Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential Policies in Respect of Enterprise Income Tax

(No. 1 [2008] of the Ministry of Finance)

The finance departments (bureaus), offices of the State Administration of Taxation and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and cities under separate state planning, as well as the Finance Bureau of Xinjiang Production and Construction Corps,

In pursuance of Article 36 of the Enterprise Income Tax Law of the People’s Republic of China and upon approval of the State Council, you are hereby notified of the issues relating to the preferential policies on enterprise income tax:

I. Preferential policies on encouraging the development of software industry and integrated circuit industry

(1) For the tax refund to a software enterprise enjoying the value added tax policy of immediate refund upon payment, if it is used in the research and development of software products and in the expansion of reproduction, it should not be regarded as taxable income for enterprise income tax, and not be subject to the enterprise income tax.

(2) A software production enterprise newly established within China may, upon determination, be exempted from enterprise income tax for its first two profit-making years and shall be subject to the income tax at the reduced half rate from the third year to the fifth year.

(3) If a key software production enterprise included in the national plan does not enjoy the preferential treatment of tax exemption in the current year, it shall be subject to the enterprise income tax at the reduced rate of 10%.

(4) The actual amount of the employee training expenses of a software production enterprise may be deducted in the calculation of the amount of taxable income.

(5) For the software purchased by an enterprise or public institution, if it meets the conditions for being recognized as a fixed asset or intangible asset, it may be calculated as fixed asset or intangible asset and upon approval of the competent tax organ, its depreciation or amortization time period may be shortened properly, with a minimum of two years.

(6) An integrated circuit design enterprise shall be regarded as a software enterprise, which may enjoy the relevant enterprise income tax policies enjoyed by the aforesaid software enterprises.

(7) The depreciation time period for the productive equipment of an integrated circuit production enterprise may be shortened properly, with a minimum of 3 years.

(8) An integrated circuit production enterprise, which has an investment of more than 8 billion yuan or which produces integrated circuits with lines of less than 0.25 um in width, may pay the enterprise income tax at the reduced rate of 15%. If its business period lasts 15 years or longer, it may be exempted from enterprise income tax for the first five profit-making years and shall pay the enterprise income tax at the reduced half rate from the sixth year to the tenth year.

(9) An enterprise, which produces integrated circuit products with lines of 0.8 um (or smaller) may, upon determination, be exempted from the enterprise income tax for the first two years and shall pay the enterprise income tax at the reduced half rate from the third year to the fifth year.

An enterprise, which has enjoyed the enterprise income tax policy of “two-year exemption and three-year reduction by half?from the first profit-making year, shall not repeatedly execute the provisions of this Article.

(10) From January 1, 2008 to the end of 2010, if an investor of an integrated circuit production enterprise or packaging enterprise directly invests its post-enterprise-income-tax profit to increase its own registered capital or as capital to establish another integrated circuit production enterprise or packaging enterprise with a businessperiod of five years or longer, 40% of the enterprise income tax it has paid for the reinvestment portion shall be refunded. If it withdraws the said investment within 5 years, it shall be demanded to pay the refunded enterprise income tax payment.

From January 1, 2008 to the end of 2010, if a domestic or foreign economic organization, as an investor, invests its post-enterprise-income-tax profit from within China as capital to establish an integrated circuit production enterprise or packaging enterprise or software production enterprise whose business period lasts five years or longer in West Regions, 80% of the enterprise income tax it has paid for the reinvestment portion shall be refunded. If it withdraws the said investment within 5 years, it shall be required to pay the refunded amount of enterprise income tax.

II. Preferential policies on encouraging the development of securities investment funds

(1) The incomes, which a securities investment fund obtains from the securities market, including incomes from the trading price differences of stocks and bonds, dividends and bonuses of equities, interest of bonds, etc., are not subject to enterprise income tax for the time being.

(2) The incomes, which an investor obtains from the distribution of securities investment funds, are not subject to enterprise income tax for the time being.

(3) The incomes, which a securities investment fund manager obtains from the trading price differences of stocks and bonds by operating the fund, are not subject toenterprise income tax for the time being.

III. Preferential policies on other relevant industries and enterprises

In order to ensure the continuity of the tax preferential policies on some industries and enterprises, all 6 categories of specified-period enterprise income tax preferential policies in respect of employment, re-employment, the Olympic Games and World Expo, pro bono, enterprise reform such as changing debts to shares, appraising fixed assets and circulating funds restructuring, ownership change and ownership transformation, agriculture and national reserves, and other separate preferential policies (see Annex) shall, as of January 1, 2008, continue to be implemented until the expiration date under the measures and time as prescribed in the original preferential policies.

IV. Preferential policies on profits that foreign investors obtain from foreign-funded enterprises

The accumulative undistributed profits formed by a foreign-funded enterprise prior to January 1, 2008, which are distributed in 2008 to foreign investors, are exempt from enterprise income tax. A foreign-funded enterprise’s profits newly increased as of 2008, which are distributed to foreign investors, shall be subject to enterprise income tax in accordance with the law.

V. Except the Enterprise Income Tax of the People’s Republic of China, Regulation on the Implementation of Enterprise Income Tax of the People’s Republic of China, Notice of the State Council on the Implementation of Preferential Policies of the State Council on Transition of Enterprise Income Tax (No. 39 [2007] of the State Council) and Notice of the State Council on Transitional Tax Preferential Treatments to High-tech Enterprises Newly Established in Special Economic Zones and Shanghai Pudong New Area (No. 40 [2007] of the State Council), all other enterprise income tax preferential policies implemented prior to January 1, 2008 shall be repealed. No place or department may formulate enterprise income tax preferential policies by overstepping its power.