (original investment enterprise income tax rate + local income tax rate applicable to the enterprise)] X original enterprise income tax rate applicable to the enterprise X tax refund rate

Chapter 7 Tax Deduction

Article 83 'Income Tax already paid abroad' in Article 12 of the Tax Law means income tax actually paid abroad by an enterprise with foreign investment on income received from sources outside China. It does not include taxes paid but later reimbursed, or any tax borne by others.

Article 84 'The Income Tax otherwise payable under this Law with respect to income derived from sources outside China' in Article 12 of the Tax Law refers to the tax payable on taxable income calculated from income derived outside China by the enterprises with foreign investment, after deducting the costs, expenses and losses incurred in earning that income and which are allowed under the relevant provisions of the Tax Law and these Rules. That tax payable shall be the limit of deductions, and it will be calculated country by country, but not item by item. The formula for calculation is as follows:

The deduction limit for tax on income derived from sources outside China = total tax sourced inside and outside China calculated according to the Tax Law X income sourced from foreign countries % total income sourced from inside and outside China.

Article 85 When the income tax actually paid on the income derived from sources outside China, by enterprises with foreign investment, is less than the deductible limit calculated according to the provisions of Article 84 of these Rules, the foreign Income Tax actually paid outside China may be deducted from the tax payable; where the deductible limit is exceeded, the excess portion shall not be allowed as a deduction from the tax payable, nor can it be itemized as an expense; but the balance of the deduction limit in subsequent years, with a carry over period not exceeding five years at a maximum.

Article 86 The provisions of Article 83 to Article 85 of these Detailed Rules shall apply only to enterprises with foreign investment with head offices established within China. Enterprises with foreign investment who apply tax deduction in accordance with the provisions of Article 12 of the Tax Law shall submit the original tax payment certificates of the same year issued by the relevant tax authorities outside China; Duplicates or tax payment certificates of different tax years are not acceptable as tax deduction certificates.

Chapter 8 Tax Collection and Administration

Article 87 Enterprises shall go to the local tax authorities for tax registration within 30 days after completing business registration. When an enterprises with foreign investment establishes or terminates a branch outside China, it shall make supplementary tax registration, change of registration or deregistration with the local tax authorities within 30 days after the establishment or termination.

When going through the registration mentioned in the preceding paragraph, the enterprise shall submit the relevant documents, licenses and information in accordance with the provisions.

Article 88 Enterprises that change address, restructure, merger, divide, dissolve or change in such major registered items as invested capital, scope of business, etc., shall submit the relevant approval documents to the local tax authorities for change of registration or deregistration within 30 days after the completion of the change in business registration or prior to the deregistration.

Article 89 Foreign enterprises which establish two or more business establishments in China may select one of the organizations for consolidated tax filing and payment. However, the establishment shall meet the following requirements:

A. it shall assume supervisory and management responsibility over the business operations of the other establishments;
B. it shall keep complete accounting records and vouchers which accurately reflect the income, costs, expenses, profits and losses of the other business establishments.

Article 90 A foreign enterprise which chooses to consolidate its Income Tax filing and payment in accordance with the provisions of Article 89 of these Rules shall select a business establishment to make such application to the local tax authorities for examination and approval according to the following provisions:

A. if all the business establishments involved in the consolidation are located in the same province, autonomous region, or municipality directly under the Central Government, the application is subject to approval by the tax authorities of the province, autonomous region or municipality;

B. if they are located in two or more provinces, autonomous regions, or municipalities directly under the Central Government, the application is subject to approval by the State Administration of Taxation.

Once the consolidated tax filing and payment of a foreign enterprise is approved, any establishment of additional business organizations, mergers, change of address, termination of operations, or shutdowns shall be reported to the local tax authorities by the business establishment in charge of the consolidated tax filing and payment, in advance of the occurrence of any of the above situations. Any change in the business establishments involving in the consolidated tax filing shall be treated in accordance with the provisions of the preceding paragraph.

Article 91 When different tax rates are applicable to different business establishments of a foreign enterprise involved in consolidated tax filing, the taxable income of different establishments shall be separately calculated on a reasonable basis and income tax shall be paid on the basis of the different tax rates.

When both profits and losses occur in the different business establishments mentioned in the preceding paragraph and there is a net profit after the profits and losses are offset against each other, Income Tax shall be levied at a rate applicable to the profit-making enterprises. For those establishments sustaining losses, Income Tax shall be levied at a rate applicable to such establishments when they become profitable after the losses have been made up against the income in subsequent years; Income Tax on the amount of profits which have been used to make up the losses shall be levied at a rate applicable to those establishments which help the losing establishment to make up losses.

Article 92 Notwithstanding the provisions of Article 91 of these Rules, when a business establishment in charge of consolidated tax filing and payment can not accurately calculate the taxable income of different establishments, the local tax authorities may make a reasonable apportionment of the taxable income among the business establishments, with reference to the respective proportions of income, costs, expenses, assets, and the number of staff and workers or the amount of salaries and wages.

Article 93 Enterprises with foreign investment which establish branch offices in China shall implement their consolidated tax filing with reference to the provisions of Article 91 and Article 92 of these Rules.

Article 94 Income Tax to be paid in advance in quarterly installments, as stipulated in Article 15 of the Tax Law, shall be calculated according to the actual profit for that quarter; Enterprises that have difficulty calculating advance payments based on actual quarterly profits may pay the tax bases on one-fourth of the taxable income of the previous year, or by adopting other method approved by the local tax authorities.

