Rules for the Implementation of the Income Tax Law of the People's Republic

(Promulgated on Order  [1991] No. 85 of the State Council on June 30, 1991)

Chapter 1    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 on Enterprises with Foreign Investment and Foreign Enterprises (hereinafter referred to as "the Tax Law").

Article 2 Income from production and business operations mentioned in paragraphs one and  two of Article 1 of the Tax Law refers to 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 trade, prospecting and exploitation and in other industries.

Income from other sources mentioned in paragraphs one and two of Article 1 of the Tax Law refers to profits (dividends), interests, rentals, income from the transfer of properties, income from the provision or transfer of patent rights, know-how, trademark rights and copyright and other non-operating income.

Article 3 "Enterprises with Foreign Investment" mentioned in paragraph one of Article 2 of the Tax Law and "foreign companies, enterprises and other economic organizations which have establishments or sites in China engaged in production or business operations" mentioned in paragraph two of Article 2 of the Tax Law shall be referred to as "enterprises" for short hereinafter, unless specified in particular wherever necessary.

　　

 "Establishments and sites" mentioned in paragraph two of Article 2 of the Tax Law refer to management organizations, business organizations, offices, factories, mines for exploitation of natural resources and sites of projects of building, installation, assembly and prospecting, sites for the provision of services and business agents.

Article 4 "Business agents" mentioned in paragraph two of Article 3 of these Rules refer to companies, enterprises and other economic institutions or individuals entrusted by foreign enterprises as agents in any of the following business operations:

1. Representing the client on a regular basis in arranging purchases and signing purchase contracts and purchasing commodities on commission,

2. Signing agency agreements or contracts with the client, for storing on a regular basis products and commodities owned by the client and delivering such products or commodities to other parties on behalf of the client, and

3. Authorized by the client to represent the client on a regular basis in signing sales contracts or accepting purchase orders.

Article 5 "Head office" mentioned in Article 3 of the Tax Law refers to the headquarters set up in China by an enterprise with foreign investment as a body corporate in accordance with the Chinese law to be in charge of the business management and control of the enterprise.

　　

Tax on the income from production and business operations and other income of the subsidiaries in and outside China of an enterprise with foreign investment shall be paid by the head office thereof on a consolidated basis.

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

1. The income from production and business operations of the establishments and sites set up in China by enterprises with foreign investment and foreign enterprises, and profits (dividends), interests, rentals, royalties and other income from sources in and outside China with practical ties with enterprises with foreign investment and those establishments and sites set up in China by foreign enterprises.

2. Income cited below of foreign enterprises with no establishments or sites set up in China: 　　

(1) Profits (dividends) from enterprises in China,

(2) Interests derived from bank deposits, loans, bonds, payments on account and deferred payments in China,

(3) Rentals on property leased to and used by lessees in China,

(4) Income derived from patent rights, know-how, trademark rights, copyright provided in China,

(5) Returns from transfer of houses and other buildings and attached structure, land use right and other properties in China,

(6) Other income derived from sources in China subject to taxation as stipulated by the Ministry of Finance.

Article 7 Chinese-foreign cooperative enterprises that do not constitute bodies corporate may assess the amount of income tax of each partner and pay tax separately in accordance with the tax laws of China, or assess the tax amount for tax payment on a consolidated basis in accordance with the Tax Law upon application thereby with approval by the local tax authorities.

Article 8 "Tax year" mentioned in Article 4 of the Tax Law begins on January 1 through December 31 of the Gregorian calendar.

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

Enterprises that start business operation in the middle of a tax year or actually operating for a period of less than 12 months in any tax year owing to a merger or closedown or other factors shall take the actual period of operation as a tax year.

In the event of liquidation, an enterprise shall make the period of liquidation a tax year.

Article 9 "The competent authorities on taxation under the State Council" mentioned in paragraph three of Article 8 and (4) in paragraph three of Article 19 of the Tax Law and Article 72 of these Rules refer to the Ministry of Finance and the State Administration of Taxation.

Chapter 2    Computation of Taxable Income

Article 10 The taxable income mentioned in Article 4 of the Tax Law shall be computed by the following formulae:　　

1. Manufacturing industry:

(1) Taxable income = profit on sales of products + profit from other operations + non-operating  income - non-operating expenses

(2) Profit of sales of products = net sales - cost of sales - tax on sales - (marketing expenses + management expenses + financial expenses)

(3) Net sales = turnover of sales - (returned goods + sales discounts)

(4) Cost of sales = cost of products manufactured in the period + inventory of products at the beginning of the period - inventory of products at the end of the period

(5) Cost of the products of  the period = manufacturing cost of the period +  ( inventory of semi-finished products at the beginning of the period and  products on production line) - (inventory of semi-finished products at end of the period and  products on production line)

(6) Manufacturing cost of the period = materials directly consumed in production in the period + direct wages + manufacturing expenses

2. Commerce:

(1) Taxable income = profit on sales + profit from other operations + non-operating income - non-operating expenses

(2) Profit on sales = net sales - cost of sales - tax on sales - (marketing expenses + management  expenses + financial expenses)

(3) Net sales = gross sales - (returned goods + sales discounts and allowances)

(4) Cost of sales = inventory of commodities at the beginning of the period + [purchase of goods  in the period - ( purchase returns  in the period + purchase discounts and allowances) + purchasing expenses] -  inventory of commodities at the end of the period

 3. Service trades:

(1) Taxable income = net business income + non-operating income - non-operating expenses

(2) Net business income = gross business income - (tax on business income + operating expenses + management expenses + financial expenses)

4. Taxable income of other industries may be computed with reference to the above formulae.

Article 11 The taxable income of an enterprise shall be computed on an accrual basis as a principle.

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

1. When products or commodities are marketed by installment payment, the income from sales may be deemed realized on the day the products are delivered or as of the date of the issuance of the invoice thereof, or as of the date of payment by the buyer as provided in a contract.

 2. When a project of construction, installation or assembly or a service that may last for more than a year, the taxable income may be deemed realized on the basis of the progress of the project or the volume of work completed.

3. In the case of processing, making large machinery, equipment or ships that may last for more than one year, the taxable income may be deemed realized on the basis of the progress of the project or the volume of work completed.

