(d) Method of Computation

Tax payable = taxable income * applicable tax rate

Taxable income = total annual income - costs - expenses - losses

(e) Filing of Tax Returns

Income tax on FIEs and foreign enterprises is levied on an annual basis and paid in advance in quarterly instalments. Taxpayers should file their quarterly income tax returns with the local tax authorities and pay the tax within 15 days as from the end of each quarter. They should file their annual income tax returns together with their final account statements within four months as from the end of each tax year, and make their final settlement within five months as from the end of the tax year. Any excess will be refunded and any deficiency will have to be paid.

For FIEs and foreign enterprises that have no establishment or venue in China but derive incomes from profits, interest, rentals, royalties and other incomes from sources in China, and for those that do have establishments or venues in China but derive incomes that are not effectively connected with such establishments or venues, the income beneficiary should be the taxpayer and the payer should be the withholding agent. The tax should be withheld from the amount of each payment by the payer. The withholding agent should, within five days, turn the amount of taxes withheld on each payment over to the State Treasury and submit a withholding income tax return to the local tax authorities.

6. Individual Income Tax

Individual income tax is levied on the incomes derived from sources both inside and outside China of individuals who have domicile in China, or although without domicile have resided for one year or more in China; and on the incomes derived from sources within China of individuals not domiciled or resident in China, or individuals not domiciled but have resident in China, or individuals not domiciled but have resided in China for less than one year.

(a) Taxpayer and Tax Liability

* Resident taxpayers refer to Chinese citizens and foreign nationals residing in China. They are individuals domiciled in China (who, by reason of their permanent registered address, family or economic interests, habitually reside in China); or foreign nationals, overseas Chinese, and Hong Kong, Macau and Taiwan compatriots who have resided in China for a calendar year in a tax year. Resident taxpayers have unlimited tax liabilities and have to pay individual income tax to the Chinese government on incomes from global sources.

* Non-resident taxpayers refer to foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are neither domiciled nor resident in China; or foreign nationals, overseas Chinese and Hong Kong, Macau and Taiwan compatriots who are not domiciled in China and have resided in China for less than a calendar year in a tax year. Non-resident taxpayers have limited tax liabilities and are required to pay individual income tax to the Chinese government only on incomes from sources inside China.

(b) Taxable Items, Tax Rates and Deduction Standards

* Income from wages and salaries

Income from wages and salaries is taxed at progressive rates ranging from 5% to 45%

Level / Monthly Taxable Income (Rmb) /Tax Allowable rate /Deduction

1 / 500 or less / 5% / 0
2 / Portion from 500 to 2,000 / 10% / 25
3 / Portion from 2,000 to 5,000 / 15% / 125
4 / Portion from 5,000 to 20,000 / 20% / 375
5 / Portion from 20,000 to 40,000 / 25% / 1,375
6 / Portion from 40,000 to 60,000 / 30% / 3,375
7 / Portion from 60,000 to 80,000 / 35% / 6,375
8 / Portion from 80,000 to 100,000 / 40% / 10,375
9 / Portion from 100,000 upwards / 45% / 15,375

Taxable income: For people working in China, the taxable income is the balance of their monthly income after deducting Rmb800 (the allowable deduction may be increased by the local tax bureaus depending on the living standard of each city). For personnel recruited from outside China, the taxable income is the balance of their monthly income after deducting Rmb4,000.

1

2

3

4

5

6

7