New Enterprise Income Tax Law Diminishes Competitive Tax Advantages for Foreign Invested Enterprises

The regulatory environment applicable to private equity and venture capital (“PE/VC”) investors in China has witnessed a radical transformation over the past eighteen months, evidenced by massive overhauls of the laws and regulations applicable to foreign exchange, mergers and acquisitions, and internet-related businesses.

Another tectonic movement was felt on March 16, 2007, when China adopted the new Enterprise Income Tax Law, which goes in effect on January 1, 2008 (the “New EIT Law”) and will replace the tax regimes which have been governing foreign- invested enterprises (“FIEs”) since the early 1990s.

While Chinese law has traditionally favored FIEs, responding in part to China’s accession to the WTO, the New EIT Law attempts to reduce the disparate treatment between FIEs and domestic funded enterprises (“DEs”). As the changes will have a profound effect on PE/VC investors in China and the portfolio companies in which they invest, investors must make sure they are familiar with the

major themes introduced by the New EIT Law.