CIRCULAR OF THE MINISTRY OF FOREIGN TRADE AND ECONOMIC COOPERATION CONCERNING THE ESTABLISHMENT OF RESEARCH WITH FOREIGN INVESTMENT AND DEVELOPMENT CENTRE

The Ministry of Foreign Trade and Economic Cooperation

Circular of the Ministry of Foreign Trade and Economic Cooperation Concerning the Establishment of Research with Foreign Investment
and Development Centre

WaiJingMaoZiFa [2000] No.218

April 18, 2000

Commissions of Foreign Trade and Economic Co-operation of all provinces, autonomous regions, municipalities under directly under the
central government and municipalities separately listed on the State plan:

The State adopts a policy of encouraging the establishment of research with foreign investment and development centres in China. MOFTEC
hereby issues the Circular Concerning the Approval of Contracts and Articles of Association for the Establishment of Research with
Foreign Investment and Development Centres:

Article 1

Form and business scope of research with foreign investment and development centres

(1)

A research with foreign investment and development centre may take the form of a Sino-foreign equity joint venture, a Sino-foreign
contractual joint venture or a wholly foreign-owned enterprise established by foreign investors in accordance with the law (including
foreign-funded holding companies). They may also take the form of a separate department or a branch company within an enterprise
with foreign investment.

(2)

Such a centre should be an institution where research and development and experimentation (including intermediate experimentation
or research and development) are conducted in the field of natural sciences and related technology. The content of research and development
includes fundamental research, applied research, high-tech research and research for the purpose of social welfare, excluding those
projects prohibited in the Guideline Catalogue of Foreign Investment Industries. The centre is not allowed to conduct any technology
trading activities not related to the technological result of its research and development, or any production activities other than
intermediate experiments. The centre may transfer fruits of its technological research and development. It may also conduct co-operative
research and development with Chinese research institutions either under a management contract or a co-operation contract. A training
centre is not included in the category of research and development.

Article 2

Conditions for the establishment of a foreign-funded research and development centre

(1)

Having clearly-defined research and development field and specific research and development projects, fixed business location, machinery
and equipment as well as other conditions necessary for conducting research and development, and an investment of no less than 2,000,000
USD for research and development.

(2)

Having professional managerial and technical personnel, 80% or above of which should be technical staff with an educational background
on the undergraduate or higher level directly involved in research and development.

Article 3

Procedure for the establishment of a foreign-funded research and development centre

(1)

A research with foreign investment and development centre which takes the form of an equity or contractual joint venture or a wholly-owned
foreign enterprise should be subject to the approval of competent authorities on the provincial level.

(2)

Establishment of a research and development centre within an enterprise with foreign investment(including investment companies):

(a)

The establishment of a branch company or a separate department of research and development should be subject to the approval of competent
approving authorities in charge of the establishment of enterprises with foreign investment. However, if the enterprise with foreign
investment is within Category A of the Catalogue of Restricted Foreign Investment Industries, the approval should be granted by the
competent authority on the provincial level (or shall be accepted according to the subsequent paragraph for record).

(b)

If the enterprise with foreign investment is already in existence and its business scope includes research or development, materials
for the establishment of a separate department of research and development centre should be submitted retroactively to the original
approving authority for record; if its business scope does not include research and development, the establishment of a separate
department of research and development necessitates the revision of its contract and the articles of association and their submission
to the original approving authority for approval. Such research and development department should also meet the conditions prescribed
in Article 2 .

(3)

The following items should be included in the application submitted to the approving authority:

(a)

orientation, scope, principal objectives and plan for the implementation of research and development;

(b)

Location, personnel and other related technological requirements;

(c)

Sources, uses and amount of fund and relevant budgetary reports;

(d)

List of equipment and related technology, spare parts, research samples and chemical reagents imported for its own specific use within
the total investment or with its own capital;

(e)

Introduction about the advanced nature of the project and about the ownership of research and development results.

Article 4

Miscellaneous provisions

(1)

The research with foreign investment and development centre should conduct its activities in accordance with the law and its investment
should not be used for purposes other than research and development.

(2)

The research with foreign investment and development centre taking the form of a branch company or a separate department within enterprise
foreign investment should maintain a separate financial budget and a separate business account.

(3)

The investment for a research and development centre taking the form of a branch company or a separate department by an enterprise
with foreign investment within Category A of the Catalogue of the Restricted Foreign Investment Industries should not exceed 50%
of its total investment.

(4)

The research with foreign investment and development centre is required to submit to its approving authority its annual report on
its research and development activities by March 31 of each year.

(5)

Please see the attachment for the preferential State policies granted to research with foreign investment and development centres.

Here is notified. Attachment:Policies for Research and Development Centres with Foreign Investment

1.

Equipment and related technology as well as spare parts imported within the total investment for self-use (excluding the items as
mentioned in the “Catalogue of Goods Imported by Enterprises with Foreign Investment Not Exempted from Taxation” and ships, aircraft,
vehicles for special purposes and construction machinery), such as laboratory use or intermediate experiment not reaching a production
scale, can be exempted from customs duties and other taxes related to importation.

2.

For the purpose of self-funded technical innovation, the equipment and related technology as well as spare parts imported within its
approved business scope in accordance with the Circular on the Importation Taxation Policies to Further Encourage Foreign Investment
(ShuShui [1999] No.791) can be exempted from customs duties and other taxes related to importation.

3.

The income from technological transfer of its own research and development results is exempted from business tax.

4.

If its research and development investment in the current year is 10% higher of that of the previous year, upon approval by the taxation
authority, 50% of the actual research and development investment in the current year may be deducted from the taxable income of the
same period.

5.

Other preferential policies formulated by the State.