Sohu.com (SOHU)

If we cannot meet certain requirements of the Corporate Income Tax Law, our effective tax for 2008 and beyond would be increased significantly.

In March 2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which were effective January 1, 2008. The Corporate Income Tax Law, among other things, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises. New technology enterprises will enjoy a favorable tax rate of 15%, but the qualifying criteria for a new technology enterprise under the Corporate Income Tax Law have not been released yet. The previous income tax laws and rules, which stipulated income tax rates for domestic and foreign invested enterprises at different rates, expired upon the effectiveness of the Corporate Income Tax Law.

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The Corporate Income Tax Law provides a five-year transitional period for those entities established before March 16, 2007, which enjoyed a favorable income tax rate of less than 25% under the previous income tax laws and rules, to gradually change their rates to 25%. In addition, the Corporate Income Tax Law provides grandfather treatment for companies qualified as new technology enterprises under the previous income tax laws and rules and established before March 16, 2007 if they continue in the period after January 1, 2008 to meet the criteria for new technology enterprises under the previous income tax laws and rules. The grandfather provision allows these enterprises to continue to enjoy their unexpired tax holiday under the previous income tax laws and rules.

The Corporate Income Tax Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China, which were exempted under the previous income tax laws and rules. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. Holding companies in Hong Kong, for example, will be subject to a 5% rate. Most of our China-based subsidiaries, Sohu Era, Sohu Media, Sohu Software, Sogou Technology, Go2Map Software and AmazGame Age are invested by immediate foreign holding companies in Hong Kong, except for Sogou Technology. All of these foreign invested enterprises will be subject to the withholding tax on January 1, 2008. Since we intend to reinvest our earnings to further expand our businesses in mainland China, our foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of December 31, 2007, we have not recorded any withholding tax on the retained earnings of our foreign invested enterprises in China.

Currently, there are divergent views on how the Corporate Income Tax Law will be implemented. The Company's ultimate applicable effective tax rate in 2008 and beyond will depend on many factors, including but not limited to whether certain of its legal entities will obtain an approval of their new technology enterprise status under the Corporate Income Tax Law, whether they could continue to enjoy the unexpired tax holidays and how the withholding tax on dividends will be applied. If any of Sohu Era, Sohu Media, Sogou Technology, AmazGame Age, Sohu Internet, Sogou Information and Gamease Age cannot obtain an approval on their new technology enterprise status under the Corporate Income Tax Law and/or cannot continue to enjoy the unexpired tax holidays or if the withholding tax on dividends is applied in a manner different from our understanding, our effective tax rate will be increased significantly. Also, under the Corporate Income Tax Law, the tax bureau may disallow us to deduct certain types of expenses.

The Corporate Income Tax Law emphasizes the requirement of an arm’s length basis for transfer pricing arrangements between related parties. Also, it requires enterprises with related party transactions to prepare transfer pricing documentation which includes the basis for determining pricing, the computation methodology and detailed explanations. Under a tax inspection by tax authorities, if our transfer pricing arrangements between the China-based subsidiaries and VIEs are judged as tax avoidance, or related documentation does not meet the requirements of the Corporate Income Tax Law, our China-based subsidiaries and VIEs may be subject to tax adjustments and late payment interest.

If we
cannot meet certain requirements of the Corporate Income Tax Law, our effective tax for 2008 and beyond would be increased significantly.

In March
2007, the Chinese government enacted the Corporate Income Tax Law, and promulgated related regulations, which were effective January 1, 2008. The Corporate Income Tax Law, among other things, imposes a unified income tax rate of 25% for both
domestic and foreign invested enterprises. New technology enterprises will enjoy a favorable tax rate of 15%, but the qualifying criteria for a new technology enterprise under the Corporate Income Tax Law have not been released yet. The previous
income tax laws and rules, which stipulated income tax rates for domestic and foreign invested enterprises at different rates, expired upon the effectiveness of the Corporate Income Tax Law.