Article 12 When a Chinese-foreign cooperative enterprise operates on the basis of product sharing, the time of dividing products among the partners shall be the time of realization of the income and the amount of income shall be computed at the price of the products sold to a third party or be computed at the market price of the time.

When a foreign enterprise joins in a cooperative venture of petroleum exploitation, the time crude oil is divided among the partners shall be the time of realization of the income, and the amount of income shall be computed at a price which is subject to periodical readjustment with reference to the price of the same type of crude oil on the international market.

Article 13 In the case of income obtained by an enterprise in the form of non-monetary assets or rights and interests, the income shall be computed or assessed with reference to the prevailing market price.

Article 14 The official exchange rate quoted by the State Administration of Exchange Control mentioned in Article 21 of the Tax Law refers to the buying price quoted thereby.

Article 15 In the case of income obtained by an enterprise in a foreign currency, the taxable income upon payment of income tax by quarterly installment in accordance with the provisions of Article 15 of the Tax Law shall be computed by converting it into RMB at the exchange rate quoted by the State Administration of Exchange Control on the last day of the quarter. At the time of final settlement for year-end clearance of the income tax payable, no more conversion and computation shall be made with the income in a foreign currency on which income tax has already been paid on a quarterly basis, and only the portion of the income tax on the taxable income in a foreign currency that has not been paid shall be converted into RMB at the official exchange rate quotation on the last day of the year.

Article 16 Where an enterprise fails to provide complete and accurate vouchers and documents of costs and expenses and to compute the taxable income correctly, the local tax authorities shall assess the rate of profit and compute the taxable income with reference to the profit level of the same industry or the similar industry. Where an enterprise fails to provide complete and accurate vouchers of income and to file income tax returns correctly, the local tax authorities shall assess the taxable income on the basis of costs (expenses) plus reasonable profit.

At the time of assessing profit rate and taxable income in accordance with the provisions of the previous paragraph, if laws, decrees and regulations provide otherwise, the tax authorities shall abide by the latter.

Article 17 Foreign enterprises engaged in international transportation business by air or ocean shall compute their taxable income at 5% of their gross revenue from the passenger and cargo shipment departing from within China.

Article 18 In the case of an enterprise with foreign investment having investment in other enterprises, the profits (dividends) it obtains therefrom shall not be assessable for taxable income; and the expenses and losses arising therefrom shall not be taken for deduction from its taxable income.

Article 19 The following shall not be itemized as costs, expenses or losses in the computation of the taxable amount liable to income tax, unless it is otherwise provided by state regulations:

1. Expenses on acquisition or construction of fixed assets,

2. Expenses on acquiring a transfer of or developing intangible assets,

3. Interests on capital,

4. Payments of income taxes,

5. Fines on account of illegal business operation and losses arising from confiscations,

6. Surcharges for overdue payments and tax fines,

7. That portion of loss from natural calamities or accidents covered by insurance indemnities,

8. Payments other than those for public welfare and relief donations in China,

9. Royalties paid to the head office,

10. Other expenses unrelated to production or business operations.

Article 20 When the establishments and sites set up in China by a foreign enterprise pay to the head office reasonable administrative fees in connection with their production and business operations, they shall be permitted to include those fee payments into expenditure upon examination and approval by the local tax authorities on the evidences of scope of the administrative expenses, total amount and the basis and methods of amortization issued by the head office with  accompanying verification report from a certified accountant.

An enterprise with foreign investment shall make reasonable amortization of the administrative fees in connection with the production and business operations to its subsidiaries.

Article 21 The interests accrued from proper loans in connection with production and business operations of an enterprise may be included in expenditure upon examination and approval by the local tax authorities on evidence of the interests of the loans.

As for interests of loans used by an enterprise for acquiring or building fixed assets or for acquiring or developing intangible assets, the interests accrued prior to the commission of the assets thereof shall be included in the original price of the assets.

The reasonable interests of loans mentioned in paragraph one of this Article refer to interests at a rate not higher than the rate of a general commercial loan.

Article 22 The expenses on entertainment paid by an enterprise in connection with the needs for public relations shall be included in the expenditure against truthful records or invoices within the limits listed below:

1. Not to exceed 5‰ of a net annual sale of up to 15 million yuan, and not to exceed 3‰ of a net annual sale of over 15 million yuan,

2. Not to exceed 10‰ of a gross annual business turnover of up to five million yuan, and not to exceed 5‰ of a gross annual business turnover of over five million yuan.

Article 23 Exchange gains and losses during preparations and in production and business operations shall be included properly in the gains and losses of the different stages of operation of the enterprise, unless it is otherwise provided by state regulations.

Article 24 Wages and welfare spending on workers shall be allowed to include in the expenditure upon examination and approval by the local tax authorities on documents indicating the wage level and grounds and the related documents provided by the enterprise.

An enterprise shall not include into its expenditure the premiums of social insurance it pays overseas for its staff working in China.

Article 25 Enterprises engaged in credit and leasing business may in view of the actual needs apply to the local tax authorities for approval for setting aside a reserve for bad accounts not exceeding 3% of the amount of the year-end loan balance (excluding inter-bank financing) or the amount of the accounts receivable, notes receivable and other receivables, to be deducted from the taxable income of the year.

In case of the actual loss from bad accounts exceeding the bad accounts reserve of the previous year, the portion in excess of the reserve thereof may be included in the loss of the current year; and in the case of the bad accounts below the reserve thereof of the previous year, the portion short of the reserve thereof shall be included in the revenue of the year.

The loss from bad accounts mentioned in the previous paragraph is subject to examination and approval by the local tax authorities.

Article 26 The loss from bad accounts mentioned in paragraph two of Article 25 of these Rules refers to the following accounts receivable:

1. Collection from a bankrupt debtor is impossible after the use of the bankruptcy assets for settlement,

2. Collection from a dead debtor is impossible after use of the estate for repayment,

3. Collection is impossible after the debtor has failed to fulfill repayment obligations for more than two years.

Article 27 Where accounts receivable have been written off as bad account losses but part or all thereof are recovered in the succeeding years, the recovered accounts receivable shall be included in the taxable income of the year.

