1. Production-oriented Enterprises

Production-oriented EFIs whose operation period is more than 10 years since their first profit-making year, may be exempted from enterprise income taxes for two years, and the tax will be reduced by half for another three years.

EFIs that are specially engaged in the following business activities could be considered as production-oriented:

Engineering designs for construction/installation/assembling projects, and labor services for the projects, including consulting services, i.e. offering technical advices and opinions in engineering projects, technical innovations, improvement in production, operation and management, technology selection and updating the manufacturing equipment and products for better performance, efficiency, and quality; husbandry (including aquatic product), farming (including flower planting), animals breeding such as livestock, poultry, cats and dogs breeding; science research and development on technique of production; providing warehousing and transporting services with self-owned conveyances and hoarding facilities.

EFIs engaging in the following businesses will not be considered as production-oriented:

Indoor and outdoor fitment, decoration, installation and adjustment of the indoor facilities; advertisement/name card/pictorial production, books and magazines distribution; food processing and manufacturing, mainly for their own restaurant or chain stores; repairing services for home appliance and apparatus.

The "repair and maintenance of production equipment and precision instruments" in the implementation rules of the Tax Laws does not cover services for automobiles, electrical appliances, computer monitoring systems, ordinary implements and devices; "communications and transportation" in the implementation rules includes businesses like house moving and transit, but not includes courier (express delivery) services.

The following EFIs working on indoor and outdoor fitment, decoration and adjustment for the indoor facilities should not be considered as production-oriented: those working on elevator and escalator installation; those working as floor or surface applicators, door/ window installers in a newly built structure.

EFIs engaged in ground grading for land development projects and houses should be considered as construction companies, and may enjoy the preferential tax policies concerning production-oriented EFIs.

EFIs engaged in the people's air defense development and updating projects and co-funded by foreigners and the national air defence department may be considered as production-oriented EFIs under the implementation rules of the Tax Laws.

EFIs working on entrusted business like inspecting, identifying, and attesting the quality, standards, quantity, weight, package and price of the import and export goods, are not considered as production-oriented.

2. EFIs Concurrently Engaged in Productive and Non-productive Business

If no productive business is included in the business scope prescribed in their business licenses, no EFIs shall enjoy related preferential tax policies as granted to production-oriented enterprises, no matter how large the proportion of the productive business is in their actual business activities.

If the business scope prescribed in the business license of an EFI covers productive and non- productive business, or if the business scope prescribed in the business license covers only productive business, but the enterprise actually engages in non-productive business, the applicable preferential tax policy can be determined in accordance with the following methods:

Within the period of tax reduction and exemption calculated from the first profit-making year of an enterprise as specified in Article 8 of the Tax Laws, an EFI engaged in concurrent operations may, in the year when the enterprise's productive business income exceeds 50 percent of all its business income, file an application and enjoy appropriate treatment of tax reduction and exemption in the year after the application is examined and approved by the competent tax authorities. However, if its productive business income does not exceed 50 percent of all its business income in the year, the enterprise shall not enjoy the appropriate preferential treatment of tax exemption and reduction in that year;

An EFI engaged in concurrent operations which is set up in the area (including Beijing Economic and Technological Development Zone) where tax is levied at a reduced tax rate as specified in Article 7 of the Tax Laws and by the State Council shall begin to enjoy related preferential treatment of taxation at a reduced rate from the year when its productive business income exceeds for the first time 50 percent of all its business income.

3.High/new Technology Enterprises

For EFIs located in the high/new technology industry development zones within coastal economic open areas approved by the State Council (including old urban districts of municipalities where special economic zones, economic and technological development zones are located) and identified as high/new technology enterprises, if they are also engaged in technology or knowledge-intensive projects or projects with foreign investments of more than US$30 million and a long period of return on investment, the tax preferences of coastal economic open areas may still apply, subject to the approval by the State Administration of Taxation.

If these high/new technology EFIs are also export-oriented enterprises, they may enjoy the tax incentives and concessions under the implementation rules of the Tax Laws. If they are recognized as both export-oriented enterprises and advanced technology enterprises, they shall choose only one status from the two to enjoy the preferential tax treatment.

Where the Chinese-foreign equity joint ventures which are in the high/new technology industry development zones approved by the State Council and which are recognized as high/new technology enterprises, have difficulty paying taxes after the tax holiday expires and need be given special favor of proper reduction and exemption of tax again in a certain period, the enterprise shall file the application and after the local tax authorities have examined report will be submitted to State Administration of Taxation for approval.

