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Detailed Rules and Regulations for the Implementation of theForeign Enterprise Income Tax Law of the People's Republic of China

Detailed Rules and Regulations for the Implementation of theForeign Enterprise Income Tax Law of the People's Republic of China (Approved by the State Council on February 17, 1982; Promulgatedby the Ministry of Finance on February 21, 1982) Whole Doc.

Article 1 The Detailed Rules and Regulations are formulated in accordance with the provisions of Article 18 of the Income Tax Law of the People's Republic of China Concerning Foreign Enterprises (hereinafter called Tax Law).

Article 2 "Establishments" mentioned in Article 1 of the Tax Law refer to organizations, places or business agents established in Chinese territory by foreign enterprises and engaged in production and business operations.

The organizations and places mentioned in the preceding paragraph mainly include management offices, branches, representative offices, factories and places where natural resources are exploited and where contracted projects of building, installations, assembly and exploration are operated.

Article 3 Foreign enterprises and Chinese enterprises engaged in any cooperative production or joint business operation should, unless separate provisions are stipulated, each pay their income taxes respectively.

Article 4 "Income derived from production and business" mentioned in Article 1 of the Tax Law refers to income from the production and business operations by foreign enterprises in industry, mining, communications, transportation, agriculture, forestry, animal husbandry, fisheries, poultry farming, commerce, service and other trades.

Income from other sources as mentioned in Article 1 of the Tax Law covers dividends, interest, income from lease or sale of property, income from transfer of patents, technical know-how, trademark interests, or copyright and other non-business income.

Article 5 The taxable income for assessing the local income tax as mentioned in Article 4 of the Tax Law is the same as the taxable income mentioned in Article 3 of the Tax Law, i.e. it is calculated according to the formulas given in Article 9 of the Detailed Rules and Regulations.

Article 6 Enterprises engaged in small-scaled production or business and enterprises of low profits, as mentioned in Paragraph 2 of Article 4 of the Tax Law, refer to foreign enterprises with an annual income of less than 1,000,000 CNY yuan.

Article 7 Foreign enterprises scheduled to operate in low-profit occupations, as mentioned in Article 5 of the Tax Law, include those low- profit enterprises engaged in exploiting coal mineral resources in deep wells.

Article 8 The tax year for foreign enterprises starts from January 1 and ends on December 31 on the Gregorian Calendar.

Where a foreign enterprise finds it difficult to compute its income of the tax year as stipulated in the preceding paragraph, it may apply to the local tax authorities for approval to use its own 12-month fiscal year for tax computation and payment.

Article 9 The taxable income shall be calculated in accordance with the following formulas: a. Industry: 1. Production costs of the year = Direct materials used up in production of the year + direct wages + manufacturing expenses 2. Cost of the product of the year = Production costs of the year + inventory of products semi-finished and in process of production at the beginning of the year - inventory of products semi-finished and in process of production at the end of the year 3. Cost of the sales of the product = Cost of the product of the year + inventory of the product at the beginning of the year - inventory of the product at the end of the year 4. Net sales of the product = Gross sales of the product - (sales return + sales allowance) 5. Profit from sales of the product = Net sales of the product - tax on the sales of the product - cost of the sales of the product - (selling expenses + overhead expenses) 6. Taxable Income = Profit from sales of the product + profit from other operations + non-business income - non-business expenditure b. Commerce: 1. Net sales = Gross sales - (sales return + sales allowance) 2. Cost of sales = Inventory of merchandise at the beginning of the year + [Purchases of the year - (purchase returned + purchase discount) + purchase expenses] - inventory of merchandise at the end of the year 3. Profit of sales = Net sales - cost of sales - tax on sales (selling expenses + overhead expenses) 4. Taxable income = Profit of sales + profit from other operations + non-business income - non-business expenditure c. Service trades: 1. Net business income = Gross business income - (tax on business + operating expenses + overhead expenses) 2. Taxable income = Net business income + non-business income - non-business expenditure d. Other trades: For other trades, refer to the above mentioned formulas for calculation.

Article 10 The following items shall not be counted as cost, expenses or loss in calculating the taxable income: 1. Expenditure on the purchase or construction of machinery, equipment, building facilities and other fixed assets; 2. Expenditure on the purchase of intangible assets; 3. Interest on equity capital; 4. Income tax payment and local income tax payment; 5. Penalty for illegal operations and losses in the form of confiscated property; 6. Overdue tax payment and tax penalty; 7. Losses from windstorms, floods and fire covered by insurance indemnity; 8. Donations and contributions other than those for public welfare and relief purposes in China; 9. Royalties paid to the head offices; 10. Other expenses that are not relevant to production and business operation.

