Income Tax Law of the People's Republic of China on Enterprises with Foreign Investment and Foreign Enterprises

Article 1 Enterprises with foreign investment who earn income from production, business operations and other sources within the borders of the People's Republic of China , shall pay Income Tax according to the provisions of this Law.

Foreign enterprises who earn income from production, business operations and other sources within the prodders of the People's Republic of China , shall pay Income Tax according to the provisions of this Law.

Article 2 ‘Enterprises with foreign investment' in this Law, refers to Chinese-foreign equity joint-ventures, Chinese-foreign contractual joint-ventures and wholly foreign-funded enterprises established within the borders of the People's Republic of China .

‘ Foreign enterprises' in this Law, refers to foreign companies, enterprises and other economic organizations which have established organizations or sites within the borders of China and engage in production or business, and those which, though not having established organizations or sites in China, have income from sources within the borders of China.

Article 3 Any enterprise with foreign investment which establishes its head office in China shall pay Income Tax on its income derived from sources inside and outside China . Any foreign enterprise shall pay Income Tax on its income derived from sources within China .

Article 4 For enterprises with foreign investment and foreign enterprises with establishments and sites in China , the amount of taxable income on the total income each year from those establishments and sites, shall be the amount remaining from gross income for that year after costs, expenses and losses have been deducted.

Article 5 The enterprise Income Tax of enterprises with foreign investment and the Income Tax which shall be paid by foreign enterprises on the income of their organizations or sites in China for production or business purposes, shall be calculated on taxable income at a rate of 30%; local Income Tax shall be calculated on taxable income at a rate of 3%.

Article 6 The State shall, in accordance with its industrial policies, guide the orientation of foreign investment and encourage the establishment of enterprises with foreign investment which adopt advanced technology and equipment and export all or the greater part of their production.

Article 7 The Income Tax on enterprises with foreign investment established in special economic zones, foreign enterprises which have establishments or sites in special economic zones engaged in production or business operations, and enterprises with foreign investment of a production nature in economic and technological development zones shall be levied at the reduced rate of 15%.

The Income Tax on enterprises whit foreign investment of a production nature established in coastal economic open zones, or in the old urban districts of cities where the special economic zones or the economic and technological development zones are located, shall be levied at the reduced rate of 24%.

The Income Tax on enterprises with foreign investment in coastal economic open zones, old urban districts of cities where the special economic zones or the economic zones or the economic and technological development zones are located, or other regions defined by State Council within the scope of energy, communications, harbour , wharf or other projects encouraged by the State, may be levied at the reduced rate of 15%. The specific rules shall be formulated by State Council .

Article 8 Any enterprise with foreign investment of a production nature scheduled to operate of a period of not less than 10 years shall, from the year in which it begins to make profits, be exempted from Income Tax in the first and second years and slowed a 50%reduction in the third to fifth years. However, the exemption from or reduction of Income Tax for enterprises with foreign investment engaged in the exploitation of resources such as petroleum, natural gas, rare metals and precious metals shall be regulated separately by State Council. Enterprises with foreign investment which have operated for a period of less than 10 years shall repay the amount of Income Tax already exempted or reduced.

The relevant regulations promulgated by State Council before the entry into force of this Law, which provide preferential treatment in the form of exemption from or reduction of Income Tax for enterprises engaged in energy, communications, harbour, wharf and other major projects of a production nature, for a period longer than that specified in the preceding paragraph, or which provide preferential treatment in the form of exemption from or reduction of Income Tax for enterprises engaged in major projects of a non-production nature, shall remain applicable after this Law enters into force.

Any enterprise with foreign investment which is engaged in agriculture, forestry or animal husbandry and any other enterprise with foreign investment which is established in remote underdeveloped areas may, upon approval, by the responsible department for tax affairs under State Council, of an application filed by the enterprise, be allowed a 15% to 30% reduction of the amount of Income Tax payable for a period of 10 years following the expiration of the period for tax exemption or reduction provided for in the preceding two paragraphs.

