Presently, foreign invested enterprises in China will be able to enjoy the following preferential treatments for taxation:

A. Income Tax Preferential Policies for Foreign Invested enterprises

1. Reduction of tax rate

a. The income tax of the following foreign invested enterprises and projects shall be levied to the rate of 15%:

(1). Foreign-invested enterprises located in special economic zones, foreign enterprises who establish institutes, sites in special economic zones for production and operation, and manufacturing foreign invested enterprises located in economic and technological development zones.

(2). Starting from January 1, 1999, manufacturing foreign invested enterprises investing in infrastructure projects of energy, transportation, ports and docks, with subject to approval by the State General Administration of Taxation, without restriction of locations.

(3). Foreign-invested enterprises located in the old sections of the cities which are called coastal open areas and economic and technological development zones, and operating projects of the category of technology-intensive and knowledge-intensive projects, or projects with over US$30 million of foreign investment and the cycle of investment return in long, or projects of energy, transportation and harbor construction.

(4). Such financial institutions as foreign funded banks and Sino-foreign equity banks set up in areas approved by the State Council, with the minimum requirement being that foreign investors' financial inputs or the operating funds injected by the head office of a bank to the branch exceeds USS10 million and the term of operation exceeds 10 years.

b. The income tax of the following foreign invested enterprises and projects shall be levied to the rate of 24%:

(1). Manufacturing foreign invested enterprises located in coastal economic development zones and the old sections of the cities with economic and technological development zones.

(2). Manufacturing foreign invested enterprises located in opening riverside and border cities, capital cities of provinces and autonomous regions.

(3). Foreign invested enterprises established within the holiday resorts approved by the State Council.

2. Tax reduction and exemption periods

a. Manufacturing foreign invested enterprises, with an operation term of 10 years and over, shall be exempted from income tax for the first 2 profiting years, and enjoy a deduction of 50% income tax in the 3rd to 5th profiting year.

b. Foreign invested enterprises and projects engaged in construction of ports and docks, with an operation term of 15 years and over, shall be exempted from income tax for the first 5 profiting years, and enjoy a deduction of 50% income tax in the 6th to 10th profiting year.

c. Foreign-invested enterprises engaged in agriculture, forestry and animal husbandry and those located in underdeveloped areas, upon the expiry of the tax exemptions and deductions enjoyed by them in accordance with the stipulated provisions, on the application of such enterprises and with the approval of the administrative department of the State Council, their income tax may continue to be reduced by 15% to 30% in the following 10 years.

d. Foreign-invested enterprises engaged in the service sector established in special economic zones, should their foreign investment exceeds USS 5 million and their term of operation exceeds 10 years, shall enjoy an exemption of enterprise income tax for the first profiting year, and a deduction of 50% of enterprise income tax for the 2nd and 3rd profiting year.

e. Financial institutions such as foreign banks and Sino-foreign joint equity banks set up in areas approved by the State Council, should the financial inputs of foreign investors or the operating funds injected by the head office of a bank to the branch exceed USS 10 million and their term of operation exceeding 10 years, shall enjoy an exemption of enterprise income tax for the first profiting year, and a deduction of 50% of enterprise income tax for the 2nd and 3rd profiting year.

3. Favorable taxation policies for high and new technology enterprises

Foreign Invested enterprises deemed to be high-tech and new-tech enterprises within the areas determined to be high and new technology development zones by the State Council enjoy a rate of 15 % enterprise income tax; Such enterprises shall also enjoy an exemption of enterprise income tax for the first two profiting years, and a deduction of 50% enterprise income tax for the 3rd to 5th profiting year provided that their operation term exceeds 10 year.

4. Favorable taxation policies for export-oriented foreign invested enterprises

Export-oriented enterprises launched by foreign invested enterprises, upon the expiry of the enterprise income tax exemptions and reductions enjoyed by them in line with tax laws, should their annual export value account for over 70% of their output that year, they may have their enterprise income tax reduced by half. Should such reduction be under 10%, they shall pay enterprise income tax at the rate of 10%.

5. Favorable taxation policies for advanced technology enterprises

Advanced technology enterprises established by foreign-in-vested enterprises, should they still be advanced technology enterprises upon the expiry of the income tax exemption and reduction periods according to laws, may have their enterprise income tax reduced by half for another three years based upon the tax rates as stipulated in tax laws. Should such reduction be under 10%, they shall pay enterprise income tax at the rate of 10%.

