Circular of the State Administration of Taxation on the Relevant Issues Concerning the Tax Payment by Enterprises with Foreign Investment and Foreign Enterprises Engaging in the Business of Financial Asset Disposition

GuoShuiFa [2003] No.3 January 7, 2003

The state taxation bureaus and local taxation bureaus of all provinces, autonomous regions, municipalities directly under the Central Government and municipalities separately listed on the State plan:

We hereby give our notice on the relevant issues concerning the tax payment by enterprises with foreign investment and foreign enterprises engaging in the business of financial asset disposition as follows in accordance with the Income Tax Law of the People's Republic of China for Enterprises with Foreign Investment and Foreign Enterprises and the detailed rules for its implementation, as well as the Interim Regulation of the People's Republic of China on Business Tax and the detailed rules for its implementation:

I. Enterprises with foreign investment and foreign enterprises (hereinafter referred to as enterprises) shall, regarding their income obtained in China from the business of financial asset disposition, file tax returns and pay value-added tax, business tax and enterprise income tax in accordance with the tax laws and the present circular.

II. The business of financial asset disposition shall mean that an enterprise obtains by means of purchase or holding shares through absorption, etc. from a financial asset management corporation inside the territory of China the share rights, creditor's rights and physical assets of other enterprises inside the territory of China or the entire assets composed of the above said assets (hereinafter referred to as replacement assets), and then dispose the above said replacement assets by means of transfer, retractation, exchange and sale, etc., and obtain the corresponding returns.An enterprise may dispose of the financial assets by the following means:

(a) retracting or transferring the creditor's rights;

(b) converting the creditor's rights it holds into share rights;

(c) disposing of the physical assets it has right to control;

(d) selling or transferring the share rights it holds;

(e) returning its replacement assets;

(f) disposing of the replacement assets by other means.

III. An enterprise shall, when obtaining replacement assets, regard the price when the assets were actually purchased or when it held the shares through absorption as the original price. The classification of replacement assets shall be based on the pricing object when the said assets are obtained, which may be one share right of an enterprise of sole pricing, or the single item of asset in the form of creditor's right or physical asset, or the combined assets uniformly priced with several items of assets being bound.For the re-classification and re-combination of all or part of the replacement assets obtained by an enterprise, the original price of the single item of or the combined replacement assets may be determined after the re-classification and re-combination, provided that the original price of the replacement assets after the re-classification and re-combination shall not exceed the original price at the time when the enterprise obtained the replacement assets.

IV. An enterprise shall, when disposing of the replacement assets, be exempted from the business tax and value-added tax in accordance with the following provisions:

(a) no business tax shall be levied on an enterprise that disposes of replacement assets of creditor's right;

(b) no business tax shall be levied on an enterprise for the income which it obtains from disposition of replacement assets of share right (including disposition by means of debt to equity);

(c) business tax shall be levied on an enterprise for the income which it obtains from disposition of its own physical replacement assets if such assets are real estates; while if such assets are goods, value-added tax shall be levied in accordance with the regulations on value-added tax and the relevant provisions.

V. With respect to the income obtained by an enterprise from its disposition of replacement assets, enterprise income tax shall be calculated and paid on the basis of the net proceeds after the original price, expenses and losses of the relevant assets are deducted.Where an enterprise disposes of its replacement assets by stages or by installments, the part exceeding the original price shall, when the income from its disposition of assets exceeds the original price of replacement assets in the form of single item of or combined assets, be calculated into the present taxable income of the enterprise, and then enterprise income tax shall be calculated and levied.The losses occurred due to an enterprise's disposition of a single item of or combined replacement assets, may be deducted from the present taxable income of the enterprise. For the combined assets, the losses shall be calculated after the disposition of combined assets has been totally finalized.

VI. A foreign enterprise that has not set up an office or a site inside the territory of China shall, either by itself or by authorizing its agent inside the territory of China, file tax returns and pay its payable tax amount. Its payable enterprise income tax may be paid at the locality of the enterprise to which one item of the replacement assets belongs; while the place for the payment of its payable business tax or value-added tax shall be determined in accordance with the relevant provisions.

Promulgated by The State Administration of Taxation on 2003-1-7