Article 11 Reasonable overhead expenses that are relevant to production and operation paid by a foreign enterprise to its head office and actual expenses paid to its head office for services directly provided may be listed as expenses on the condition that the said expenses are backed up by certificates and vouchers from the head office, together with a financial report signed by a chartered public accountant, and examined and approved by the local tax authorities.

Where a foreign enterprise is engaged in co-operative production and joint business operation with a Chinese enterprise and an agreement has been reached and included in the signed contract for the sharing of overhead expenses of the head office, such payments may be listed as expenses in accordance with the confirmed method in the contract after being examined and ratified by the local tax authorities.

Article 12 Foreign enterprises are permitted to list as expenses the interest payments on loans at reasonable rates on the condition that the loans and interest payments are backed up by certifying documents and, after being examined by the local tax authorities, are considered as being of normal terms.

Article 13 Reasonable entertainment expenses paid by foreign enterprises that are relevant to production and business income more than 5,000,000 CNY yuan, the vouchers and documents, and then may be listed as expenses within the following limits respectively: 1. For enterprises with annual net sales less than 15,000,000 CNY yuan, the reasonable entertainment expenses shall not be in excess of 0.3%, or three thousandths, of the net sales; for those with annual net sales more than 15,000,000 CNY yuan, the expenses for that portion above the limit shall not exceed 0.1%, or one thousandth, of the said portion.

2. For enterprises with annual total business income less than 5,000,000 CNY yuan, the reasonable entertainment expenses shall not be in excess of 1%, or ten thousandths, of the total business income, for those with annual total business income more than 5,000,000 CNY yuan, the expenses for that portion above the limit shall not exceed 3 , or three thousandths, of the said portion.

Article 14 Depreciation of fixed assets of foreign enterprises in use shall be calculated on an annual basis. The fixed assets cover houses, buildings, machinery and other mechanical apparatuses, means of transport and other equipment for the purpose of production or business operations with useful life of more than one year. But articles with a per-unit value of less than 500 CNY yuan and a shorter useful life that are not main equipment for production or operation, can be itemized as expenses according to the actual quantity in use.

Article 15 Fixed assets shall be assessed according to the original value. For fixed assets counted as an investment by foreign enterprises and Chinese enterprises engaged in co-operative production and business operation, the original value shall be the price of the assets agreed upon by all participants at the time of co-operation.

For purchased fixed assets, the original value shall be the purchase price plus freight, installation expenses and other related expenses incurred before they are put into use.

For self-made and self-built fixed assets, the original value shall be the actual expenditures incurred in the course of manufacture of construction.

For self-owned and used fixed assets that are shipped in from abroad, the documents certifying their original value and the number of years in use, together with reference data on their market price, shall be presented and their actual value shall be reassessed according to the quality. For assets without certifying documents, the value shall be assessed by the enterprise and submitted to the local tax authorities for examination and approval in accordance with the quality of the assets.

Article 16 Depreciation of fixed assets shall be calculated starting from the month when the assets are put into use. Depreciation shall no longer be calculated starting from the month following that in which the fixed assets cease to be used.

For enterprises engaged in exploiting off-shore petroleum resources, all investments at the stage of exploration shall be counted as capital expenditure with the oil (gas) field as a unit, and depreciation shall be calculated starting from the month when the oil (gas) field begins to go into production for commercial purposes.

Article 17 In calculating depreciation on fixed assets, the residual value shall be assessed first and deducted from the original value, the principle being to make the residual value about 10 per cent of the original value; those assets to retain a lower or no residual value shall be submitted for approval to the local tax authorities. If the depreciation is calculated in accordance with a composite life method, residual value may not be retained.

Depreciation on fixed assets shall generally be computed in average under the straight-line method.

Article 18 The depreciation period for various kinds of fixed assets is set as follows: 1. The minimum depreciation period for houses and buildings is 20 years; 2. The minimum depreciation period for trains, ships, machines and equipment and other apparatuses for the purpose of production is 10 years; 3. The minimum depreciation period for electronic equipment, means of transport other than trains and ships, as well as appliances, tools and furniture relevant to production and operation is 5 years.

For cases where the depreciation on fixed assets of foreign enterprises, owing to special reasons, needs to be accelerated or to be computed under modified methods, applications may be submitted to the local tax authorities for examination and then relayed level by level to the Ministry of Finance for approval.

Depreciation of various kinds of fixed assets resulting from the investments of enterprises engaged in exploiting offshore petroleum resources, during and after the stage of exploration, may be calculated in accordance with a composite life method. The depreciation period shall not be less than six years.

For enterprises engaged in exploiting coal mineral resources, the provisions of the preceding paragraph may also be applied.