Article 28 In case the establishments and sites set up in China by a foreign enterprise have obtained profits (dividends), interests, rentals, royalties and other incomes from sources outside China but in connection with them and they have paid income tax thereon outside China, the income tax paid may be deducted in the form of expenses from the taxable income, unless it is otherwise provided by state regulations.

Article 29 The net asset or the remnant asset mentioned in Article 18 of the Tax Law refers to the balance of all assets or property deducted by various liabilities and losses in the liquidation of an enterprise.

Chapter 3    Tax Treatment of Assets

Article 30 The "fixed assets of an enterprise" refer to houses, buildings and other structures, machines, mechanical apparatuses, means of transportation and other equipment, appliances and tools of a life span of at least one year related to the production and business operations of the enterprise. Articles other than major equipment for production and business operations of a value of no more than 2,000 yuan a piece or of a life span of no more than two years may be accounted for as expenses on the basis of the actual consumption.

Article 31  Valuation of fixed assets shall be based on the original prices thereof.

The original price of a fixed asset shall be valued on the basis of the price thereof at the time of acquisition plus the expenses on shipment and installation and related expenses incurred prior to the commencement of the use thereof.

The fixed assets made or built by the enterprise itself shall be valued on the basis of the expenses incurred in the course of the manufacturing or construction as the original price thereof.

The fixed assets used as investment contribution shall be valued as the original price thereof on the basis of the reasonable price plus due consideration given to the degree of wear thereof as provided in the contract or an assessed price with reference to the market price plus the expenses incurred prior to the commencement of the use thereof.

Article 32 Depreciation of the fixed assets of an enterprise shall begin in the next month of the commencement of its use and depreciation shall cease in the month next to the month when its use ends.

The initial investment by an enterprise engaged in petroleum exploitation shall be aggregated as capital outlay with each oilfield (or gas field) as a unit, and depreciation shall begin in the month next to that when the oilfield (or gas field) starts its commercial production.

Article 33 Prior to the depreciation of a fixed asset, the scrap value thereof shall be assessed and be deducted from the original price thereof. The scrap value of a fixed asset shall not be lower than 10% of the original price and the ratio thereof to be reserved shall be done with the approval of the local tax authorities.

Article 34 Depreciation of fixed assets shall be done by the straight-line method; should there be any need for the use of other methods, it shall be applied after an application is submitted by the enterprise and examined by the local tax authorities and reported level by level right to the State Administration of Taxation for approval.

Article 35 The minimum time limits to the depreciation of fixed assets are as follows:

1. 20 years for houses and other constructions,

2. 10 years for locomotives and railway rolling stock, vessels, machines, mechanical equipment and other production equipment,

3. 5 years for electronic equipment, means of transportation other than trains and ships, instruments, tools, furniture and other articles related to production or business operations.

Article 36 Depreciation of fixed assets resulting from the investment in the development stage and subsequent stages of an enterprise engaged in the exploitation of petroleum may be assessed on a consolidated basis without leaving scrap value in a depreciation term of no less than six years.

Article 37 The houses and structures mentioned in (1) of Article 35 of these Rules refer to those houses and structures and their attachments used in production and business operations and for the living and well being of the workers. They include:

Houses, including factory buildings, business buildings, offices, warehouses, dormitories, canteens and other houses;

Structures, including towers, ponds, chutes, wells, derricks (excluding temporary and simple sheds used as temporary workshops and garages), yards, roads, bridges, platforms, docks, ship berths, tunnels, service stations and pipelines, chimneys and compound walls independent from houses and machinery and equipment;

Attachments to houses and structures, namely, the auxiliary facilities inseparable from the houses and structures and not valued independently, including facilities of ventilation, water supply, oil pipelines, communications wire, electric wire, elevators and bathroom equipment in the houses and structures.

Article 38 The scope of the railway rolling stock, vessels, machines, mechanical apparatuses and other production equipment mentioned in (2) of Article 35 of these Rules is defined as follows:

Trains, including locomotives, passenger cars, freight cars and the auxiliary facilities on the rolling stock not to be valued separately;

Vessels, including all types of engine-propelled vessels and those auxiliary facilities on ships not to be valued separately;

Machines, mechanical apparatuses and other production equipment, including machines, mechanical apparatuses, machine sets, production lines and auxiliary facilities, and all types of moving, conveying and conducting equipment.

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

Electronic equipment: integrated circuitry, transistors, electron tubes and other electronic components, equipment with the functions of applied electronic technology (including software), including electronic computers, computer-controlled robots, digital or program-controlled systems, etc.

Means of transportation other than railway rolling stock and ships: aircraft, motor vehicles, trams, tractors, motorcycles (motorboats), motorized sailboats, and other means of transportation.

Article 40 In case the term for depreciation of fixed assets is required to be shortened on account of special reasons, the enterprise involved may file an application with the local tax authorities level by level up to the State Administration of Taxation for approval.

The special reasons for shortening the term of depreciation of fixed assets mentioned in the previous paragraph include:

1. Machines and equipment subject to strong acid or alkali corrosion and factory buildings and other structures subject to constant vibration and shaking,

2. Machines and equipment in 24-hour operation the year round for higher efficiency and greater intensity,

3. A shorter term of depreciation has been provided by a contract of a Chinese-foreign cooperative enterprise than that provided by Article 35 of these Rules and the fixed asset shall be owned by the Chinese partner at the expiration of the term of the contract.

Article 41 The used fixed asset which an enterprise has acquired having a remnant usage span shorter than that provided by Article 35 of these Rules may be depreciated on the basis of its remnant usage span against evidence provided and upon approval to an application by the local tax authorities.

Article 42 In case expenses increase on account of expansion, replacement, overhaul and technological transformation of a fixed asset to increase its value in the course of use, the original price thereof shall be increased accordingly, and wherever the usage span may be lengthened, the depreciation term thereof shall be readjusted accordingly.

Article 43 No further depreciation shall be assessed although a fixed asset may continue to be used after its depreciation is fulfilled.

Article 44 The balance of the proceeds from the transfer or disposal of fixed assets by an enterprise after the deduction by the net value or scrap value after depreciation and the expenses involved in the handling shall be assessed as gain or loss of the year.

