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Since opening its markets in the late 1970s, China has applied separate income tax regimes to foreign invested enterprises (FIEs) to the disadvantage of domestic enterprises. As a result, China has attracted massive foreign investments and imported advanced technologies, but has ingrained defects into its economy and investment environment. This article reviews the development of China’s tax incentive policies, and analyses their effect on FIEs. It also explains the changes to tax incentive policies after the enactment of the new Enterprises Income Tax Law. This law indicates the growth of China’s economic regime and the shift towards a more mature and systematic taxation regime that will effectively utilise foreign direct investment (FDI). The new taxation regime will facilitate the structural change necessary for economic growth, and reinvigorate the suffering industrial structure of the nation and its many regions.