To the Finance Departments (Bureaus), State Tax Bureaus, and Local Tax Bureaus of all provinces, autonomous regions, municipalities directly under the central government, and separately planned cities; and to the Financial Bureau of the Xinjiang Production and Construction Corps: In accordance with Article 36 of the Enterprise Income Tax Law of the People’s Republic of China and with the approval of the State Council, we hereby notify you of the following issues concerning preferential policies for enterprise income tax:

I. Preferential Policies for Encouraging the Development of the Software Industry and the Integrated Circuit Industry

(1) The tax refunds received by software production enterprises under the immediate refund policy for value-added tax shall be used by the enterprises for research and development of software products and for expanding reproduction. Such refunds shall not be treated as taxable income for enterprise income tax purposes and shall not be subject to enterprise income tax.

(2) Newly established software production enterprises within China, upon obtaining certification, shall be exempt from corporate income tax for the first and second years starting from the year in which they become profitable; from the third to the fifth year, their corporate income tax will be levied at half the standard rate.

(3) Key software production enterprises within the national planning and layout, if they did not enjoy tax exemptions in the current year, shall be subject to corporate income tax at a reduced rate of 10%.

(4) The training expenses for employees of software production enterprises may be deducted from the taxable income based on the actual amount incurred.

(5) For software purchased by enterprises and institutions that meets the criteria for recognition as fixed assets or intangible assets, it may be accounted for as either fixed assets or intangible assets. With approval from the competent tax authority, the depreciation or amortization period may be appropriately shortened, with a minimum of 2 years.

(6) Integrated circuit design enterprises shall be treated as software enterprises and enjoy the relevant corporate income tax policies applicable to software enterprises mentioned above.

(7) With the approval of the competent tax authority, the useful life for depreciation of productive equipment used by integrated circuit manufacturing enterprises may be appropriately shortened, with a minimum of 3 years.

(8) Integrated circuit manufacturing enterprises with an investment exceeding 8 billion RMB or with an integrated circuit linewidth less than 0.25 micrometers may pay corporate income tax at a reduced rate of 15%. Among these, enterprises with an operating period of more than 15 years shall be exempt from corporate income tax from the year they begin to turn a profit for the first five years, and shall pay corporate income tax at half the rate from the sixth to the tenth year.

(9) For enterprises engaged in the production of integrated circuit products with a linewidth of 0.8 microns or less (inclusive), upon certification, they shall be exempt from corporate income tax for the first and second years starting from the year in which they become profitable; from the third to the fifth year, their corporate income tax shall be levied at half the rate. Enterprises that have already benefited from the “two-year exemption and three-year half-rate” corporate income tax policy starting from the year they became profitable shall not be subject to this provision again.

(10) From January 1, 2008, to the end of 2010, investors in integrated circuit manufacturing and packaging enterprises who reinvest their profits—after paying corporate income tax—in their own enterprises to increase registered capital, or who use such profits as capital investment to establish other integrated circuit manufacturing or packaging enterprises with an operational period of no less than five years, shall be eligible for a refund of 40% of the corporate income tax already paid on their reinvested amounts. If such reinvested funds are withdrawn before the five-year operational period is completed, the previously refunded corporate income tax shall be recovered. From January 1, 2008, to the end of 2010, domestic and foreign economic organizations that, as investors, reinvest their profits—after paying corporate income tax—obtained within China into the establishment of integrated circuit manufacturing, packaging, or software product enterprises in western regions, with an operational period of no less than five years, shall be eligible for a refund of 80% of the corporate income tax already paid on their reinvested amounts. If such reinvested funds are withdrawn before the five-year operational period is completed, the previously refunded corporate income tax shall be recovered.

II. Preferential Policies for Encouraging the Development of Securities Investment Funds

(1) Income derived by mutual funds from the securities market—including capital gains from buying and selling stocks and bonds, dividend and bonus income from equity holdings, interest income from bonds, and other income—is temporarily exempt from corporate income tax.

(2) For the time being, corporate income tax will not be levied on income obtained by investors from distributions made by mutual funds.

(3) For the time being, no corporate income tax shall be levied on the capital gains realized by fund managers from buying and selling stocks and bonds using fund assets.

III. Preferential Policies for Other Relevant Industries and Enterprises

To ensure the continuity of tax preferential policies for certain industries and enterprises, the following six categories of periodic corporate income tax preferential policies—covering employment and re-employment, the Olympic Games and World Expos, social welfare, debt-to-equity swaps, asset and capital verification, restructuring, reform, transformation, agricultural-related initiatives, national reserves, and other individual preferential policies (see attachment)—will continue to be implemented according to the original methods and timelines specified in the respective preferential policies, starting from January 1, 2008.

IV. Preferential Policies Regarding Profits Obtained by Foreign Investors from Foreign-Invested Enterprises

Cumulative undistributed profits generated by foreign-invested enterprises prior to January 1, 2008, when distributed to foreign investors after 2008, shall be exempt from corporate income tax. For newly generated profits distributed to foreign investors by foreign-invested enterprises in 2008 and subsequent years, corporate income tax shall be paid in accordance with the law.

V. Except for the preferential policies stipulated in the “Enterprise Income Tax Law of the People’s Republic of China,” the “Implementation Regulations of the Enterprise Income Tax Law of the People’s Republic of China,” the “Notice of the State Council on Implementing Transitional Preferential Policies for Enterprise Income Tax” (Guofa [2007] No. 39), the “Notice of the State Council on Granting Transitional Tax Preferences to Newly Established High-Tech Enterprises in Special Economic Zones and the Pudong New Area of Shanghai” (Guofa [2007] No. 40), and this Notice, all other preferential policies for enterprise income tax implemented prior to January 1, 2008, shall be hereby abolished. All regions and departments are strictly prohibited from formulating preferential policies for enterprise income tax beyond their authorized powers. Appendix: Table of Enterprise Income Tax Preferential Policies Whose Implementation Period Has Expired

Ministry of Finance, State Administration of Taxation
February 22, 2008