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

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.

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