On September 5, 2006, the Government of the People’s Republic of China and the Government of the Republic of Mauritius signed a new protocol to amend the 1994 China-Mauritius Treaty for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income, (the “1994 China-Mauritius Double Tax Treaty”). The new protocol introduces two major amendments to the 1994 China-Mauritius Double Tax Treaty in relation to: (1) capital gains and (2) exchange of information.

The 1994 China-Mauritius Double Tax Treaty offers a full tax exemption on capital gains derived by a Mauritius company from disposal of equity interests in a PRC company, provided that the assets of the PRC company do not principally consist of, directly or indirectly, immovable properties located in the PRC.

The new protocol imposes a further restriction, in addition to the existing restriction on immovable properties, that if a Mauritius company owns directly or indirectly 25 percent or more equity interests in the PRC company in the 12 months preceding the disposal of equity interests in the PRC company, the Mauritius company may be subject to taxes in the PRC on the capital gains derived by it from the disposal of equity interests in the PRC company.

The new protocol also amends the “Exchange of Information” provisions under the 1994 China- Mauritius Double Tax Treaty to expand the scope of the information exchange between the PRC and Mauritian tax authorities to the greatest possible extent in order to assist the two governments in enforcing the provisions of the 1994 China-Mauritius Double Tax Treaty or their respective domestic laws concerning taxes of every kind rather than income taxes only. As a result, the PRC and Mauritian governments will be assumed more obligation to obtain the requested information under the new protocol. It is anticipated that the broadened scope of information exchange will enable the PRC government to combat tax avoidance problems in a more effective manner. The new protocol will come into force on the date after the ratification procedures have been completed by the two governments. The provisions of the new protocol will apply to capital gains obtained since the following dates:

i) in respect to China, the capital gains obtained in the taxable years beginning on or after January 1 in the calendar year following the year in which the new protocol becomes effective;

ii) in respect to Mauritius, the capital gains obtained in the income years beginning on or after July 1 in the calendar year following the effective date of the new protocol.

has been a popular jurisdiction which many foreign investors use as a base for their investments in the PRC due to the capital gains exemption and the reduced dividend withholding tax provisions under the China-Mauritius Double Tax Treaty. However, once the new protocol becomes effective, any capital gains realized from the disposal of equity interests in the PRC company by a Mauritius company are likely to be taxable in the PRC.