Article 45 The fixed asset an enterprise has accepted as a gift may be valued and assessed for depreciation properly.

Article 46 Valuation of an enterprise's patent right, know-how, trademark right, copyright and site use right and other intangible assets shall be based on the original price thereof.

The original price of the intangible asset transferred to an enterprise shall be the actual payment for it at a reasonable price.

The original price of an intangible asset developed by the enterprise itself shall be the actual expenses involved in the development thereof.

The original price of an intangible asset as an investment contribution shall be the reasonable price provided in the agreement or contract.

Article 47 Intangible assets shall be amortized by the straight-line method.

The intangible assets invested or transferred with the usage span provided in the agreement or contract may be amortized on the basis of that usage span, or, if no such usage span is provided or the intangible assets are developed by the enterprise itself, the time for amortization shall be no less than ten years.

Article 48 Reasonable expenses on prospecting incurred to an enterprise engaged petroleum exploitation may be amortized on income from oil (gas) field which has started commercial production and the amortization period shall be no less than one year.

Where operation of oil (gas) exploration on a contract zone owned by a foreign oil company is terminated due to failure to find commercially viable oil (gas), and where it does not continue to be entitled to the contract that provides for the continued exploitation of oil (gas) resources, nor does it have a management organization or office in China to carry on exploration for the exploitation of petroleum (gas), the reasonable prospecting expenses already incurred in the contract zone of which the contract has been terminated may, upon examination and confirmation and issuance of certification by the tax authorities, be permitted to be amortized on production income of a newly owned contract field if a new contract for  cooperative exploitation of oil (gas) resources is signed within 10 years from the day the old contract is terminated.

Article 49 The expenses incurred during the period of preparations of an enterprise shall be amortized from the next month after the start of production or business operation and continue for no less than five years.

The period of preparations mentioned in the previous paragraph refers to the period beginning on the day the enterprise is approved to start preparations up to the day production or business operation (including trial production and trial operation) begins.

Article 50 The valuation of an enterprise's inventory of commodities, finished products, products on the production line, raw materials and other materials shall be based on the cost thereof.

Article 51 An enterprise may choose from among the methods of first-in first-out, moving average, weighted average or last-in first-out for assessment of the actual costs of inventories delivered or used.

Once an option is made, no further change shall be permitted at will; where a change of the valuation method is actually required, it shall be reported to the local tax authorities for approval prior to the start of the next tax year.

Chapter 4    Business Connections among Associated Enterprises

Article 52 "Associated enterprises" mentioned in Article 13 of the Tax Law refer to companies, enterprises and other economic institutions that have one of the business connections cited below:

1. Direct or indirect ties of ownership or control of capital, business operations or marketing and purchase,

2.  Directly or indirectly owned or controlled by a third party,

3.  Other ties of association of interests.

Article 53 Business exchanges among independent enterprises mentioned in Article 13 of the Tax Law refer to business ties based on fair trading prices and regular business operations among enterprises without ties of association.

An enterprise has the obligation to provide to the local tax authorities the levels of prices and charges and other information in connection with its business ties with its associated enterprises.

Article 54 If sales and purchases between an enterprise and its associated enterprises are not priced as those between independent enterprises, the local tax authorities shall make proper readjustment in the following order and methods defined:

1. At the prices in the business activities among independent enterprises or similar business activities thereof,

2. On the basis of the average profit for sales to a third party which the enterprise has no ties of association,

3. On the basis of costs plus reasonable expenses and profits,

4. By other reasonable methods.

Article 55 The profits paid or collected on inter-enterprise financing between an enterprise and its associated enterprises, if higher or lower than those that could be agreed to be paid or collected between it and other enterprises without ties of association, or if the profit rate thereof is higher or lower than the normal profit rate for business activities of the same kind, shall be subject to readjustment by the local tax authorities with reference to normal profit rates.

Article 56 If an enterprise fails to collect or pay commissions for services between it and its associated enterprises as it does in its business ties with independent enterprises, the local tax authorities shall make adjustments with reference to the normal level of charges on similar services.

Article 57 If transfers of assets, provisions of assets for use and other similar business activities between an enterprise and its associated enterprises are not priced or charged or paid as among independent enterprises, the local tax authorities shall make adjustments with reference to the level permissible for such business ties among independent enterprises.

Article 58 An enterprise shall not include in expenditure the administrative fees it pays to its associated enterprises.

Chapter 5    Withholding Tax at Source

Article 59 "Profits, dividends, rentals, royalties and income from other sources" mentioned in paragraph one of Article 19 of the Tax Law shall be assessed in full amount for tax amount payable, unless it is otherwise provided by state regulations.

The full amount of the charges collected from the use of patent right and know-how shall include the charges on the use of relevant blueprints and other relevant information, technical service, personnel training and other relevant charges.

Article 60 "Profits" mentioned in Article 19 of the Tax Law refer to income from investment based on contribution ratio, equities, shares and other profit-sharing income from non-credit relationships.

Article 61 "Other income" mentioned in Article 19 of the Tax Law refers to returns derived from the transfer of houses, structure and other attached facilities and the use right of land and other properties in China.

 "Returns" mentioned in the previous paragraph refer to the balance of the income from the transfer of a property after the original value thereof has been deducted. In case a foreign enterprise fails to provide the proper evidence of the original value of the property, the local tax authorities shall make an assessment of the original value of the property in the light of the actual conditions.

Article 62 "Payments" mentioned in paragraph two of Article 19 of the Tax Law refer to payments in cash, payments by remittance, payments by account transfer, and payments with non-monetary assets or the monetary equivalent of rights and interests.

Article 63 "Profits from an enterprise with foreign investment" mentioned in (1) in paragraph three of Article 19 of the Tax Law refer to returns from the profits of the enterprise with foreign investment after payment of tax in accordance with the tax laws and regulations or after tax reduction or exemption.

Article 64 "International financial organizations" mentioned in (2) in paragraph three of Article 19 of the Tax Law refer to the International Monetary Fund (IMF), the World Bank, the Asian Development Bank, the International Development Association, the International Agricultural Development Fund and other international financial organizations.