After this Law enters into force, any modification to the provisions of the preceding three paragraphs of this Article on the exemption from or reduction of Income Tax on enterprises shall be submitted by State Council to the Standing Committee of the National People's congress for a decision.

Article 9 For any enterprise with foreign investment which operates in an industry or undertakes a project encouraged by the State, the exemption from or reduction of local Income Tax shall, in accordance with the actual situation, be at the discretion of the People's government of the relevant province, autonomous region or municipality under the Central Government.

Article 10 Any foreign investor of an enterprise with foreign investment which reinvests its share of profit from the enterprise directly into that enterprise by increasing its registered capital, or which uses the profit as capital investment to establish other enterprises with foreign investment to operate for a period of not less than 5 years shall, upon approval by the tax authorities of an application filed by the investor, be refunded 40% of the Income Tax already paid on the reinvested amount. Where regulations of State Council provide otherwise in respect of preferential treatment, such regulations shall apply; if the investor withdraws his reinvestment before the expiration of a period of 5 years, he shall repay the refunded tax.

Article 11 The losses incurred in a tax year by an enterprise with foreign investment or by the organizations or sites established by a foreign enterprise in China for production or business operations, may be offset against income in the following tax year. Where the income of the following year is not sufficient to offset those losses, the balance may be offset against income of subsequent years, over a period not exceeding 5 years.

Article 12 enterprises with foreign investment may, when filing a consolidated Income Tax return, deduct from the amount of tax payable the foreign Income Tax already paid abroad in respect of income derived from sources outside China . The amount deducted, however, may not exceed the amount of Income Tax otherwise payable under this Law with respect to income derived from sources outside China .

Article 13 In business transactions between an enterprise with foreign investment or the establishments or sites set up in China by a foreign enterprise for production or business operations, and its associated enterprise, the payment of receipt of charges or fees shall be made in business transactions between independent enterprises. Where the payment or receipt of charges or fees is not made in the same way as business transactions between independent enterprises and results in a reduction of taxable income, the tax authorities have the right to make appropriate adjustments.

Article 14 Where an enterprise with foreign investment or a foreign enterprise with an establishment or site in China for production or business operations, moves to a new site, merges with another enterprise, breaks up, winds up or makes a change in any of the main entries of its registration, it shall present the relevant documentation to, and go through registration procedures of change or cancellation of its registration with, the local tax authorities, after the relevant event is registered or a change or cancellation in registration has been made with the Industrial and Commercial Administration Department.

Article 15 Enterprise Income Tax and local Income Tax shall be calculated on an annual basis and paid in advance in quarterly installments. These payments shall be made within 15 days of the end of each quarter and the final settlement shall be made within 5 months of the end of the tax year. Any excess payment will be refunded and any deficiency shall be made up.

Article 16 Any enterprise with foreign investment of a foreign enterprise with an establishment of site in China for production or business operations shall file its quarterly provisional Income Tax returns with the local tax authorities within the period for each advance payment of tax, and shall file an annual Income Tax return together with the final accounting statements within 4 months of the end of the tax year.

Article 17 Any enterprise with foreign investment and any foreign enterprise with establishments or sites in China for production or business operations, shall report its financial and accounting systems to the local tax authorities for reference purposes. All accounting records must be complete and accurate, with legitimate vouchers as the basis for entries.

Where the financial and accounting procedures adopted by an enterprise with foreign investment of organizations or sites established by a foreign enterprise for production or business operations, conflicts with relevant tax provisions of State Council, the tax payment due shall be calculated according to the relevant provisions of State Council.

Article 18 Where an enterprise with foreign investment goes into liquidation, and where the net balance of its assets or the balance or its property, after deduction of its undistributed profits, various funds and liquidation expenses, exceeds the enterprise's paid in capital, the excess shall be considered liquidation income on which Income Tax shall be paid according to provisions of this Law.