Updated: 2005-07-13 10:33

State Administration of Taxation and Ministry of Commerce Circular on Procedures for Examination and Approval of Reduction and Exemption of Enterprise Income Tax on Related Technology Import

SAT Document No.45, 2005

Issued by the State Administration of Taxation and the Ministry of Commerce on March 17, 2005

To: State taxation administrations and commercial departments of all provinces, autonomous regions, municipalities and cities directly under central planning, local taxation administrations of Guangdong and Hainan provinces and Shenzhen City, and departments in charge of commerce of all provinces, autonomous regions, municipalities, cities directly under central planning, and Xinjiang Production and Construction Corps

In order to encourage technology import and standardise the procedures for tax reduction and exemption, the procedures for examination and approval of enterprise income tax on royalty fees involved in technology import are hereby further clarified as follows:

1. Technology import refers to the act of transferring technology from outside the Chinese territory to the Chinese territory through trade, investment or economic and technological cooperation. Foreign enterprises may enjoy enterprise income tax reduction or exemption on technology import contracts complying with the stipulations.

2. When a foreign company receives royalties from providing patent technology listed in the PRC Income Tax Law on Foreign‑Invested Enterprises and Foreign Enterprises and its Implementing Rules, if the involved technology is advanced or the conditions are preferential, it may apply for reduction or exemption of enterprise income tax, and the said application shall be submitted to the State Administration of Taxation for approval.

3. If a foreign company applies for reduction or exemption of income tax, the related procedures may be handled by the recipient of the technology on trust. The recipient should first apply for the Letter on Proposing Reduction or Exemption of Enterprise Income Tax from the government department in charge with which the technology import contract is registered. Te said Letter has two types : Type A and Type B. Letter B shall be applied for if the technology import contract is taken as an appendix to the contract or articles of association of the foreign‑invested enterprise, and Letter A shall be applied for in all other cases. The following documents shall be presented when making the application:

1) A duplicate of the technology import contract;

2) The certificate for registration of technology import contract;

3) The data sheet of the technology import contract;

4) The form of application for enterprise income tax reduction or exemption filed by the foreign enterprise;

5) The certificate of entrustment for which the foreign enterprise entrusts the recipient with handling the income tax exemption or reduction application procedures;

6) The letter of application for tax exemption or reduction filed by the recipient.

If the technology import contract is taken as an appendix to the contract or articles of association of the foreign invested enterprise, the document of approval to the contract or articles of association and the Document of Approval to Foreign Invested Enterprise or the Document of Approval to Hong Kong, Macao or Taiwan Invested Enterprise shall substitute the Certificate for Registration of Technology Import Contract, and the Letter on Proposing Reduction or Exemption of Enterprise Income Tax (Letter B) shall be handled at the original body examining and approving the contract or articles of association.

4. After the recipient handles the Letter on Proposing Reduction or Exemption of Enterprise Income Tax, it shall handle related tax exemption and reduction procedures with the taxation department by also presenting other documents as listed in article 3 of this circular.

5. When issuing a letter of proposal, the commercial department should carry out examination strictly in accordance with the PRC Income Tax Law on Foreign‑Invested Enterprises and Foreign Enterprises. If any of the following circumstances occur in the technology import contract, it shall not be regarded as "conditioned preferential treatment" as stipulated by the tax law, and the letter of proposal should in principle not be given:

1) Import of technology in the category of being listed;

2) There are serious restrictive clauses in the contract that runs counter to the contents of the PRC Regulations on Administration of Technology Import and Export;

3) The royalties are paid in the form of deducting a specified percentage and the said percentage exceeds 5%.

If it really belongs to advanced technology and a letter of proposal is necessary to be issued, special instructions shall be attached.

6. If the State Administration of Taxation has doubts about the letters of proposal issued by the departments in charge of commerce of provinces, autonomous regions, municipalities and cities under central planning, it may request the Ministry of Commerce to re‑check them.

7. The Ministry of Commerce is responsible for designing the form of letters of proposal in a unified way, and local departments in charge of commerce may download it under the Laws and Regulations Column at the Science and Technology Department Sub‑website of the website of the Ministry of Commerce.

8. This Circular shall be implemented as of the date of its issuance.