6. Favorable taxation policies for software industry

a. Key software production enterprises within the national planning and distribution shall enjoy a reduced tax rate of 10%, provided that they have not enjoy an exemption in the same year.

b. The expenses for wages and training of the software production enterprises shall be deducted from the taxable income as per the actual amount.

c. The cost of enterprises' and undertaking units' purchase of software shall be accounted as fixed assets and intangible assets, provided that such cost meets the criteria of the fixed assets or becomes intangible assets. The fixed number of year for the depreciation or sale promotion of such assets shall be suitably shorted with a minimum of 2 years, subject to the approval of the State General Administration of Taxation for foreign invested enterprises with a total investment of over US$30 million, or the ratification of the administrative taxation institutions for foreign invested enterprises with a total investment of less than US$30 million.

7. Preferential taxation policies for integrate circuits industry

a. Integrate circuits designing enterprises are regarded as soil-ware production enterprises, hence enjoy the favorable policies for software industry.

b. The fixed number of year for the depreciation of the production equipment of the integrate circuits production enterprises shall be suitably shorted with a minimum of 3 years, subject to the approval of the State General Administration of Taxation for foreign invested enterprises with a total investment of over US$30 million, or the ratification of the administrative taxation institutions for foreign invested enterprises with a total investment of less than US$30 million.

c. Integrate circuits production enterprises with a total investment of over RMB 8 billion, or producing integrate circuits with a line width of less than 0.25?JAm, shall enjoy the following preferential treatments:

(1). To follow the favorable taxation policies encouraging foreign investors to invest in energy and transportation.

(2). When importing raw materials for their own production, or expendable, these enterprises shall enjoy the exemption of customs tariff and value added tax on import stage.

8. Refund of taxation for re-investment

Should the foreign partners to an foreign-invested enterprise directly re-invest the profit gained from the enterprise in that enterprise, expand the registered capital or use it to fund the setting up of other foreign-invested enterprises with an over-five-year term of operation, on the application of the investor and with the approval of taxation authorities, shall have 40% of the already paid income tax on the portion used for re-investment refunded.

Should the foreign investors use its profit derived from the foreign-invested enterprises to launch or expand a product-exporting or technologically-advanced enterprise in China, within I year from the first date of commencement of re-investment, they shall produce the verification (issue by the relevant authorities) of export-oriented enterprises or advanced technology enterprises, to apply to the taxation authorities, and the amount of enterprise income tax already paid on the portion of profit used for re-investment will be refunded.

9. Reduction and exemption of pre-raised income tax

Foreign invested enterprises providing know-how for scientific research, development of energy and transportation undertakings shall enjoy a reduced pre-raised income tax rate of 10% on franchising fees, or shall exempt from pre-raised income tax provided that the enterprises are technologically-advanced or they offer favorable conditions.

In 2000, the country reduced the rate of pm-raised income tax. The pre-raised income tax on the actual income of foreign enterprises is 10%, provided that the foreign enterprises have no institution or site established in China and their income originates from profit, interest, rent and franchising fees, or even though these enterprises have institutions or sites in China, but the above income has no connection with the institutions and sites in China.

10. Exemption of local income tax

It is stipulated by Guangdong Province Government that foreign invested enterprises shall be exempted from local income tax in the same period when they are enjoying exempt or reduction of enterprise income tax, or enjoying a reduced rate of 50% of income tax. All foreign invested enterprises established in mountainous areas are exempted from local income tax.

11. Cost of purchase of China-made equipment credited as exemption of income tax

For all foreign invested enterprises involved in the encouraged category of industries stipulated in the newly revised State Industrial Catalogue Guiding Foreign Investment (promulgated on March 11, 2002), 40% of the cost of their purchase of China-made equipment shall be credited as an exemption of the increase of enterprise income tax of the previous year of the year of purchasing, provided that such equipment is not under the list commodities not permitted to be exempted from import tariff for the industrial catalogue of foreign invested enterprises, and such China-made equipment shall be purchased in cash, un-used and made after July 1, 1999, not including equipment of investing parties regarded as registered capital. Within 2 months of the purchase of the equipment, the enterprises shall apply for such credited exemption to the local taxation administrative institutions, and then report to the provincial taxation bureau for approval.

12. Favorable policies for cost of technological development

If the annual increase of the costs for technological development of foreign-invested enterprises is over 10%, (including 10%), with the approval of the taxation authorities, the enterprises can be approved to deduct the amount 50% of its actual costs used for technological development from its total taxable income of the year.