7. Notice on Treatment of Enterprise Income Tax where the Investment of the Foreign Party to a Foreign Investment Enterprise Is Not Paid in as Required

Issued by the State Administration of Taxation

This Notice, issued on April 19, 1999 and effective as of the same date, was sent by the State Administration of Taxation in Beijing to the local State Tax Bureaus of all provinces, autonomous regions, municipalities directly under the central government, cities with independent planning and the Shenzhen Municipal Local Tax Bureau.

In order to standardize implementation of preferential tax policies for foreign-invested enterprises ("FIEs") and strengthen the administration of tax collection, the Notice clarifies certain issues in respect of enterprise income tax where the investment of the foreign party(ies) to an FIE is not paid in as required:

1. This Notice applies to foreign parties to FIEs who, without legitimate reasons, fail to make contributions of their registered capital within the time limit specified by the relevant laws and regulations or as set out in their investment contracts.

2. If the investment of the foreign parties to an FIE is not paid in as required and FIE status is lawfully revoked by the relevant authority, tax payment obligations under tax laws and regulations concerning income tax treatment of FIEs will not apply to the various activities carried out in the name of that FIE; instead, enterprise income tax will be assessed and paid in accordance with the tax laws and regulations governing domestic enterprises.

3. If the investment of the foreign parties to an FIE is not paid in as required, its enterprise income tax will be assessed and paid provisionally in accordance with tax laws and regulations governing FIEs before its qualification as an FIE is revoked by the relevant authority. If, however, the registered capital contributed by the foreign investor(s) does not amount to 25 percent of the registered capital already paid into the FIE, such FIE shall not be entitled to the relevant preferential income tax treatment available to FIEs.

4. If the investment of the foreign parties to an FIE is not paid in as required but FIE status has not been revoked, such FIE may be entitled to tax rate reductions and relevant preferential tax treatment for the remainder of the specified period, commencing from the first profitable year, provided the foreign parties have contributed their investment in a subsequent year or their paid-in investment amounts to 25 percent of the registered capital already paid into the FIE.

5. When carrying out consolidation, assessment and settlement of FIE income tax payment for the 1998 fiscal year (i.e. January 1, 1998-December 31, 1998), all local tax bureaus shall strictly implement this Notice. For any matter arising prior to 1998, this Notice may be implemented retrospectively if the time limit set out in Article 31(2) of the Law of the PRC on the Administration of Tax Collection has not expired.

The above should be implemented in accordance with the relevant provisions of the PRC Foreign-Invested Enterprise and Foreign Enterprise Income Tax Law and its Implementing Rules.