To: Commissions (Bureaus) of Finance, State Tax Bureaus and Local Tax Bureaus of the Provinces, Autonomous Regions, Municipalities Directly under the Central Government and Municipalities Separately Listed on the State Plan:

with a view to adhering to the spirit of relevant stipulations of the CPC Central Committee and the State Council, expanding absorption of overseas capital and encouraging the use of domestically made equipment by overseas funded enterprises and foreign enterprises, the issues concerning the offsetting of enterprise income tax relating to investment in purchases of domestically made equipment by overseas funded enterprises and foreign enterprises are hereby notified as follows:

　　I. For all overseas funded enterprises established in the country, and their purchases of domestically made equipment within the amount of their total investment for projects conforming to the category of encouraged investment and restricted investment category B in the "Guiding List for Overseas Investment in Industries" as stipulated in the "Circular of the State Council Relating to adjustments in Policies of Taxation for Imported Equipment" (No.GF[1997]37), with the exception of those items listed in the "Catalogue of Imports Not Exempt from Duties for Projects of Overseas Investment"(GF[1997]37), 40% of the investment for the purchase of domestically made equipment may offset the increase in enterprise income tax of the year of purchase over the previous years.

For foreign enterprises setting up organizations and work sites for production and business activities, these measures shall be taken as reference.

In the case of the abovementioned enterprises adopting advanced and practical new technology, new processes, and new equipment and new materials for the transformation of existing installations and manufacturing processes with a view to increasing profit, improving product quality, increasing varieties, upgrading products, expanding export, reducing costs, economizing energy consumption, and enhancing comprehensive utilization of resources as well as improving waste treatment and labour safety. 40% of the investment for the purchase of domestically made equipment beyond the total investment may also offset the increase in enterprise income tax of the year of purchase over the previous year.

　　II. Demestically made equipment eligible for offsets refer to manufacturing equipment (including those require for testing and inspection in production) produced by domestic enterprises. Excluing equipment directly imported form abroad and equipment manufactured from "imported materials, supplied materisals and supplied components or compensation trade".

　　III. the amount of income tax of overseas funded enterprises or foreign enterprises offset each year should not exceed the amount of the increase in the enterprises' income tax of the year of equipment purchase over the previous year. In case the amount of the increase in the enterprises' income tax of that year falls short of the amount to realize the offset, the part of the investment not offset may be offset in the following years, to a maximum of 5 years, against the increase in enterprise income tax over the year before the pruchase of the equipment.

Overseas funded enterprises and foreign enterprises enjoying the policies on the generalized reduction and exemption of enterprise income tax according to the taxation law adopted by the Standing Committee of the National People's Congresss or regulations and ordinances promulgated by the National People's congress and the State Council, the time limit for offsets may be posponed appropriately during the period of tax exemption, but the prolonged offsets should not exceed 7 years to the maximum.

　　IV. Overseas funded enterprises and foreign enterprises applying for tax offsets for domestically made equipment shall present to the taxation authorities in charge of enterprise income tax such valid vouchers and papers as invoice etx. For their purchase of domestically made equipment.

　　V. for domestically made equipment purchased by overseas funded enterprises and foreign enterprises for which value added taxes have been refunded according to regulations, the tax refundment shall not be included in the original price of the equipment.

　　VI. Domestically made equipment for which offset of income tax has been effected for the investment may still be depreciated according to the original purchase price for deductions in calculations for taxable income according to relevant stipulations.

　　VII. Overseas funded enterprises and foreign enterprises that lease or transfer domestically made equipment for which they have enjoyed offset in income tax for their investment within 5 years after the date of purchase shall, at the time of lease or transfer, repay the enterprise income tax already offset.

　　VIII. These measures shall be in force as from July 1, 1999. Specific measures for implementation shall be formulated separately by the State General Administration of Taxation.

　Custom Duties

• Import:

Beginning from April 1, 1996, customs duties and import link taxes shall be levied at official rates on equipment and raw and processed materials imported by newly established foreign-funded enterprises as part of the total capital input.

In regard to the foreign-funded enterprises set up in accordance with law before March 31, 1996, there shall be a grace period lasting until December 31, 1997 for those involving a foreign capital input of not less than US$30 million and until December 31, 1996 for those involving a foreign capital input of less than US$30 million during which periods duties shall be levied according to stipulations for imports falling under total investment and added investment. In case importation has not been completed within the stipulated period, the grace period may be extended with the approval of the State Council upon an application filed to the Ministry of Foreign Trade and Economic Cooperation.

• Export:

Foreign-funded enterprises shall be exempted from export duties when exporting their own products, except those products the export of which are limited as stipulations otherwise prescribed by the state.

　Bonded Warehousing:

Goods entering the boundaries without going through duty formalities by approval of the customs for storage, processing and assembling for export such as spare parts, Components and packing materials imports for processing and finished goods for re-export, will be under supervision of the customs as bonded goods.

In case the technology developed by a hi-tech development project is truly advanced but no tangible goods are produced, the enterprise may still apply for confirmation and assessment to qualify for the status of technologically advanced enterprise.

After the expiration of the stipulated period of income tax exemption and reduction, export-oriented enterprises whose export products exceed 70% of total output in value in the current year shall pay income tax at a rate of 12%, if located in the urban area, and 10%, if located in the Tianjin Port Free Trade Zone, as the case may be.

For technologically advanced enterprise, the period of 50% reduction can be prolonged for another 3 years after expiration of the stipulated period for income tax exemption and reduction.