Article 19 Expenditures arising from enlargement, replacement, refitting and technical innovation and resulting in the increase of value of fixed assets in use, should be regarded as capital expenditure, and shall not be listed as expenses.

For the fixed assets remaining in use after the full depreciation period, no depreciation shall be allowed.

Article 20 The balance of the proceeds from the alienation or disposal of fixed assets at the current price, after the net unamortized value or the residual value of the assets is deducted, shall be entered into the profit and loss account for the current year.

Article 21 For intangible assets such as patents, technical know-how, trademark interests, copyright, right to use sites and other franchises that are alienated to foreign enterprises, the payment made by the enterprises at reasonable prices shall be amortized from the month they come into use.

Intangible assets mentioned in the preceding paragraph and counted as the investment by foreign and Chinese enterprises in co-operative production and business operation, may be amortized on the basis of the assessed value as provided in the agreements or contracts from the month they come into use.

The intangible assets mentioned in the preceding two paragraphs that are alienated to or counted as investment by the foreign enterprises with the provision of time limit for use, shall be assessed and amortized according to the time limit; those without such provision shall be assessed and amortized in a period not less than 10 years.

Article 22 Expenses arising during the period of preparation for a foreign enterprise shall be amortized after it goes into production or business in a period not less than five years.

Reasonable exploration expenses incurred by foreign enterprises engaged in exploiting off-shore petroleum resources may be amortized from the revenues derived from the oil (or gas) field that has gone into production for commercial purposes, but the time limit of such amortization shall not be less than one year.

Article 23 Inventory of merchandise, raw materials, products in process of production, semi-finished products, finished products and by- products shall be valued according to the cost price. For the method of computation, the enterprises may choose one out of the following: first-in first-out, shifting average and weighted average. In case a change in the method of computation is necessary, it shall be submitted to the local tax authorities for approval.

Article 24 If a foreign enterprise cannot provide accurate evidence of costs and expenses and cannot correctly work out its taxable income, the local tax authorities shall appraise and determine its profit rate with reference to the profit level of other enterprises of the same or similar trade, and then calculate its taxable income on the basis of its net sales or its gross business income.

The taxable income of a foreign enterprise engaged in contracted projects for exploring and exploiting off-shore petroleum resources shall be calculated according to the profit rate appraised and determined in relation to its gross income of the contract.

Article 25 For foreign air and ocean shipping enterprises engaged in international transport business, the taxable income shall be 5 per cent of the gross income from transport services for passengers and cargoes within the Chinese territory.

Article 26 Foreign enterprises engaged in cooperative production with Chinese enterprises on the basis of proration of products are considered as receiving income when such products are distributed, and the amount of their income shall be computed according to the prices at which the products are sold to the third party or with reference to the prevailing market prices of the products.

Foreign enterprises engaged in cooperative exploitation of off-shore petroleum resources are considered as receiving income when they receive their share of crude oil, and the amount of their income shall be computed according to the prices which are regularly adjusted with reference to the international market price of crude oil of equal quality.

Article 27 The income of dividends interest, rentals, royalties and other sources in China as mentioned in Article 11 of the Tax Law is explained as follows: "Dividends" refer to the dividends or the share of profits obtained from enterprises in China.

"Interest" refers to interest earned from deposits and loans, interest on various bonds purchased and interest earned from payments made for others and from deferred payments in China.

"Rentals" refer to rentals on properties rented to persons in China.

"Royalties" refer to income obtained from the provision of various patents, technical know-how, copyright and trademark interests for use in China.

"Incomes from other sources" refer to incomes specified to be taxable by the Ministry of Finance other than those mentioned above.

Article 28 The income of dividends, interest, rentals, royalties and other sources in China as mentioned in the preceding article, with the exception of those for which separate provisions are stipulated, shall be assessed on its full amount, and the tax to be paid shall be withheld by the paying unit from each payment.

Article 29 "International finance organizations" as mentioned in Article 11 of the Tax Law refer to the International Monetary Fund, the International Bank for Reconstruction and Development (World Bank), the International Development Association, the International Fund for Agricultural Development and other finance organizations of the UN The "preferential interest rate" mentioned therein refers to a rate that is at least 10 per cent less than the general prevailing interest rate in the international financial market.

Article 30 "China's state banks" mentioned in Article 11 of the Tax Law include the People's Bank of China, the Bank of China, the Agricultural Bank of China, the People's Construction Bank of China, the Investment Bank of China, and China International Trust and Investment Corporation which has been authorized by the State Council to be engaged in business of foreign exchange deposits, loans and credits with foreign clients.

Article 31 "Income derived from interest on deposits", as mentioned in Paragraph 4 of Article 11 of the Tax Law shall not include the interest on deposits of foreign banks in China's state banks at a rate of interest lower than that prevailing in the international financial market. Income from interest on deposits at a rate lower than that prevailing in the international financial market shall be exempted from income tax.

