12. INCOME TAX

Effective January 1, 2008, the PRC government implemented a new corporate income tax law with a maximum rate of 25%. The Company is governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% (33% prior to 2008) on income reported in the statutory financial statements after appropriate tax adjustments. Under the 2008 Chinese tax law, the tax treatment of finance and sales-type leases is similar to US GAAP. However, the local tax bureau continues to treat CREG sales-type leases as operating leases. Accordingly, the Company recorded deferred income taxes.

The Company’s subsidiaries generate all of their net income from their PRC operations. Shanghai TCH’s effective income tax rates for 2011 and 2010 are 24% and 22%, respectively. Xi’an TCH’s effective income tax rate for 2011 and 2010 is 15% as a result of its high tech enterprise status that was approved by the taxing authority. Xingtai Huaxin’s effective income tax rate for 2011 and 2010 is 25%. Huahong and Erdos TCH’s effective income tax rate for 2011 and 2010 is 25%. Pingshan Shengda’s effective income tax rate for 2011 is 25%. Shanghai TCH, Xi’an TCH, Xingtai Huaxin, Huahong, Pingshan Shengda and Erdos TCH file separate income tax returns. If Xi’an TCH had not been granted high tech enterprise status, income tax expense for the year ended December 31, 2011, would have been increased by $1,725,123 and earnings per share would have been reduced by $0.04.

Shanghai TCH, as a business in a Development Zone, was subject to a 15% income tax rate. According to the new income tax law that became effective January 1, 2008, for those enterprises to which the 15% tax rate was previously applicable, the applicable rates shall increase as follows:

Year		Tax Rate
2012			25	%

There is no income tax for companies domiciled in the Cayman Islands. Accordingly, the Company’s consolidated financial statements do not present any income tax provisions related to Cayman Islands tax jurisdiction where Sifang Holding is domiciled.

The parent company, China Recycling Energy Corporation, is taxed in the U.S. and, as of December 31, 2011, had net operating loss carry forwards for income taxes of $108,000, which may be available to reduce future years’ taxable income as NOLs can be carried forward up to 20 years from the year the loss is incurred. Our management believes the realization of benefits from these losses may be uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

Consolidated foreign pretax earnings approximated $23.6 million and $23.3 million for the years ended December 31, 2011 and 2010, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent that such earnings are indefinitely invested outside the United States. As of December 31, 2011, $62.6 million of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At the existing U.S. federal income tax rate, additional taxes of approximately $11.7 million would have to be provided if such earnings were remitted currently.

The following table reconciles the U.S. statutory rates to the Company’s effective tax rate for the years ended December 31, 2011 and 2010, respectively:

	2011			2010
U.S. statutory rates		34.0	%		34.0	%
Tax rate difference – current provision		(8.9	)%		(10.4	)%
Effective tax holiday		(7.2	)%		(7.3	)%
Non-taxable income, net		(7.3	)%		(1.3	)%
Effect of tax rate change on deferred tax items		-%			3.1	%
Other		0.2	%		0.2	%
Valuation allowance on NOL		7.0	%		6.7	%
Tax per financial statements		17.8	%		25.0	%

Non-tax deductible expenses represented permanent non-tax deductible interest expense resulting from an amortization of a beneficial conversion feature for a convertible note, changes in fair value of conversion feature liability, and non-taxable income on gains from stock issued to a third party for settlement of debt on equipment purchase.

The provision for income tax expenses for the years ended December 31, 2011 and 2010 consisted of the following:

	2011		2010
Income tax expense - current	$	4,226,593	$	2,349,135
Income tax expense - deferred		6,352		4,516,905
Total income tax expenses	$	4,232,945	$	6,866,040