Article 65 The Chinese national banks" mentioned in (2) and (3) in paragraph three of 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 China Construction Bank, the Bank of Communications, the China Investment Bank and other banking institutions dealing with foreign clients in foreign exchange depositing and lending and other credit business with the approval of the State Council.

Article 66 The scope of reduction and exemption of tax on "royalties" mentioned in (4) in paragraph three of Article 19 of the Tax Law is defined below:

1. Royalties on the use of know-how used in the development of agriculture, forestry, animal husbandry and fishery as listed below:

(1) Technologies for the improvement of soil and grassland, land reclamation and  the fullest possible use of natural resources,

(2) Technologies of breeding new species of animals and plants and the production of high-efficient and low toxic pesticides,

(3) Technologies for scientific management of farming, forestry, animal husbandry and fishery, the protection of eco-equilibrium and the improvement of the capacity in combating natural adversities.

2. Charges on know-how provided for research or cooperative research and scientific experiments undertaken by the Chinese Academy of Sciences, Chinese institutions of higher learning and other Chinese scientific research institutions.

3. Charges on know-how applied to the development of energy industry and transportation and communications in China.

4. Charges on know-how applied to projects of energy saving and environment protection.

5. Charges on the following know-how to be applied to important scientific and technological fields:

(1) Important advanced technologies in the production of machinery and electrical equipment,

(2) Nuclear energy technology,

(3) Technology in the production of large-scale integrated circuits,

(4) Technologies in the production of photo-integration microwave semiconductors and microwave integrated circuits and micro-electronic tubes,

(5) Technology in the production of super-high speed computers and micro-processors,

(6) Optical telecommunications technology,

(7) Technology of transmission of ultra-high voltage D/C  electricity,

(8) Technologies of coal liquefaction and gasification and integrated utilization.

Article 67 For the income of a foreign enterprise from building, installation, assembly, prospecting or other projects and consultation, management, personnel training or other services, the tax authorities may appoint the payer of the payment for the project or service as the income tax withholder.

Chapter 6    Tax Preference

Article 68 Pursuant to the provisions of Article 6 of the Tax Law, preferential treatment with regard to income tax wherever necessary may be given to those enterprises with foreign investment that merit encouragement from China in accordance with the relevant provisions of state laws, administrative decrees and regulations.

Article 69 "Special economic zones" mentioned in paragraph one of Article 7 of the Tax Law refer to Shenzhen SEZ, Zhuhai SEZ, Shantou SEZ, Xiamen SEZ and Hainan SEZ set up in accordance with the law and with the approval of the State Council; the "economic and technological development zones" mentioned therein refer to those economic and technological development zones set up in coastal port cities with the approval of the State Council.

Article 70 "Coastal open economic zones" mentioned in paragraph two of Article 7 of the Tax Law refer to the cities, counties and districts that constitute the coastal open economic zones opened with the approval of the State Council.

Article 71 "Income tax shall be levied at the reduced rate of 15%" mentioned in paragraph one of Article 7 of the Tax Law is limited to income of enterprises from production and business operations in those places provided by the provisions of paragraph one of Article 7 of the Tax Law.

 "Income tax levied at the reduced rate of 24%" mentioned in paragraph two of Article 7 of the Tax Law is limited to the income of those enterprises from production and business operations in those places provided by paragraph two of Article 7 of the Tax Law.

Article 72 "Foreign-invested productive enterprises" mentioned in paragraph one and paragraph two of Article 7 and paragraph one of Article 8 of the Tax Law refer to those enterprises with foreign investment engaged in the following industries and trades:

1. Manufacturing industry, electronic industry,

2. Energy industry (excluding oil and natural gas exploitation),

3. Metallurgical, chemical and building material industries,　

4. Light, textile, packaging industries,

5. Medical instrument and equipment and pharmaceutical industries,

6. Agriculture, forestry, animal husbandry, fishery and irrigation and water conservation,

7. Building industry,

8. Transport industry (excluding passenger transportation),

9. Scientific and technological development projects that serve production directly, general geological survey, industrial information consultancy and service trade for repair of production equipment and precision instrument,

10.  And other industries and trades approved by the competent authorities under the State Council.

Article 73 "Income tax levied at the reduced rate of 15%" mentioned in paragraph three of Article 7 of the Tax Law is applicable to:

1. Foreign-invested productive enterprises engaged in the following projects in coastal open economic zones, and old urban districts of special economic zones and economic and technological development zones:

(1) Technology-intensive projects, knowledge-intensive projects,

(2) Projects each with an investment of at least 30 million US dollars and a long period needed for recovery of the investment,

(3) Building projects of energy, transportation and ports.

2. Chinese-foreign equity joint ventures engaged in harbor and dock construction projects.

3. Foreign banks, branches of foreign banks, banks with Chinese and foreign joint investment, and other banking institutions established in the special economic zones, and other areas approved by the State Council, with capital contribution by the foreign investor or an operating fund allocated by the head office to its subsidiary each exceeding 10 million US dollars and an operating period of no less than ten years.

4. Foreign-invested productive enterprises in the New Pudong of Shanghai and enterprises with foreign investment engaged in projects of airports, harbors, railways, roads, power stations and other energy and transportation construction projects.

5. Enterprises with foreign investment set up in new and hi-tech industry development zones designated by the State Council and recognized as hi-tech enterprises and enterprises with foreign investment set up in new technology industry development experimental zone in Beijing and recognized as new technology enterprises.

6. Enterprises with foreign investment set up in other places designated by the State Council but engaged in projects encouraged by the State.

Those enterprises with foreign investment itemized under the category provided in (1) above shall be entitled to a reduced tax rate of 15% of enterprise income tax after application thereof is approved by the State Administration of Taxation.

Article 74 "Operating period" mentioned in paragraph one of Article 8 of the Tax Law refers to such a period of time beginning from the day of the commencement of the production or business operation (including trial production and trial operation) of an enterprise with foreign investment up to the day of termination of the production or business operation thereof.

An enterprise with foreign investment likely to be entitled to reduction or exemption of enterprise income tax in accordance with the provisions of paragraph one of Article 8 of the Tax Law shall report the industry it engages, the names of its major products and the operating period it has decided to run to the local tax authorities for examination, and shall not enjoy tax reduction or exemption before approval is given upon examination by the local tax authorities.

