Circular of the State Administration of Taxation on Interpreting the Related Articles in the Second Protocol to the Tax Agreement
between China and Korea

Guo Shui Han [2007] No. 334

The state taxation bureaus and local taxation bureaus in each province, autonomous region, municipality directly under the Central
Government, and city specifically designated in the state plan:

The Second Protocol to the tax agreement between China and Korea (hereinafter referred to as the China-Korea agreement) has been in
force as from July 4, 2006. For the purpose of making it easy to understand and implement by all localities, we hereby render an
interpretation on Article 1 as follows:

This Article is aimed at preventing any taxpayer from improperly enjoying the treatments as provided in the tax agreement. To be
detailed, it means that this Agreement is not applicable to such a company, trust or any other entity given that the company or trust
or any other entity is a resident of a contracting state, be it directly or indirectly owned or controlled by one or more non-residents
(individuals or organizations) of this contracting state and in case the tax imposed by this contracting state on the income of this
company, trust or any other entity has reduced substantially in comparison with the circumstance under which it is owned or controlled
by the resident(s) of this contracting state. But if it actively conducts business operations, it shall be an exception. For instance,
where all shareholders of a Korea company are residents of other countries (non-residents of Korea), if the tax on the income of
this company is reduced by 50% in comparison with the circumstance under which this company is wholly owned by the resident(s) of
this contracting state after Korean tax authority has considered and implemented any preferential treatment as prescribed by law,
it may not enjoy the treatments as provided in the China-Korea Agreement either when this company acquires any income from China,
although it is a Korean resident. But if 90% or more of the amount of taxable income in Korea is derived from active trade or business
operations other than investments, the China-Korea Agreement is applicable to this Company.

Such provisions in this Article of the Second Protocol to the China-Korea Agreement is an effort made by the tax authorities of both
contracting states to adopt the international experience in the prevention of abuse of tax treaties. With a view to giving play to
the actual role of provisions of this Article please pay attention to other related information besides checking and verifying its
resident identity certificate when any Korean resident company applies for enjoying the treatments as provided in the China-Korea
Agreement (especially the preferential treatments in the Articles regarding dividends, interests and royalties).

The State Administration of Taxation

March 16, 2007