On November 27, 2014, the State Council issued the State Council Circular on Clearing and Regulating Preferential Tax Policies (Guo Fa (2014) No. 62, "Circular 62"), requiring all provincial people's governments and the relevant agencies to make special efforts to clean up preferential tax and non-tax policies, including contracts entered into with enterprises in the past. All tax preferential policies that violate the national laws and regulations shall be shut down, and circulars issued to notify their termination. When certain preferential policies should be retained in the absence of regulatory barriers, the provincial people's governments or relevant agencies shall apply to the Ministry of Finance for approval and consolidation before making the special submissions to the State Council.

The State Council issued the State Council Circular on Matters Concerning Preferential Tax Policies (Gua Fa (2015) No. 25,"Circular 25") on May 11 to provide eased some of the requirements for the special cleanups stipulated in Circular 62 that was released at the end of last year. Pursuant to Circular 25, the fixed-term preferential policies that have already been released in all regions by all agencies should be implemented pursuant to the relevant fixed term periods. For policies that are not subject to a fixed term but still require adjustments to, the local governments and relevant agencies will set a transitional period in which such policies will continue to be implemented. Circular 25 also specifically points out that preferential policies under contracts entered into with enterprises will continue to be effective, and the portions that have already been carried out shall not be retroactive. In addition, except for matters which have been stipulated under laws and administrative regulations, new preferential policies from any region or agency that involve tax collection or non-tax revenues requiring the approval shall require the prior approval of the State Council before implementation. All other policies will be implemented after approval from the local governments and relevant agencies. Generally, arranged expenditures should not be linked to tax or non-tax revenues paid by enterprises. Circular 25 also specifically points out that the special cleanups required under Circular 62 will not be implemented until separate arrangements have been made in the future.

Circular 25 eases the strict criteria for cleaning up preferential tax policies under Circular 62 to a certain extent, even though the direction that preferential tax policies will gradually be set collectively by the state remains unchanged. To accommodate this development, it is advisable to confirm if the applicable preferential tax policies are subject to a fixed term or are contractually guaranteed. If so, such policies will continue to be remain in effect or implemented under Circular 25; if not, it is advisable to coordinate with the local government agencies for a feasible transitional period to protect the investors' rights. For future preferential tax policies, it is necessary to obtain a full understanding if the policy is backed by any mandate pursuant to laws or administrative regulations.