Article 75 "Regulations promulgated by the State Council prior to the implementation of this Law" mentioned in paragraph two of Article 8 of the Tax Law refer the following regulations concerning reduction and exemption of enterprise income tax promulgated by or the promulgation thereof approved by the State Council:

1. Chinese-foreign equity joint ventures engaged in harbor and dock construction and with an operating period of no less than 15 years may, upon approval of their application by the tax authorities at the level of the province, autonomous region or municipality directly under the State Council, in which the enterprises are located, shall be entitled to exemption of enterprise income tax from the first through the fifth year beginning from the year when it begins making profit, and to a 50% reduction of the enterprise income tax from the sixth year through the tenth year.

2. Enterprises with foreign investment set up in Hainan Special Economic Zone and engaged in the construction of airports, ports, docks, railways, power stations, coal mines, water conservancy, and other infrastructure projects, or in the development and operation of agriculture and with an operating period of no less than 15 years, may, upon approval of their applications by the provincial tax authorities of Hainan, enjoy exemption from enterprise income tax from the first profit-making year through the fifth year beginning from the year when it begins making profit and reduction of enterprise income tax by 50% from the sixth year through the tenth.

3. Enterprises with foreign investment set up in New Pudong of Shanghai and engaged in the construction of airport, port, railway, road, power stations and  other energy and transportation projects and with an operating period of no less than 15 years may, upon approval of their applications by the Shanghai tax authorities, enjoy exemption from enterprise income tax from the first profit-making year through the fifth year beginning from the year when it begins making profit and reduction of enterprise income tax by 50% from the sixth year through the tenth.

4. Enterprises with foreign investment in special economic zones engaged in service trades, with foreign investment exceeding five million US dollars and an operating period of no less than 10 years, may, upon approval of their applications by the SEZ tax authorities, enjoy exemption from enterprise income tax in the first year beginning from the year when it begins making profit and a 50% tax reduction in the second and third year.

5. Foreign-funded banks and Chinese-foreign equity joint banks in SEZs and other places approved by the State Council with foreign investment or allocation to the subsidiary from its head office exceeding 10 million US dollars and with an operating period of no less than 10 years may, upon approval of applications by the local tax authorities, enjoy exemption from enterprise income tax in the first year beginning from the year when it begins making profit and a 50% reduction of enterprise income tax in the second and third year.

6. Chinese-foreign equity joint ventures recognized as new hi-tech enterprises with an operating period of no less than 10 years may, upon approval of applications by the local tax authorities, enjoy exemption from enterprise income tax in the first and second years beginning from the year when it begins making profit. Enterprises with foreign investment in SEZs and economic and technological development zones shall be accessible to the provisions for tax preference for SEZs and economic and technological development zones. Enterprises with foreign investment in the New Technology Development Experimental Zone in Beijing shall be accessible to the regulations for tax preference thereof.

7. Enterprises with foreign investment engaged in export of its products shall, after the expiration of the period of reduction and exemption of enterprise income tax in accordance with the tax law, enjoy a 50% reduction of the enterprise income tax when their exports exceed 70% of the gross output of their production of the year. But those in SEZs and economic and technological development zones with products for export and paying enterprise income tax at the rate of 15% shall be accessible to a reduced rate of 10% for enterprise income tax.

8. Enterprises with foreign investment of advanced technology may continue to enjoy a 50% reduction of enterprise income tax for three more years if they remain enterprises of advanced technology after the period for reduction and exemption of enterprise income tax has expired.

9. Other regulations regarding exemption and reduction of enterprise income tax promulgated by or the promulgation thereof approved by the State Council.

In applying for exemption or reduction of enterprise income tax in accordance with the provisions of (6), (7) and (8)  of the previous paragraph, enterprises with foreign investment shall provide the relevant documents issued by the authorities in charge of the examination thereof for approval by the local tax authorities.

Article 76 "The year when it begins making profit" in paragraph one of Article 8 of the Tax Law and Article 75 of these Rules refers to the first profit-making tax year after the commencement of operation of the enterprise. If an enterprise sustains losses in its initial stage of operation, it may make up for the losses in the following years and when there is still profit left after losses have been made up for, that year shall be the first profit-making year.

The time limit to exemption and reduction of enterprise income tax provided in paragraph one of Article 8 of the Tax Law and the provisions of Article 75 of these Rules shall be computed continuously from the first profit-making year of the enterprise and no postponement thereof shall be allowed on account of losses sustained in between.

Article 77 If an enterprise with foreign investment starts its operation in the middle of a year and its profit-making operating period is short of six months, it may choose the next tax year as the starting year of the period of exemption and reduction of enterprise income tax. But it shall pay income tax on the profit it has made in the opening year.

Article 78 The tax preference provided in paragraph one of Article 8 of the Tax Law shall be inapplicable to those enterprises engaged in the exploitation of petroleum, natural gas, rare metals and precious metals and other similar resources, unless it is otherwise stipulated by the State Council.

Article 79 An enterprise with foreign investment which has enjoyed preferential treatment of exemption and reduction of enterprise income tax in accordance with the provisions of paragraph one of Article 8 of the Tax Law and Article 75 of these Rules shall pay back the enterprise income tax hitherto reduced or exempted if its operation period consequently is short of the prescribed length, unless it has sustained major losses from natural calamities or accidents.

Article 80 "Direct reinvestment" mentioned in Article 10 of the Tax Law refers to the fact that the foreign investor of an enterprise with foreign investment uses the profit to increase the registered capital thereof directly before it draws the profit from the enterprise or invests the profit directly in setting up another enterprise with foreign investment after it has drawn the profit.

When computing the refund of tax payment in accordance with the provisions of Article 10 of the Tax Law, the foreign investor shall provide evidence of the year confirming the reinvestment of its profit; and if it fails to provide the said evidence, the local tax authorities shall make an assessment by a reasonable method.

A foreign investor shall submit the evidence confirming the size of the direct reinvestment, the time limit to its capital increase or its investment contribution to the original tax authorities in request of reimbursement of the tax payment within one year beginning on the day of the actual realization of the reinvestment.