Article 32 Payments of income, as mentioned in Article 11 of the Tax Law, include payments in cash, payments by remittance, payments through transfer accounts, as well as payments made in marketable securities or in kind which are rendered into equivalent amounts of money.

Article 33 Income tax to be paid provisionally in quarterly installments as stipulated in Article 7 of the Tax Law may be paid according to the actual quarterly profit, or it may be paid on one-fourth of the taxable income calculated on the basis of the planned profit for the current year or the actual income in the preceding year.

Article 34 For foreign enterprises which have operated for less than a year, the income tax shall be assessed on the actual income earned in the operation period at the applicable tax rate prescribed by the Tax Law.

Article 35 When foreign enterprises go into operation or close down, such enterprises shall, within 30 days after starting operation or before closing down, go to the local tax authorities for the relevant tax registration according to Article 10 of the Tax Law.

Article 36 Foreign enterprises shall file their income tax returns and final accounting statements with the local tax authorities within the prescribed period irrespective of making profit or loss in the tax year and, unless otherwise stipulated, shall send in at the same time the audit certificate of the chartered public accountants registered in the People's Republic of China.

Article 37 In case of failure to submit the tax returns within the prescribed time limit owing to special circumstances, the foreign enterprise should submit application to the local tax authorities within the said time limit, and the time limit for filing tax returns and accordingly that for final settlement may be appropriately extended upon the latter's approval.

The final day of the time limit for tax payment and that for filing tax returns may be extended if it falls upon an official holiday.

Article 38 The revenue and expenditure of foreign enterprises shall in principle be accounted on accrual basis. All accounting records shall be accurate and complete, and shall have lawful vouchers as the basis for entries.

Article 39 Accounting vouchers, books, statements and reports adopted by foreign enterprises shall be made in the Chinese language or in both Chinese and foreign languages.

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

Article 40 Forms of sales invoices and business receipts shall be submitted for approval to the local tax authorities before they are used.

Article 41 Officials sent by tax authorities when investigating the financial, accounting and tax affairs of a foreign enterprise, shall produce identification cards and maintain confidentiality.

Article 42 As foreign enterprises with income in foreign currencies pay income tax in quarterly installments, the income shall be assessed according to the exchange rate quoted by the State General Administration of Exchange Control on the day when the tax payment certificates are made out and shall be taxed in Renminbi; when the final settlement is made after the end of the tax year, excess payments of the tax shall be refunded or deficiencies made up in Renminbi according to the exchange rate quoted by the State General Administration of Exchange Control on the last day of the tax year.

Article 43 Tax authorities may impose a penalty of 5,000 CNY yuan or less on a foreign enterprise which has violated the provisions of Article 8, Paragraph 1 of Article 9, Article 10 and Article 12 of the Tax Law according to the seriousness of the case.

Article 44 Tax authorities may impose a penalty of 5,000 CNY yuan or less on a foreign enterprise which has violated the provisions of Paragraph 2 of Article 39 and Article 40 of the Detailed Rules and Regulations according to the seriousness of the case.

Article 45 "Evade or refuse to pay income tax", as mentioned in Paragraph 3 of Article 15 of the Tax Law, shall be interpreted as follows: "Evade to pay income tax" refers to the taxpayer's deliberate violation of the regulations of the Tax Law by forging, altering or destroying account books, papers or vouchers for accounting entries; falsifying and overstating costs and expenses; concealing or understating the amount of taxable income or gross income; avoiding taxes or defrauding to take back the paid taxes; or by other illegal activities.

"Refuse to pay income tax" refers to the taxpayer's defiance of the regulations of the Tax Law by refusing to file tax returns and present certificates, papers and vouchers for tax purposes; refusing the investigation of financial, accounting and tax affairs conducted by tax authorities, refusing to pay taxes and penalties according to the Tax Law; or by other illegal activities.

Article 46 Tax authorities shall serve notice on relevant parties for cases involving penalty in accordance with the relevant provisions of the Tax Law and the Detailed Rules and Regulations.

Article 47 When a foreign enterprise applies for reconsideration in accordance with the provisions of Article 16 of the Tax Law, the tax authorities concerned are required to make decisions within three months after the application is received.

Article 48 Income tax returns and tax payment certificates for foreign enterprises are to be printed by the General Taxation Bureau of the Ministry of Finance of the People's Republic of China.

Article 49 The right of interpreting the provisions of the Detailed Rules and Regulations resides in the Ministry of Finance of the People's Republic of China.

Article 50 The Detailed Rules and Regulations come into force on the same date as the Income Tax Law of the People's Republic of China Concerning Foreign Enterprises.


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