58 th UIA Congress at Florence Foreign Investments Commission October 30, 2014

1. Is my country attractive to foreign investment: Tax incentives in China 58th UIA Congress at FlorenceForeign Investments CommissionOctober 30, 2014 Philip ZHANG, Partner 总机 T: +1 212 220 9399 |传真F: +1 212 202 3758 | 电邮 E: pzhang@zhonglun.com 340 Madison Avenue, 19th Floor, New York, New York 10173, USA Zhong Lun Law FirmBeijing ∙ Shanghai ∙ Shenzhen ∙ Guangzhou ∙Wuhan ∙ Chengdu ∙ Tokyo ∙ Hong Kong ∙ London∙ New York

2. Table of Contents • Introduction to the Firm • Tax incentives in China • Statutory tax rate • Regional incentives • Sectoral incentives • Export incentives and free trade zones • Other incentives • Tax Considerations in Respect of China M&A

3. Zhong LunLaw FirmChambers 2014 China Law Firm of the Year By all objective measures . . . • Scope and scale • Breadth and depth of practice area expertise • Geographical footprint • Legal industry rankings • Client list • Legal knowhow resources • Local knowledge and international reach

4. Zhong Lun – “absolutely top . . exceed[ing] any of the other law firms we have used” (Chambers Asia 2010) More than 200 partners and more than 900 total lawyers and other legal professionals Our lawyers include Recognized leaders in the Chinese legal profession and Experienced senior lawyers from leading international law firms

5. A Leading Full Service Firm for China The firm’s major practices cover all key areas of commercial law specializations, including: • Corporate Finance and Capital Markets • Mergers and Acquisitions • Private Equity and Venture Capital • Foreign Direct Investment • Banking and Finance • Structured Finance and Securitization • International Trade and WTO • Technology, Media and Telecommunications • Intellectual Property • Bankruptcy and Corporate Reorganization • Dispute Resolution • Real Estate and Construction

6. Our Network of Offices Zhong Lun Law Firm is headquartered in Beijing and has offices in Shanghai, Shenzhen, Guangzhou, Chengdu and Wuhan together with international offices in Hong Kong,Tokyo, London and New York. Local knowledge and relationships are critical in China. In addition to our Zhong Lun network of offices, we have identified leading law firms and lawyers in more than two dozen additional cities across all regions of China which can provide assistance with local legal matters ranging from local government approvals and registrations to local litigation and arbitration matters.

7. Tax incentive in China

8. Statutory tax rate • The standard income tax rate applicable to enterprise with foreign investment is 30% • The local government and municipalities levy 3% tax on net taxable income, this may be waived or reduced at the discretion of the local government • So the effective corporate tax rate is 33% • Withholding tax of 20% is levied on dividend income received by foreign companies that do not have permanent establishments or sites in China; However, dividend received from FIEs are exempt from tax on that income which is not effectively connected with a permanent establishment • Withholding tax on interest is 20% • Withholding tax on royalties is 20%. Royalties paid for the use of technology that is held to be advanced, or provided on preferential terms, may be exempt from tax. The rate is reduced to 10% on royalties paid for the use of certain proprietary technology for specific important development areas and paid by foreign investment enterprises located in specified investment zones

9. Regional incentives Special Economic Zones (SEZs) • Special incentives are granted for investment in SEZs, such as Shantou, Shenzhen, Zhuhai, Xiamen, and Hainan • The rate of income tax levied on production-oriented foreign investment enterprises (FIEs) in SEZs is 15% Economic and Technological Development Zones (ETDZs) • ETDZs are located In some coastal cities • Similar to SEZs Shanghai Pudong New Area, High or New technology Development Zones, etc.

10. Sectoral incentives • Foreign investment enterprises (FIEs) scheduled to operate for at least 10 years, and engaged in production-oriented activities, are entitled to an exemption from income tax for two years, starting with the first profit-making year. This is followed by a 50% reduction of the usual income tax rate over the subsequent three years • The State Council is authorized to issue separate exemption and reduction regulations for FIEs engaged in the exploitation of resources such as petroleum, natural gas and rare or precious metals • Foreign investment enterprises (FIEs) engaged in agriculture, forestry or animal husbandry or located in a remote undeveloped area may, with the approval of the State Council, be allowed a 15-30% reduction in the usual income tax rate for a further 10 years after the expiration of the initial tax exemption and reduction period • Foreign investment enterprises (FIEs) that has certified to be technologically advanced may be granted a 50% reduction of the usual income tax rate • If foreign investment exceeds US$ 5 million, and FIE that is established in an SEZ, that is engaged in a service industry, may be grated an exemption form income tax in its first profit making year, followed by a 50% reduction in the next two years • A high or new-technology enterprise and that is established in a high and new-technology development zone may be granted an exemption form income tax for two years, starting with the first profit-making year

11. Export incentives and free trade zones • Export-oriented enterprises may be entitled to further tax reductions after the expiration of the initial tax exemption and reduction period • In any year in which the FIE exports at least 70% of its total output, it may be granted a 50% reduction of the usual income tax rate • Free trade zones are entitled to the following advantage: Goods imported into the zone from abroad are exempt form customs duty; and products manufactured in the free trade zone are exempted for customs duty when sold inside the free trade zone or shipped outside China

12. Other incentives • A foreign investor that directly reinvests its share of profits derived from a FIE may obtain a refund of 40% of the tax already paid by the FIE on the reinvested amount • The profits must be reinvested for at least five years • A 100% tax refund is granted to foreign investors if profits are reinvested in an export-oriented enterprise or a technologically advanced enterprise

