1. www.lehmanlaw.com Edward Lehman Practising Law Institute 810 Seventh Avenue, 20th Floor New York, NY 10019 LEHMAN, LEE & XU www.lehmanlaw.com

2. New Taxation Regulations: Impact on Investment

3. www.lehmanlaw.com As the Saying Goes 人生难料，但一定会死亡，一定要纳税。 人生难料，但一定会死亡，一定要纳税。 Ren sheng nan liao, dan yi ding hui si wang, yi ding yao na sui. Ren sheng nan liao, dan yi ding hui si wang, yi ding yao na sui. –Pin yin (Chinese Romanization) There’s nothing certain in life except death and taxes. There’s nothing certain in life except death and taxes.

4. www.lehmanlaw.com Of Interest BizChina BizChina Discussion of new tax law and potential impacts on foreign investment Discussion of new tax law and potential impacts on foreign investment –located at www.lehmanlaw.com under TV & Media www.lehmanlaw.com

5. Policy Issues For over 20 years China has pursued aggressive approach to development: For over 20 years China has pursued aggressive approach to development: –“worship” of foreign investment New tax law marks a change in policy to a more “harmonious society” New tax law marks a change in policy to a more “harmonious society” An equalization of tax treatment or reversal of “reverse discrimination” An equalization of tax treatment or reversal of “reverse discrimination” Signals increased confidence in Chinese economy Signals increased confidence in Chinese economy

6. www.lehmanlaw.com Planned to Market Economy Movement from PLANNED to MARKET economy Movement from PLANNED to MARKET economy –New Bankruptcy Law –New Property Law –New Labor Contract Law –New Anti-monopoly Law –New M&A Regulations All over approximately past year showing quick movement by State All over approximately past year showing quick movement by State

7. www.lehmanlaw.com China’s Tax Laws up Until Now -Dual Enterprise Income Tax systems Interim Regulations on Income Tax of PRC Enterprise Interim Regulations on Income Tax of PRC Enterprise - 33% tax rate for domestic enterprises - 33% tax rate for domestic enterprises Law on Income Tax of Foreign investment Enterprises and Foreign Enterprises (the “FEIT” Law) Law on Income Tax of Foreign investment Enterprises and Foreign Enterprises (the “FEIT” Law) I.15% t o 24% tax rate for FIEs; II.“Two-plus-three” year tax holiday for FIE manufacturers III.Actual corporate income tax rate for FIEs may be as low as 11%

8. www.lehmanlaw.com The New Tax Regime - Unified Enterprise Income Tax System “ Law of the People’s Republic of China on Enterprise Income Tax” (the “EIT Law”), to take effect Jan. 1, 2008 Unified Income Tax Rate Unified Income Tax Rate Unified Tax Deduction Unified Tax Deduction Unified Tax Preference Unified Tax Preference

9. www.lehmanlaw.com Common Investment Structures Special Purpose Vehicle (Hong Kong) Parent CompanyChina Company Domestic Company ROUND TRIP FIE

10. www.lehmanlaw.com Resident vs. Non-Resident Enterprises Resident Enterprises Resident Enterprises Enterprises incorporated in China or incorporated in other jurisdictions but having management organizations in China Global income shall be subject to China taxation Unified EIT rate of 25%

11. www.lehmanlaw.com Resident vs. Non- Resident Enterprises  Non-resident Enterprises Enterprises incorporated in other jurisdictions and with offices but no management organizations in China 20% income tax rate for its China-sourced income

12. www.lehmanlaw.com Unified Tax Deduction Current dual taxation systems Current dual taxation systems - - Domestic enterprises are subject to more stricter deduction standard than FIE Unified Deduction Standard and Method Unified Deduction Standard and Method - - Reasonable costs and expenses - Charity donation expense: within 12% of the total annual revenue - Research & development activity expense, etc.

13. www.lehmanlaw.com Unified Tax Preference Five years transitional period from Jan 1, 2008 to existing FIEs, allowing them to transfer current preferential tax rate to unified tax rate Five years transitional period from Jan 1, 2008 to existing FIEs, allowing them to transfer current preferential tax rate to unified tax rate Also transitional period for enterprises registered in certain special economic zones, but the policy is to be made by the State Council Also transitional period for enterprises registered in certain special economic zones, but the policy is to be made by the State Council

14. www.lehmanlaw.com Other Incentives More preferential treatment for enterprises investing in environmental protection and energy conservation More preferential treatment for enterprises investing in environmental protection and energy conservation The law retains preferential policy on investments in agriculture, forestry, fisheries, public infrastructure construction, etc. The law retains preferential policy on investments in agriculture, forestry, fisheries, public infrastructure construction, etc.

15. www.lehmanlaw.comAnti-Avoidance “Special Taxable Adjustments,” introduces new anti-avoidance measures: “Special Taxable Adjustments,” introduces new anti-avoidance measures: I.“Controlled foreign corporate” rule: If a foreign company registered in a low tax jurisdiction is controlled by corporate taxpayers in China, the undistributed profits made by the foreign company may be considered as the controlling company’s taxable income

16. www.lehmanlaw.comAnti-Avoidance Stricter controls for transfer pricing: requires report indicating transactions with affiliated companies Stricter controls for transfer pricing: requires report indicating transactions with affiliated companies Affiliated transaction: If an enterprise engages in transaction against independent trade principle and reduces taxable income with an affiliated company, tax authority can make adjustments Affiliated transaction: If an enterprise engages in transaction against independent trade principle and reduces taxable income with an affiliated company, tax authority can make adjustments

17. www.lehmanlaw.com Case Study Not related specifically to new EIT law but to new approach of tax bureau Not related specifically to new EIT law but to new approach of tax bureau Facts: Rep Office understated income for chief representative. In order to close Rep Office and must show various tax documents. Facts: Rep Office understated income for chief representative. In order to close Rep Office and must show various tax documents. Because of several documents (rent much higher than salary), chief rep and Rep Office under investigation. Because of several documents (rent much higher than salary), chief rep and Rep Office under investigation. In this instance, tax bureau can impose any income amounts at their discretion, including penalty In this instance, tax bureau can impose any income amounts at their discretion, including penalty

18. www.lehmanlaw.com Outstanding Questions  What is the definition of “Management organization”?  What is “hi-tech” or “low-earning and small scale” enterprises?  Treatment of foreign investment from Hong Kong, Macao, and Taiwan?  Transition of tax preference for existing enterprises registered in special economic zones? Etc.

19. www.lehmanlaw.comImplementation Like many Chinese laws, the EIT Law requires further implementation rules for uncertain issues Like many Chinese laws, the EIT Law requires further implementation rules for uncertain issues State Administration of Taxation said regulations will be promulgated within this year State Administration of Taxation said regulations will be promulgated within this year

20. www.lehmanlaw.com Impact on Foreign Investment “Why do you rob banks?” “Why do you rob banks?” –Because that’s where the money is. »Willie Sutton Very little impact on foreign investment numbers Very little impact on foreign investment numbers Market drives investment NOT taxes Market drives investment NOT taxes Compared to other markets, China’s tax rate comparable or lower Compared to other markets, China’s tax rate comparable or lower –Germany 39%, France 33%, India 30% to 40%, Japan 30%

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