1. Since Jul. 1st, 1999, with regard to the domestically made equipment purchased within the investment amount by the EFIs established within the territory of the PRC, if they fall under the Encouraged Category and Restricted B Category listed in the Catalogue Guiding the Enterprises with Foreign Investment stipulated in the Circular of the State Council concerning the Adjustment of Taxation Policies for Imported Equipments (G.F. [1997] No.37), 40 percent of the price for the domestically made equipment purchases shall be allowed as a credit against the increased part of their enterprise income taxes of the purchasing year over those of the previous year (except for the Catalogue of Imported Commodities Not Exempt from Tax for EFI Projects stipulated in the document GuoFa [1997] No.37).

The preferences shall be applicable to the foreign enterprises that have set up establishments or places for productions or business operations within the territory of China.

Where the above enterprises purchase domestically made equipments exceeding their total investment for the purpose of improving existing equipments, manufacturing techniques and conditions with advanced and suitable new technologies, processes, equipment and materials to increase economic benefit, improve product quality, increase product varieties, promote product upgrading, enlarge export, decrease cost, conserve energies, enhance comprehensive resource utilizations and waste control, and ensure labor protection and safety, 40 percent of their payments on such equipment is creditable against their increased enterprise income taxes of the purchasing year over those of the year before.

2. The domestically made equipments for tax credit refer to those manufactured by domestic enterprises for production (including necessary test and inspection for production), excluding those imported directly from abroad and those manufactured for contract processing and compensation trades.

3. The allowable tax credit of an EFI or foreign enterprise shall not exceed its newly increased enterprise income tax of the equipment purchasing year over that of the year before. If the amount of newly increased enterprise income tax is not sufficient for tax credit, the remaining part of investment exceeding tax credit shall be refundable against the newly increased tax of the next year over that of the year before the purchasing year. However, the period for continuous tax credit shall not exceed five years.

EFIs and foreign enterprises eligible for unified enterprise income tax reduction and exemption policies stipulated in Tax Laws approved by the Standing Committee of the National People's Congress and laws and regulations promulgated by the National People's Congress and the State Council can extend the duration of continuous deduction as appropriate. The maximum duration of continuous deduction, however, should not exceed 7 years.

4. The amount of value added tax refunded in accordance with regulations to EFIs and foreign enterprises for their purchasing of domestically made equipment shall not be calculated into the prices of the equipments.

5. The depreciation amount of domestically made equipments with tax credit shall be calculated on the basis of the original prices of the equipments, and deducted in accordance with regulations concerned at the calculation of taxable income amount.

6. If EFIs and foreign enterprises rent or transfer their domestically made equipments that have enjoyed tax credit within 5 years beginning from the purchase date, they shall repay the credited enterprise income tax at the time of the equipments' rent or transfer.

7. Procedure for application and approval

(1) After the purchase of the domestically-made equipment, the EFIs and foreign enterprises should file a written application with the competent tax authorities with the following documents attached: Application of Tax Credit Arising from Purchase of Domestically-made Equipment by EFIs or Foreign Enterprises; Corporate Business License (Duplicate) (Photocopy); Tax Registration Certificate (Duplicate) (Photocopy); photocopy of approval of the project granted by the administration of Commerce; photocopy of the contract for the establishment of the enterprise; photocopy of the purchasing contract of the domestically-made equipment and the invoice; photocopy of the Tax Payment Receipt (for exportation of commodities); any other documents requested by the competent tax authority.

(2) The tax authority that receives the application should get the following work done in 20 working days: keep separate record books to manage the data submitted by the enterprise, register and maintain the files in time, verify the application, check the purchase of the domestically made equipment strictly against applicable regulations, check the logical validity and consistency of the data, fill in Approval of Income Tax Credit Arising from Purchase of Domestically-made Equipment by EFIs and Foreign Enterprises for the approved application, and issue replies to applicants.

8. Year-end reviews and verifications

(1) EFIs and foreign enterprises that have obtained the above approval shall file the following documents within 30 days after the end of a year: General Form for Approval of Income Tax Credit Arising from Purchase of Domestically-made equipment by Enterprises with Foreign Investment and Foreign Enterprises; Detailed Form of Income Tax Credit Arising from Purchase of Domestically-made equipment by Enterprises with Foreign Investment and Foreign Enterprises for the current year and the prior year; Certificate (photocopy) on paid-up enterprise income tax in the year of tax credit application and the year before the equipment purchase.

(2) The following work should be completed within 20 working days after the tax authorities receive the above documents: check if the documents are complete, truthful and logical, verify the total credit amount for enterprise income tax, confirm the creditable amount of the year, stamp the Form for Approval and the Detailed Form if no problems are identified, timely deliver the Detailed Form of Income Tax Credit Arising from Purchase of Domestically-made equipment by Enterprises with Foreign Investment and Foreign Enterprises to the enterprise.

(3) Where EFIs and foreign enterprises pass the review, the amount as verified by the tax authority shall be credited against the enterprise income tax of the year. When the enterprises file returns for the final settlement of the current enterprise income tax, they shall also truly indicate the tax credit verified.

9. Inspection and adjustment

After the payment made by EFIs and foreign enterprises on domestically made equipment has been approved to be credited against the enterprise income tax, if the tax authority concludes in a taxation inspection that any adjustment in the amount of the enterprise income tax for the year before the purchase is necessary, the credit basis should be adjusted accordingly, as well as the credited enterprise income tax in the subsequent years.

10. Tax credit for branches of EFIs

The request of income tax credit arising from the purchase of domestically-made equipment by any branch of an EFI shall be filed at the place where the head office is located unless the said branch is authorized to pay the enterprise income tax to local tax authorities. In the latter case, the request of tax credit may be submitted to the local tax office.