Article 95 Enterprises shall file income tax returns and final accounting statements with the local tax authorities within the time limit prescribed in Article 16 of the Tax Law, whether they make a profit or sustain a loss in that tax year. At the same time as they submit their final accounting statements, enterprises shall also submit audit reports signed by a certified public accountant registered in China, unless otherwise provided by the State.

If an enterprise cannot submit the income tax returns and final accounting statements within the time limit prescribed in the Tax Law, due to special reasons, they shall make an application for an extension to the local tax authorities within the filing time limit.

Article 96 Branches or business establishments shall submit the a copy of their final accounting statements to the local tax authorities at the same time as they submit them to their respective head offices or to the business establishments in charge of consolidated tax filing.

Article 97 An enterprises which is merged, divided or dissolved during the year shall, within 60 days of the termination of production or business operations, settle the Income Tax liability for that period with the local tax authorities, when the excess tax payment or tax payment deficiency shall also be settled.

Article 98 Where an enterprises which converted its foreign currency income into RMB according to the officially quoted exchange rate when paying tax, has excess tax refundable, it shall convert the refundable RMB tax amount into the original foreign currency according to the exchange rate quoted on the day when the tax was first paid, and then convert the sum back into RMB, according to the exchange rate on the day of issue of the tax refund voucher. Where there is a balance of tax payable, the balance of tax payable shall be converted into RMB according to the quoted exchange rate on the date of issue of the tax payment certificate.

Article 99 When an enterprise with foreign investment goes through liquidation, it shall file its Income Tax returns with he local tax authorities prior to the completion of the cancellation of business registration,.

Article 100 Unless otherwise provided by the State, enterprises shall keep inside China their accounting vouchers, books and statements that support the correct calculation of taxable income.

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

Enterprises using electronic computers for book-keeping shall treat the accounting records in computer storage or output as account books. Magnetic tapes and diskettes shall be kept properly before hard copies are printed.

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

Article 101 Invoices and certificates of receipts of enterprises shall be submitted to the local tax authorities for approval before they are printed and put into use.

The controlling mechanism over the printing and use of invoices and certificates of receipts of enterprises shall be formulated by the State Administration of Taxation.

Article 102 All enterprise Income Tax returns and tax payment certificates shall be printed by the State Administration of Taxation.

Article 103 When the final due dates for tax filing and tax payment fall on a Sunday or on an official public holiday, the day following the public holiday shall be treated as the final due date.

Article 104 The tax authorities, as specified in Paragraph 2, Article 19 of the Tax Law and Article 67 of these Rules, may pay to tax withholding agents a withholding fee calculated at a certain percentage of the tax withheld; Detailed procedures shall be formulated by the State Administration of Taxation.

Article 105 If any taxpayer or withholding agent fails to accept the examination of the tax authorities according to the relevant provisions or fails to pay the surcharge for overdue payment within the time limit prescribed by the tax authorities, the local tax authorities may, according to the seriousness of the case, levy a fine of 5,000 yuan

Article 106 If any enterprise violates the provisions of Article 87, Paragraph 2 of Article 90, Article 95, Article 96, Article 97, Article 99, Article 100 and Article 101 of these Rules, the tax authorities may, according to the seriousness of the case, impose a fine of up to RMB 5,000 yuan.

Article 107 "Tax evasion" in Article 25 of the Tax Law refers to unlawfully and deliberately carrying out activities in violation of the provisions of the Tax Law such as altering, forging or destroying bills, account vouchers or accounting books; falsifying or overstating costs and expenses; concealing or understating the amount of taxable income or revenue; or avoiding taxes or fraudulently recovering taxes already paid.

Article 108 The tax authorities shall serve a Notice of Penalty on the relevant parties in case involving penalties, in accordance with the provisions of the Tax Law and these Rules.

Article 109 All units or individuals have the right to provide information and assistance to report offenders or offenses against the Tax Law. The tax authorities shall keep confidentiality the identity of informants and reward them in accordance with the relevant provisions.

Chapter 9 Supplementary Rules

Article 110 Where an enterprise with foreign investment which completed business registration prior to the promulgation of the Tax Law would have a higher tax burden based on the rate stipulated in the Tax Law than that incurred before the enforcement of the Tax Law, the original applicable tax rate may be adopted during the approved operation period. If there is no agreed period of operation, the original tax rate eilll apply for 5 years from the date the Tax Law enters into force. However, if the tax liability of a particular year during the aforesaid period is higher than that assessed at the rate stipulated in the Tax Law, the tax rate stipulated in the Tax Law shall be adopted starting from that tax year.

Article 111 Enterprises with foreign investment which completed business registration prior to the promulgation of the Tax Law but have enjoyed preferential treatment of income tax exemption and reduction pursuant to the laws and regulations before the enforcement of the Tax Law, may continue to remain in effect until the termination of the period of exemption and reduction.

Enterprises with foreign investment which completed business registration before the enforcement of the Tax Law, but have not yet started to make profits or have become profit-making for less than 5 years, shall be granted Income Tax exemption and reduction for a due period pursuant to Paragraph 1,Article 8 of the Tax Law.

Article 112 Enterprises with foreign investment which completed business registration after the promulgation and before the enforcement of the Tax Law may refer to the provisions of Article 110 and Article 111 of these Rules for application.

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

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

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