Article 81 "Preferential treatment otherwise prescribed by the State Council" mentioned in Article 10 of the Tax Law refers to the case in which a foreign investor, who makes direct reinvestment in setting up or expanding an export 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, may get a full refund of the enterprise income tax paid on the reinvested amount, according to the relevant regulations of the State Council.

An enterprise with foreign investment applying for refund of income tax on reinvestment shall, in addition to pursuance to the provisions of paragraphs two and three of Article 80 of these Rules, provide documents issued by the examining authorities confirming the reinvestment made in setting up or expanding an export enterprise or a technologically advanced enterprise.

In case an enterprise set up or expanded with reinvestment by a foreign investor fails to reach the norm for an export enterprise in the first three years since the commencement of production, or fails to be recognized as a technologically advanced enterprise, it shall pay back 60% of the tax refund.

Article 82 Tax refund on reinvestment mentioned in Article 10 of the Tax Law and paragraph one of Article 81 of these Rules shall be assessed by the following formula:

 Tax refundable = amount reinvested ÷ [1 - (the original enterprise income tax rate applicable + local income tax rate applicable) X  original enterprise income tax rate applicable X refund rate]

Chapter 7    Tax Credit

Article 83 "Income tax already paid abroad" mentioned in Article 12 of the Tax Law refers to the income tax on a source outside China an enterprise with foreign investment actually has paid abroad, excluding the compensation received after payment of the tax or the tax has been borne by others.

Article 84 The tax amount assessed on his income from an overseas source in accordance with the provisions of the Tax Law mentioned in Article 12 of the Tax Law refers to the amount of tax assessed on the basis of the income an enterprise with foreign investment receives from a source outside China after the costs, expenses and losses attributable to that income have been deducted. That tax amount shall be the limit to tax credit to be computed for different countries but not item by item. The formula for the assessment is:

 Credit limit to tax on income derived outside China = the aggregate of tax assessed payable on income from inside and outside China X income from a source in a foreign country ÷  total income from inside and outside China

Article 85 When the income tax actually paid by an enterprise with foreign investment on the income from a source outside China is short of the tax credit limit assessed in accordance with the provisions of Article 84 of these Rules, it may be deducted from the tax amount; if it exceeds the credit limit, the portion in excess shall not be deducted from the tax amount or accounted for as expenditure, but may be made up for from the favorable balance of the tax credit after the actual payment of income tax abroad is deducted  in later years, but that period shall not exceed five years.

Article 86 The provisions of Article 83 through Article 85 are applicable only to enterprises with foreign investment with their head offices in China. An enterprise with foreign investment applying tax credit in accordance with the provisions of Article 12 of the Tax Law shall submit the original tax payment receipts of the same year issued by the relevant tax authorities outside China. Duplicates or tax payment receipts of different tax years shall be unacceptable as evidence for tax credit.

Chapter 8    Tax Administration

Article 87 An enterprise shall make tax registration with the local tax authorities within 30 days following the completion of registration with the administration for industry and commerce. With regard to the setting up or termination of a subsidiary in China, an enterprise with foreign investment shall make registration, alteration of registration or cancellation of registration with the local tax authorities within 30 days of the setting up or termination thereof.

An enterprise making the registration mentioned in the previous paragraph shall present the relevant documents, licenses and other information.

Article 88 An enterprise in case of a change of address, reorganization, merger, division, termination, or change of the registered capital and scope of business and other major registration items shall make alteration or cancellation of registration with the local tax authorities with the relevant documents within 30 days after completing registration or before cancellation of registration with the authorities for industry and commerce.

Article 89 A foreign enterprise with two or more business organizations set up in China shall choose one of them to file tax returns for all of them and such a business organization should meet the following qualifications:

1. It is responsible for the control and administration of the other business organizations,

2. It has established complete account books and accounting vouchers capable of reflecting the income, costs, expenses and profits and losses of all of the business organizations.

Article 90 For filing tax returns in a consolidated fashion in accordance with the provisions of Article 89 of these Rules, the business organization chosen by a foreign enterprise for the mission shall file an application to the local tax authorities for examination and then apply for examination and approval in accordance with the procedure as prescribed below:

1. If the business organizations pooled for filing tax returns together in the same province or autonomous region or the same municipality directly under the jurisdiction of the State Council, it shall require approval by the taxation administration directly thereof. 　

2. If they are located in two or more provinces, autonomous regions and municipalities directly under the jurisdiction of the State Council, it shall require approval by the State Administration of Taxation.

In the event of any increase, merger, movement, suspension of business or termination of business organizations, a foreign enterprise with the approval for filing tax returns for its business organizations on a consolidated basis shall have the business organization responsible for filing tax returns report the case to the local tax authorities in advance. Where there is need for a change of the business organization responsible for filing tax returns on a consolidated basis, the provisions of the previous paragraph shall apply.

Article 91 In the case of the business organizations of a foreign enterprise being bundled together for filing tax returns being subject to different tax rates, the taxable incomes of the different business organizations shall be computed separately and reasonably at the respective different tax rates.

If the business organizations mentioned in the previous paragraph make profits and losses among them and there is still a favorable balance after profits are offset by losses, the tax rate applicable to the profit making organization shall be applied. The loss making organization shall make up for the loss with its profits in the coming year, and if there is a remnant profit after the loss is made up for, it shall pay income tax on the remnant profit at the tax rate applicable thereto. Income tax shall be paid on the amount used to offset the loss of the loss-making business organization at the rate applicable to the business organization with profit to make the offset.

Article 92 Despite the provisions of Article 91 of these Rules, when the business organization responsible for filing tax returns for all of the business organizations fails to properly assess the taxable incomes of them separately, the local tax authorities may make a reasonable distribution of the combined taxable income of the relevant business organizations by taking into consideration the ratio of business income, ratio of costs and expenses, ratio of assets, the number of workers and payroll among them.

Article 93 When an enterprise with foreign investment with subsidiaries set up in China files tax returns in a consolidated way for itself and its subsidiaries, it shall refer to the provisions of Articles 91 and 92 of these Rules.

