Ministry of Finance, State Administration of Taxation

Circular of the Ministry of Finance and the State Administration of Taxation on Relevant Taxation Policy Issues concerning the Securitization
of Credit Assets

Cai Shui [2006] No.5

The departments (bureaus) of public finance, bureaus of state taxes and those of local taxes of all provinces, autonomous regions,
municipalities directly under the Central Government, and cities specifically designated in the state plan, and the Financial Bureau
of Xinjiang Production and Construction Corps:

In order to carry out the “Some Opinions of the State Council on Promoting the Reform, Opening and Stable Development of Capital Markets”
(Guo Fa [2004] No.3), support and increase the proportion of direct financing, improve the structure of assets and liabilities of
banks, promote financial innovation, we hereby, upon approval of the State Council, the notice concerning the relevant issues on
taxation policies for developing the business of securitization of credit assets in the banking sector of China is set forth as follows
:

1.

With regard to the issues of Stamp Duty Policies

(1)

When an initiating institution of securitization of credit assets (i.e., the financial institution that transfers credit assets through
setting up a trust project for a certain purpose [hereinafter referred to as trust project], the same hereafter) trusts a trustee
institution (i.e., the institution that takes charge of managing the trust project properties and sells asset-backed securities on
the basis of its covenant on trust, the same hereafter) with the credit assets for securitization, the stamp duty shall not be levied
on the trust contract signed between both of the parties for the time being.

(2)

When a trustee institution entrusts a loan service institution (i.e., the institution accepts commission of the trustee institution
and takes charge of managing the loans, the same hereafter) to manage credit assets, the stamp duty shall not be levied on the entrusted
management contract signed between both of the parties for the time being.

(3)

Other taxable contracts signed during the course of securitization of credit assets between an initiating institution or trustee institution
and a fund custody institution (i.e., the institution that is entrusted by the trustee institution to take charge of custody of the
funds in the account of trust project properties, the same hereafter) a securities registration and trusteeship institution (i.e.,
China Government Securities Depository Trust & Clearing Co. Ltd.) or any other institution providing services in securitized transactions
shall be exempted from the stamp duty for the said initiating institution or trustee institution for the time being.

(4)

The selling of credit asset-backed securities by the trustee institutions and the trading of credit asset-backed securities by the
investors shall be exempted from stamp duty for the time being.

(5)

The fund accounting books specially set up by initiating institutions or trustee institutions for developing the business of securitization
of credit assets shall be exempted from stamp duty for the time being.

2.

With regard to the issues of Business Tax Policies

(1)

Business tax shall be imposed on the total amount of loan interest income obtained by a trustee institution from the credit asset
trust project that it is entrusted to manage.

(2)

During the course of securitization of credit assets, the loan service institutions that have obtained their service charge income,
the trustee institutions that have obtained their trust rewards, the fund custody institutions that have obtained their entrust rewards,
the securities registration and trusteeship institutions that have obtained their trustee fees, and other institutions that provide
services to securitization transactions and have obtained their service charge incomes, etc., shall all pay business taxes in accordance
with the current business tax policies.

(3)

Business tax shall be imposed on the price differential income obtained by financial institutions (including banks and non-bank financial
institutions) as investors from the trading of credit asset-backed securities; and no business tax shall be imposed on the price
differential income obtained by non-financial institutions as investors from the trading of credit asset-backed securities.

3.

With regard to the issues of Income Tax Policies

(1)

An initiating institution that has got the income from the assignment of credit assets shall calculate and pay enterprise income taxes
in accordance with the policies on enterprise income tax, and the losses incurred as a result of the assignment of credit assets
may be deducted in accordance with the policies on enterprise income tax. The assigned credit assets that are redeemed or replaced
by initiating institutions shall be disposed in accordance with the current policies on enterprise income tax concerning assignment
of assets.

In the process of assignment, redemption and replacement, the initiating institution and the trustee institution shall pay cost and
fees in the light of business transactions between independent enterprises; otherwise the taxation organ shall make adjustment according
to the relevant provisions of the “Law on the Administration of Tax Collection”.

(2)

Enterprise income tax shall not be imposed for the time being, in the course of trust on the part of trust project proceeds allocated
to institutional investors of asset-backed securities (hereinafter referred to as institutional investors) in the same year. For
the part not allocated to the institutional investors in the same year, the trustee institution shall, in the course of trust, declare
and pay enterprise income tax in accordance with the policies on enterprise income tax. When the trust project proceeds on which
the taxes have been paid in the course of trust are allocated to institutional investors again, the institutional investors shall
be disposed in accordance with the relevant current policies concerning enterprise income tax on after-tax proceeds.

(3)

In the process of securitization of credit assets, the loan service institutions that have obtained their service charge, the trustee
institutions that have obtained their trust rewards, the fund custody institutions that have obtained their rewards, the securities
registration and trusteeship institutions that have obtained their trustee fees, and other institutions that provide services to
securitization transactions and have obtained their service charge incomes, shall all calculate and pay enterprise income tax in
accordance with the policies on enterprise income tax.

(4)

During the period when enterprise income tax is exempted from the trust project proceeds for the time being, the institutional investor
to whom proceeds are allocated from the trust project shall, in the course of institutional investment, have its taxable income confirmed
in accordance with the accrual basis, and shall calculate and pay enterprise income tax in accordance with the policies on enterprise
income tax. An institutional investor that has obtained price differential income as a result of its trading in credit asset-backed
securities shall calculate and pay enterprise income tax in accordance with the policies on enterprise income tax, and the losses
of the trading in credit asset-backed securities may be deducted in accordance with the policies on enterprise income tax.

(5)

The trustee institutions and the securities registration and trusteeship institutions shall provide the taxation authority in charge
of the trust project and the taxation authority at the institutional investor’s locality with all the information on finance of trust
project and the detailed information of the proceeds allocated to the institutional investors.

(6)

An institutional investor who obtains income of distribution as a result of liquidation of the trust project shall pay enterprise
income tax in accordance with the policies on enterprise income tax, and the losses as a result of the liquidation may be deducted
in accordance with the policies on enterprise income tax.

4.

When a trustee institution disposes of the credit assets entrusted by an initiating institution for managing, the matters not contained
in the present Notice shall be dealt with in accordance with the present taxation laws, regulations and policies.

5.

The present Notice shall come into force as of the date when the experiment of securitization of credit assets starts.

Ministry of Finance

State Administration of Taxation

February 20, 2006