13. Tax Considerations in Respect of China M&A Tax structuring options and tax reporting obligations for China M&A deals vary according to the nature of the deal (onshore vs. offshore) and whether you are buyer or seller. For example: If you are selling an onshore/PRC entity (e.g. a FIE or a domestic entity), you are subject to PRC capital gains tax at the following rate • 20% if you are a PRC or foreign individual, • 25% if you are a PRC entity’ • 10% if you are a foreign entity. Tax treaties may provide a tax exemption in certain cases. If the buyer is a PRC entity, it will withhold the applicable capital gains taxes. If the buyer is not a PRC entity, then the capital gains tax is payable on a self-assessment basis. If you are buying an onshore/PRC entity, the requirements vary according to the specific circumstances: • If you are a PRC buyer and the seller is a foreign entity, you need to report the transaction to the tax authorities within 30 days after the share transfer agreement is signed and withhold the applicable capital gains tax. • None of the above will apply if both the seller and the buyer are PRC entities. • If you are a foreign buyer, you do not need to withhold the tax even if the seller is also a foreign entity, but the onshore entity (target) you are purchasing needs to report the share transfer to the tax authorities and assist in collecting the tax in such a case

14. Tax Considerations in Respect of China M&A – part 2 If you are selling an offshore/non-PRC entity (e.g. an offshore holding company): • This transaction previously was not subject to PRC tax but is now subject to the 10% PRC capital gains tax under State Administration of Tax (SAT) Circular 698, if the offshore holding company doesn’t have any substance and is located in a low/no tax jurisdiction. • You need to report the transaction to the tax authorities within 30 days after signing the share transfer agreement if certain conditions are met. • It is important to note that this reporting requirement may apply even if it is a global M&A deal where the PRC entity is many tiers lower than the entity being transferred. If you are buying an offshore/non-PRC entity, you need to keep the following points in mind: • you do not have a withholding obligation, but the ultimate Chinese target may need to report the share transfer to the tax authorities and assist in collecting the tax. • There may be a double taxation issue if you sell the onshore entity later on (see the example below). • Treaty-based preferential withholding tax rates are difficult to apply for under SAT Circular 601 and Circular 124.

15. Tax Considerations in Respect of China M&A – A Case Study US1 US2 Example: US2 purchases HK from US1 for acquisition price of $1 billion, but the registered capital of China is only $10 million. Question: What happens if HK later sells China for $1.2 billion? Answer: The difference between the $1 billion and $10 million would be taxed again at 10%! HK HK China China

16. Tax-free Reorganizations in Connection with China M&A Tax-free reorganization has become difficult to structure under the new M&A tax rules (SAT Circular 59) and is available only if the following 5 tests are satisfied: • “Business purpose”: a reasonable business purpose with no main purpose of reducing, avoiding, or deferring tax • “Substantially all”: the shares or assets acquired are no less than 75% of the target’s total shares or assets • “Equity consideration”: no less than 85% of the total consideration must be in equity form • “Continuity of business enterprise”: the substantial operation of the target will remain unchanged within 12 months after the reorganization • “Continuity of proprietary interest”: the main shareholders cannot dispose of their received equity considerations within 12 months after the reorganization. Cross-border tax-free reorganization is even more difficult and is only available in very limited cases: • Foreign to foreign – limited to the transfer of a PRC entity to a 100% directly held foreign subsidiary; certain conditions apply • Foreign to PRC – limited to the transfer of a PRC entity to a 100% directly held PRC entity For M&A transactions electing a tax-free treatment, enterprises involved are required to file with the in-charge tax authorities for record filing purposes

17. Our International M&A Practice Zhong Lun's M&A practice was highly recommended by Chambers Global 2010 (China/Hong Kong), and ranked in band 1 by Chambers Asia Guide (2008-2011). As a leading player in M&A, Zhong Lun has extensive experience in mergers, acquisitions, restructuring, and other strategic reorganization and alliances. Zhong Lun has particular strengths in cross-border transactions as well as deals involving listed companies. Our industry expertise and innovative approaches have helped international clients efficiently and effectively enter the China market, as well as facilitated successful expansion of domestic clients into international markets. Zhong Lun has consistently been ranked as one of the top M&A law firms by many respected surveys and tables. Chambers Asia Guide 2009, for example, praised Zhong Lun as a first class "pioneering firm with some incredibly strong partners". Asia Law & Practice has consistently recognized a number of the partners in our M&A practice as Asialaw Leading Lawyers. We have also won awards from Asian Legal Business, International Financial Law Review, Bloomberg, Fortune and Asian Counsel for our professional achievements in cross-border M&A transactions. Scope of Services: • Advising on industry access policies • Structuring and tax planning • Legal due diligence • Documentation and negotiation • Assisting in approval and filing procedures • Issuing legal opinions as required by clients or regulators • Post-transaction integration We offer full service M&A support with full coverage across all regions of China With excellent connections to key government agencies, this firm frequently assists foreign and domestic clients. Sources say: "It provides exactly the sort of proactive assistance you need." "The lawyers laid out a step-by-step road map, complete with turnaround time for the necessary paper work – they showed impeccable organization and a methodical approach.“ — Chambers Asia Guide 2010

18. Thank you! Philip ZHANG, Partner 总机 T: +1 212 220 9399 |传真F: +1 212 202 3758 | 电邮 E: pzhang@zhonglun.com 340 Madison Avenue, 19th Floor, New York, New York 10173, USA Zhong Lun Law FirmBeijing ∙ Shanghai ∙ Shenzhen ∙ Guangzhou ∙Wuhan ∙ Chengdu ∙ Tokyo ∙ Hong Kong ∙ London∙ New York