1. Foreign invested enterprises are joint-venture enterprises, Chinese-foreign joint co-operative enterprises and enterprises with foreign capitals set up in China.

2. Foreign enterprises are foreign corporations, enterprises and other economic organizations that either set up organs and locales in China for production and locales in China but receive income from China.

3. Tax Items & Income Sources

(1) Tax Items

• Production and operation incomes and other income of foreign invested enterprises in China;
• Production and operation incomes and other incomes in China received by foreign enterprises.

(2) Income Sources

• If the headquarter of a foreign invested enterprise is located in China, an income tax will be collected on the enterprise's earnings inside and outside China.
• For foreign enterprises, an income tax will be collected on their earnings in China.

4. Table of Tax Items and Rates

(1) Corporate income tax of foreign invested enterprises and corporate income tax payable for the earnings of organs and locales for production and business operation established in China by foreign enterprises will be calculated on the taxable income with a rate of 30%. Local income tax will be calculated on the taxable income with a rate of 3%.

(2) Foreign enterprises that have no organs and locales in China but receive profit, interest, rent, franchise user charges and other earnings from China or foreign enterprises that have organs and locales in China but receive earnings (as mentioned above) that have no actual relation with their organs and locales should pay a 20% income tax.

5. Taxable Earnings and Taxable Incomes

Taxable income of organs and locales established in China by foreign invested enterprises and foreign enterprises for production and business operation is the remaining amount of each tax year's total earnings less cost, expenses and losses.

Calculation of enterprises' taxable income is carried out with the principle of right-duty mutual effect system.

Calculation formula is as followed:

(1) Manufacture Industry

Taxable incomes = products sales profits + other operation profits + non-operating earnings - non-operating expenditures

(2) Commerce

Taxable incomes =merchandise sales profits + other operation profits + non-operating earnings - non-operating expenditures

(3) Service Industry

Taxable incomes =net business incomes + non-operating earnings - non-operating expenditures

(4) Other Industry

Refer to above calculation formulas

6. Prescriptions for Costs and Expenses Listing and Year Loss Compensation

(1) Year Loss Compensation

If losses take place in organs and locales for production and business operation established in China by foreign invested enterprises and foreign enterprises, the following tax year's income will be used as loss compensation. If the following tax year's income is insufficient to cover the loss, the compensation can be continued for less than five successive years.

(2) Prescriptions for Costs & Expenses Listing

1) In the calculation of taxable incomes, unless the State has separate regulations, the following items cannot be listed as costs, expenses and losses.

• Purchases, constructions and expenditures of fixed assets.
  
  
• Release, development and expenditures of intangible assets.
  
  
• Capital interest.
  
  
• Various income taxes.
  
  
• Illegal operation fines and losses of confiscated properties.
  
  
• Fee for deference and fines of various taxes.
  
  
• Compensable part of losses in natural disasters or accidents.
  
  
• Non-commonweal and non-relieve donations in China.
  
  
• Franchise effect fees paid to the headquarters;
  
  
• Other expenditure irrelevant to production and business operation.

2) Organs and locales established in China by foreign enterprises should provide certifying documents issued by headquarters with contents covering collection scope of management charges, total amount and apportionment foundations, and methods for the reasonable management charges paid to headquarter that are related with the production and business operations of the organs and locales. In Addition, a verification report by registered accountant should be attached. Items of charges will be listed after the auditing and approval from local taxation offices. Foreign invested enterprises should make reasonable apportionment of management charges that are related with the production and business operation of branch organizations.

3) Enterprises should provide certifying documents of interest payment for the borrowing, which is related with production and business operation, with reasonable interest. Items of interest will be listed after the auditing and approval from local taxation offices.

If the borrowing is for the purchase and construction of fixed assets or the release and development of intangible assets, the interest effectuated before the involved assets are put into use should be calculated as the original value of fixed assets.

Reasonable borrowing interest is the interest no higher than that calculated with rates of common commercial loans.

4) Enterprises should keep authentic records or bills for social intercourse expenses related with the production and business operation, which, if within the following limits, can be listed as items in expenses.

• For year net sales below 15 million RMB, the social intercourse expenses should not exceed 0.5% of the net sales; for the part of year net sales beyond 15 million RMB, the social intercourse expenses should not exceed 0.3% of this part of net sales.
  
  
• For the year total operating income below 5 million RMB, the social intercourse expenses should not exceed 1% of the total operating income; for the part of year total operating income beyond 5 million RMB, the social intercourse expenses should not exceed 0.5% of this part of total operating income.

5) For wages and welfare fees paid to employees, enterprises should report and send the payment standards as well as supporting documents and relevant materials to local taxation offices for verification and approval before listing them as expenses.

6) Enterprises' fixed assets are houses, architectures, machines, engines, transportation tools that have been used over one year as well as other equipments, apparatus and tools related to production and business operations. Articles not categorized as major equipment of production and business operation with a unit value below 2,000 RMB or a service life under two years can be listed as expenses in the light of actual use amount.