Law of the People's Republic of China on Income Tax of Enterprises with Foreign Investment and Foreign Enterprises

(Adopted by the Fourth Session of the Seventh National People's Congress on April 9, 1991, promulgated by Order No.45 of the President of the People's Republic of China on April 9, 1991, and effective on July 1, 1991)

Article 1 The income originating in the production and business operations and other income of enterprises with foreign investment in the territory of the People's Republic of China shall be subject to income tax in accordance with the provisions of this Law.

Foreign enterprises shall pay income tax for their income arising in production and business operations and other income in the territory of the People's Republic of China in accordance with the provisions of this Law.

Article 2 The term "enterprises with foreign investment" as is used in this Law means Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and foreign-capital enterprises, which are established in China.

The term "foreign enterprises" as is used in this Law means foreign companies, enterprises and other economic organizations, which have set up organizations or sites dealing in production or business operations in China, and which have not set up organizations or sites but have income originating in China.

Article 3 The income originating both inside and outside China of enterprises with foreign investment with their head offices in China shall be subject to income tax. Foreign enterprises pay income tax for their income originating in China.

Article 4 For enterprises with foreign investment or organizations or sites dealing in production or business operation set up within the territory of China by foreign enterprises, their taxable income amount shall be the remaining amount by deducting the costs, expenses and losses from their gross income in one tax year.

Article 5 The enterprise income tax charged on enterprises with foreign investment and on foreign enterprises for the income of their organizations and sites dealing in production and business operations set up in the territory of China shall be calculated based on the taxable income amount and the tax rate is 30 per cent; and the local income tax shall be calculated based on the taxable income amount and the tax rate is 3 per cent.

Article 6 According to its industrial policies, the State gives the foreign investment direction and encourages to establish enterprises with foreign investment utilizing advanced technologies and equipment with their products being completely or mostly exported.

Article 7 Enterprises with foreign investment founded in special economic zones, organizations or sites dealing in production or business operations set up in the special economic zones by foreign enterprises or productive enterprises with foreign investment founded in the economic and technological development zones, shall be subject to the enterprise income tax at a reduced rate of 15 per cent.

Productive enterprises with foreign investment founded in the coastal economic open areas and in the old districts of the cities where the special economic zones or economic and technological development zones are located, shall be subject to the enterprise income tax at a reduced rate of 24 per cent.

Where enterprises with foreign investment founded in the coastal economic open areas, in the old districts of the cities where the special economic zones or economic and technological development zones are located, or in other regions designated by the State Council, fall under the categories of energy, communications, harbor, docks or other projects which are encouraged by the State, the enterprise income tax may be charged at a reduced rate of 15 per cent. The State Council shall lay down the concrete measures thereon.

Article 8 In case productive enterprises with foreign investment have an operating period of more than 10 years, its enterprise income tax is, commencing from the year in which it starts to profit, exempted from in the first and second year, and levied with a 50 per cent reduction from the third to the fifth year. The State Council is, however, separately to prescribe those for the projects in the exploration of resources such as petroleum, natural gas, rare metals and precious metals. If the actual operating period of an enterprise with foreign investment is less than 10 years, it shall make up the enterprise income tax which has been exempted or reduced.

The State Council's regulations, announced prior to the entry into force of this Law, which grant preferential treatment of a longer term of enterprise income tax exemption or reduction than those provided in the preceding paragraph for enterprises engaging in energy, communications, harbor, dock and other key productive projects, or grant preferential treatment of enterprise income tax exemption or reduction for non-productive key projects, shall continue to be effective after the entry into force of this Law.

Enterprises with foreign investment engaging in agriculture, forestry or animal husbandry or enterprises with foreign investment established in remote and economically-underdeveloped areas, which have enjoyed the treatment on tax exemption and tax reduction as provided in the preceding two paragraphs, may, after the expiration of the period of treatment and upon the application of the enterprise and approval by the competent department of the State Council for taxation, continue to enjoy a 15 per cent to 30 per cent reduction of the amount of enterprise income tax payable for 10 more years.

If, after the entry into force of this Law, it is necessary to modify the provisions of the preceding three paragraphs on enterprise income tax exemption or reduction, the State Council shall submit such modifications to the Standing Committee of the National People's Congress for decisions.

Article 9 People's governments of provinces, autonomous regions and municipalities directly under the Central Government may, in light of the actual conditions, decide on the local income tax exemption or reduction for the sectors and items on which the foreign investment is encouraged.

Article 10 Where a foreign investor of an enterprise with foreign investment uses its profits earned from the enterprise directly to reinvest into the enterprise for increasing its registered capital, or uses its profits as capital to invest and establish other enterprises with foreign investment with the operating period not less than five years, 40 per cent of the income tax amount already charged on the reinvested portion shall, upon the application of the investor and approval by the tax authority, be refunded therefor, if the State Council prescribes otherwise on the preference, the regulations of the State Council shall be observed; in case the reinvestment has been withdrawn before the expiration of five full years, the amount of refunded tax shall be paid back.

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