LDK Solar Co., Ltd. - Asia Europe Clean Energy (Solar) Advisory Co ...

tax rates and other measures. Foreign-invested enterprises that are determined by PRC tax authorities to be
manufacturing companies with authorized terms of operation for more than ten years are eligible for:
‚ a two-year exemption from the national enterprise income tax beginning with their first profitable
year; and
‚ a 50% reduction of their applicable national enterprise income tax rate for the succeeding three years.
The local preferential enterprise taxation treatment is within the jurisdiction of the local provincial
authorities as permitted under the current PRC tax laws relating to foreign-invested enterprises. The local tax
authorities decide whether to grant any tax preferential treatment to foreign-invested enterprises on basis of
their local conditions. The Jiangxi provincial government has announced that energy companies with
authorized terms of operation for more than ten years are eligible for:
‚ a five-year exemption from the 3% local enterprise income tax from their first profitable year; and
‚ a 50% reduction of their local enterprise income tax rate for the succeeding five years.
Under current PRC laws and regulations, Jiangxi LDK Solar is entitled to a two-year exemption from the
national enterprise income tax for 2006 and 2007 and will be subject to a reduced national enterprise income
tax rate of 15% from 2008 through 2010. Likewise, Jiangxi LDK Solar is entitled to a five-year exemption
from the local enterprise income tax beginning in 2006 and will be subject to a reduced local enterprise income
tax rate of 1.5% from 2011 through 2015. When these tax benefits expire, the effective tax rate of our PRC
subsidiary will increase, which will result in an increase in our income tax expenses.
In March 2007, the National People's Congress of China enacted a new Enterprise Income Tax Law,
which will become effective on January 1, 2008. The new tax law would impose a unified income tax rate of
25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain limited
exceptions. The new tax law permits companies to continue to enjoy their existing preferential tax treatment
until such treatment expires in accordance with its current terms. Under the new tax law, ""high and new
technology enterprises'' specially supported by the PRC government will continue to enjoy a reduced national
enterprise tax rate of 15%. The new tax law, however, does not specify what high and new technology
enterprises will be eligible for special support from the government. Our wholly owned subsidiary, Jiangxi
LDK Solar, obtained the ""high and new technology enterprise'' status in December 2006. Such status is valid
for two years and is renewable upon review and approval by the Science and Technology Bureau of Jiangxi
Province. If we fail to maintain our status as a ""high and new technology enterprise'' or fail to qualify for
special support from the PRC government, we will be subject to the 25% unified enterprise income tax rate
beginning in 2011 after our current preferential tax treatment expires.
Under the current PRC tax law, dividend payments to foreign investors made by foreign-invested
enterprises such as our PRC subsidiary, Jiangxi LDK Solar, are exempt from PRC withholding tax. Pursuant
to the new tax law, however, dividends payable by a foreign-invested enterprise to its foreign investors will be
subject to a 20% withholding tax, unless any such foreign investor's jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding arrangement. The Cayman Islands, where we are
incorporated, does not have such a tax treaty with China. Although the new tax law contemplates the
possibility of exemptions from withholding taxes for China-sourced income of foreign-invested enterprises, the
PRC tax authorities have not promulgated any related implementation rules and it remains unclear whether
we would be able to obtain exemptions from PRC withholding taxes. In addition, under the new tax law,
enterprises organized under the laws of jurisdictions outside China with their ""de facto management bodies''
located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise
income tax at the rate of 25% on their worldwide income. The new tax law, however, does not define the term
""de facto management bodies.'' If a majority of the members of our management team continue to be located
in China after the effective date of the new tax law, we may be considered a PRC resident enterprise and
therefore subject to PRC enterprise income tax at the rate of 25% on our worldwide income.
If our current tax benefits expire or otherwise become unavailable to us for any reason, our profitability
may be materially and adversely affected.
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