Article 94 An enterprise in paying income tax on a quarterly basis in accordance with the provisions of Article 15 of the Tax Law shall pay an advance on the basis of actual profit gained, and in case of any difficulties, it may pay a quarterly advance to the equivalent of 1/4 of the tax payable of the previous year or in other ways with the approval of the local tax authorities.

Article 95 Irrespective of making profits or losses in a tax year, an enterprise shall file tax returns and final account statements to the local tax authorities within the prescribed time limit in accordance with the provisions of Article 16 of the Tax Law. It shall attach an audit report by a certified accountant to the final account statements it submits to the local tax authorities, unless it is otherwise provided by state regulations.

In case of any difficulty to file tax returns and final account statements owing to special reasons, an enterprise shall apply for a postponement thereof to the local tax authorities for approval within the prescribed time limit.

Article 96 A branch or business organization of an enterprise in sending final account statements to the head office or the responsible business organization for filing returns in a consolidated way shall also do so to the local tax authorities at the same time.

Article 97 In the event of a merger, division or termination, the relevant enterprise shall clear its tax payments with the local tax authorities by making up for the deficit or taking back the surplus within 60 days following the termination of its production or business operation.

Article 98 In case an enterprise has paid income tax on income in a foreign currency by converting it into RMB and has found it has overpaid the tax, when it applies for refunding of the excess payment, the excess payment in RMB may be refunded by converting it into the original foreign currency at the original exchange rate and then converting it back into RMB for refunding at the exchange rate of the day of refunding. In case of a shortage of payment, the deficit shall be paid by converting the original currency into RMB at the exchange rate of the day the unpaid portion of the income tax to be paid.

Article 99 An enterprise with foreign investment in time of liquidation shall file tax returns to the local tax authorities before making cancellation of registration with the authorities for industry and commerce.

Article 100 Unless it is otherwise provided by state regulations, an enterprise shall set up accounting vouchers and account books in China that can accurately reflect its taxable income for income tax.

The accounting vouchers, account books and statements of an enterprise should be entered in the Chinese language or in both Chinese and a foreign language.

For an enterprise that keeps accounts by computers, its accounting records saved in and downloaded from the computer shall be deemed as account books; and if the records have not been printed, the magnetic discs and tapes should be kept intact.

The accounting vouchers, account books and statements shall be kept for no less than 15 years.

Article 101 The invoices and receipts of enterprises shall not be printed or used without the official approval of the local tax authorities.

The rules for the control over the printing and use of enterprise invoices and receipts shall be formulated by the State Administration of Taxation.

Article 102 The forms of enterprise income tax returns and tax payment receipts shall be printed in a uniform way by the State Administration of Taxation.

Article 103 In case the last day of the time limit prescribed for enterprises to pay tax and file tax returns happens to be Sunday or an official holiday, the next day thereto shall be the last day of the prescribed time limit.

Article 104 The tax withholder stipulated by the provisions of paragraph two of Article 19 of the Tax Law and Article 67 of these Rules may receive a commission from the tax authorities at a certain percentage of the tax withheld, the detailed rules thereof shall be formulated by the State Administration of Taxation.

Article 105 The local tax authorities may impose a fine up to 5,000 yuan in the light of the degree of gravity of the case on a taxpayer or tax withholder for failure to accept inspection by the tax authorities or to pay the fine for overdue tax payment within the prescribed time limit.

Article 106 The tax authorities may impose a fine up to 5,000 yuan in the light of the degree of gravity of the case on a violation of Article 87, paragraph two of Article 90, and Articles 95, 96, 97, 99, 100, and 101 of these Rules.

Article 107 "Tax evasion" mentioned in Article 25 of the Tax Law refers to illegal activities conducted deliberately by a taxpayer in violation of the provisions of the Tax Law, such as tampering with, forging or destroying bills, accounting vouchers or account books, fabricating or overstating costs and expenses, concealing or understating taxable amount or amount of income, dodging tax payment or getting back tax payments by cheating.

Article 108 The tax authorities shall issue letters of announcement of decisions on punishments to be imposed on taxpayers and tax withholders in accordance with the provisions of the Tax Law and these Rules.

Article 109 Any organization or individual has the right to inform on any violation and violator of the Tax Law. The tax authorities shall protect the confidentiality of the informer and give proper awards in accordance with relevant regulations.

Chapter 9    Supplementary Rules

Article 110 In case an enterprise with foreign investment has registered with the authorities for industry and commerce before the implementation of the Tax Law and  when paying income tax in accordance with the provisions of the Tax Law, finds its tax burden is heavier than before, it may pay income tax at the original rate for the officially approved operating term; if there is no operating term provided, it may pay income tax at the originally applicable tax rate in the five years following the implementation of the Tax Law. But if the annual tax burden is found to be heavier than the provisions of the Tax Law at a time as mentioned above , income tax shall be paid at the prevailing tax rate from the tax year thereof.

Article 111 Those enterprises with foreign investment that have registered with the authorities for industry and commerce and already been enjoying preferential treatment of exemption or reduction of enterprise income tax in accordance with the provisions of the law and administrative decrees shall be permitted to continue to do so up to the expiration of approved term of tax preference.

Those enterprises with foreign investment that have registered with the authorities for industry and commerce but have not made profit or have not been making profits for five years may be given a tax preferential term for exemption or reduction of enterprise income tax in accordance with the provisions of paragraph one of Article 8 of the Tax Law.

Article 112 Enterprises with foreign investment having registered with the authorities for industry and commerce after the promulgation of the Tax Law but before the implementation thereof may act with reference to the provisions of Article 110 and Article 111 of these Rules.

Article 113 The power of interpretation of these Rules rests with the Ministry of Finance and the State Administration of Taxation.

Article 114 These Rules shall go into effect as from the day the "Income Tax Law of the People's Republic of China on Enterprises with foreign investment and Foreign Enterprise" goes into effect. The "Detailed Rules for the Implementation of the Income Tax Law of the People's Republic of China concerning Chinese-Foreign Equity Joint Venture" and the "Detailed Rules for the Implementation of the Income Tax Law of the People's Republic of China concerning Foreign Enterprise" shall be abrogated therefrom.