For EFIs established in development zones and identified as high/new technology enterprises, the enterprise income tax may be levied at a reduced rate of 15% since the tax year in which the date of the determination to be high/new technology enterprises falls.

Where the high/new technology industry development zones defined by the State Council is in a coastal economical open zone, the EFIs recognized as high/new technology enterprises are permitted to choose between preferences applicable for economical open zones and those for industry development zones, but shall not choose both.

Where the EFIs established in development zones and recognized as high/new technology enterprises need to accelerate the depreciation of the apparatus and facilities used for the development of high/new technology or production of high/new technology products, they shall file an application. The application, after the review of local taxation authorities, shall be reported, level by level, to the State Administration of Taxation for approval.

4.Advanced Technology Enterprises

When the tax holiday under the Tax Laws is over, the foreign enterprise recognized by competent authorities as technologically advanced may pay enterprise income taxes at a halved rate or a rate of ten percent, 10% is applicable if the reduced rate is lower than 10%, for another three years.

If the production-oriented enterprises obtain the Certificate for Advanced technology enterprises after the commencement of the tax holiday under the Tax Laws, the policy of imposition at a halved tax rate for another three years may only apply for the remaining term, beginning at the year when such certificate is obtained.

5. Export-oriented Enterprises

When the tax holiday under the Tax Laws is over, the foreign enterprises who are recognized as export-oriented by competent authorities and whose export value of the year amounts to 70 per cent of their total output values (or 40 per cent for new technology enterprises), may continue to pay the enterprise income tax at a halved rate or a rate of ten percent (if the halved rate is lower than 10%) for the year.

The export value of EFIs covers that of exports on the enterprise' own accord, or by foreign trade agents entrusted by the EFIs, or by foreign trade companies who purchase the commodities from the EFIs; fees for contract processing with materials supplied by foreign clients; and value of other exports recognized by Ministry of Commerce Trade and Economic. To calculate the proportion of the export value to the total output values, MOC data concerning the assessment of enterprises' export performance could be referred to.

6.Foreign-funded Financial Institutions

Among the foreign-funded financial institutions authorized to be established in Beijing, those whose working capital transferred from the head offices is over US$10 million and whose period of operation is over ten years, upon the review of the competent tax authorities and the approval of State Administration of Taxation, may pay enterprise income taxes at a reduced rate of 15 per cent and Moreover, starting from the profit-making year, they may be exempted from enterprise income taxes in the first year and subject to enterprise income taxes at a halved rate in the second and the third year.

Foreign-funded financial institutions working on RMB businesses on a trial basis should manage the account books for RMB businesses and foreign currency businesses separately, and the accounts should be adjusted independently as well, so that the tax could be charged respectively. Income derived from foreign currency businesses is subject to enterprise income taxes under the Tax Laws and its implementation rules. The income derived from the RMB businesses is subject to enterprise income taxes at a rate of 30 percent and local income taxes at 3 percent, commencing the date of approval on such businesses. The policy of tax exemption in the first year and reduction in the following two years as mentioned in the preceding paragraph is not applicable for RMB businesses.

7. Joint-stock Enterprises

An EFI authorized by the competent authority to be reorganized into a joint-stock company, should continue to pay taxes under tax regulations applicable for EFIs.

Where domestically-funded enterprises and EFIs or foreign investors are authorized by the competent authority to organize a new joint-stock company as co-promoters and the stocks subscribed by the foreign party are less than 25 per cent of the company's total, tax should be charged in the light of Interim Provisions; if the proportion is more than 25 per cent, after the company's application and the verification by the tax authorities, the tax regulations concerning EFIs shall apply.

Where an EFI, while deregistered with the administrative department of industry and commerce, is reorganized or merged into a joint-stock enterprise, the newly founded joint-stock enterprise may enjoy the tax holidays under the Tax Laws if the following conditions are met: the former EFI has handled taxation issues concerning asset revaluation according to the preceding regulations; the former EFI has repaid the amount of income taxes already exempted or reduced under Article 8 of the Tax Laws if its actual operation period is not long enough to enjoy the preferential tax treatment under the Tax Laws. If the above conditions are not met, the newly founded joint-stock enterprise may not enjoy the tax exemptions or reductions under Article 8. However if the former EFI is still under the tax holiday stipulated in Article 8 or the tax holiday does not commence yet, the newly founded joint-stock company may enjoy the preferences until the date of expiration.

If the EFI or foreign investor is a shareholder of the new joint-stock company, the new company may enjoy the preferential treatment for enterprise income tax under Article 8.