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10.4. Specific Regimes

R&D and New/High Tech Industry Regimes

China has a broad tax regime in place regarding enterprises engaged in R&D or the production of high and new technology products and services. The main incentive programs and the related criteria are as follows.

Reduced Corporate Income Tax for High and New Technology Enterprises

Certain high and new technology enterprises are eligible for a reduced corporate income tax rate of 15% for three consecutive years (can be renewed). Eligible sectors include:

  • Electronic information technology;
  • Biological and new pharmaceutical technology;
  • Aviation and aerospace technology;
  • New material technology;
  • High technology service industry;
  • New energy and energy conservation technology;
  • Resources and environmental technologies; and
  • Advanced manufacturing and automation.

Effective 1 January 2018, losses incurred by qualified High and New Technology Enterprises may be carried forward for ten years (see Sec. 7.).

In order to qualify as a High and New Technology Enterprise (HNTE), the enterprise must meet the following conditions:

  • Must have existed for at least a year at the time it applies for HNTE status;
  • The enterprise must own the intellectual property (IP) rights of key technologies which show core support to their main products or services gained through independent R&D, purchase, transfer, donation, or acquisition;
  • The technology must be approved for use by the qualifying sector;
  • The enterprise’s R&D personnel carrying out related activities must represent at least 10% of the enterprise’s total employees for the year concerned (reduced from 30% effective 2016, and the condition that the personnel hold a college degree or above is removed);
  • The ratio of the enterprise’s R&D expenses to revenue in the past three years (or actual years if it hasn’t existed for three years) must be at least:
    • 5% if revenue in the most recent year does not exceed CNY 50 million (reduced from 6% effective 2016);
    • 4% if revenue in the most recent year is up to CNY 50 million, but does not exceed CNY 200 million; or
    • 3% if revenue in the most recent year exceeds CNY 200 million;
  • R&D expenses in China must represent at least 60% of the enterprise’s worldwide R&D expenses;
  • Revenue from high/new-tech products or services must represent at least 60% of the enterprise’s total revenue; and
  • The enterprise must not have committed any serious violations regarding work safety or environmental law in the 12 months prior to applying for HNTE status.

In order to obtain HNTE status, the enterprise must apply with the competent authority and submit documentation demonstrating that it meets the conditions. An expert panel will review the documentation and provide comments to the competent authority, and if approved, the HNTE certificate will be issued.

An enterprise must maintain the following documentation:

  • HNTE status certificate;
  • Documentation supporting that the HNTE status conditions are met;
  • Documentation on the intellectual property;
  • Documentation confirming the main products and services are within the scope of the HNTE incentive scheme;
  • Documentation on total personnel and R&D personnel;
  • Documentation on R&D expenses for the current and previous two years; and
  • Other information that may be required by the provincial tax authority.

Once issued, the enterprise will be eligible for the reduced tax rate and other benefits from the year the certificate is issued. If an enterprise subsequently fails to meet the conditions or commits serious violations regarding work safety or environmental law, the certificate will be revoked, and the tax benefits will be canceled retroactively from the year the conditions were no longer met, or the violation occurred.

The incentives apply from the year the HNTE status certificate is issued, and the enterprise completes all filing procedures.

In the year of the expiry of the HNTE status, a tax prepayment shall be made by the enterprise at the rate of 15%. If the HNTE status certificate is not renewed by the end of the year it expires, an additional payment must be made for the difference between the reduced rate and the standard rate (25%).

Super Deduction for Eligible R&D Expenditures

The super deduction tax incentive allows a 150% deduction of eligible R&D expenses. If the expenses are capitalized, 150% of the amortization may be deducted. An enterprise performing R&D activities may generally qualify for the increased super deduction, if it is a registered resident enterprise in China, has 500 or fewer employees, and its annual sales and total assets do not exceed CNY 200 million.

From 1 January 2018 to 31 December 2023 (extended from 31 December 2020), the super deduction is increased to 175% for all qualifying companies.

This deduction is increased to 200% (increased from 175% effective 1 January 2022) for eligible SMEs for expenses that have not created intangible assets. Where the expenses incurred by SMEs result in intangible assets, the amortization base of such intangible assets is increased from 175% to 200% from 1 January 2022.

Similarly, the super deduction is increased to 200% for R&D expenses actually incurred by manufacturing industries that have not resulted in the creation of intangible assets, effective 1 January 2021.  For R&D activities that have resulted in the creation of intangible assets, 200% of the cost of the intangible assets can be amortized before tax. The benefit can be availed by qualifying manufacturing enterprises whose main business income (i.e., income from manufacturing activities) accounts for more than 50% of total income in a year.

Under Circular 119/2015, effective 1 January 2016, the rules regarding the R&D super deduction were amended and clarified as follows.

Eligible and Excluded R&D Activities and Sectors

The incentive may apply to all R&D activities and sectors, unless specifically excluded. Eligible R&D activities are defined as activities that are continuous and systematic with a defined objective to:

  • Obtain or innovatively apply new knowledge in science or technology; or
  • Substantially improve technology, products, services, or processes.

Activities that are specifically excluded include:

  • Regular upgrades of products or services;
  • Direct application of new publicly available scientific and research results, such as new production processes, materials, equipment, products, services, or knowledge;
  • Technical support for customers after commercialization;
  • Repeated or simple changes of existing products, services, technology, materials, or production processes;
  • Market research and studies, efficiency surveys, or management studies;
  • Normal quality control, test analysis, repair, or maintenance in industrial or services processes; and
  • Studies related to social sciences and humanities.

Industries that are specifically excluded include:

  • Tobacco manufacturing;
  • Accommodation and catering;
  • Wholesale and retail;
  • Real estate;
  • Leasing and commercial services;
  • Entertainment; and
  • Others industries that may be stipulated by the MOF and SAT as ineligible.

Eligible Expenses

Expenses that are eligible for the incentive include:

  • Salaries and mandatory social security contributions for employees engaged in R&D activities and service fees for externally engaged R&D personnel;
  • Design expenses for new products and expenses for new production processes;
  • Materials, fuel, and power costs for R&D activities;
  • Mold, equipment, and manufacturing fees for test and trial products;
  • Samples, prototypes, and purchase costs for general testing if not treated as fixed assets;
  • Testing fees for trial products, including clinical trials for new medicines and testing fees for onsite exploration and development technology;
  • Operation, maintenance, modification, testing, and repair expenses for instruments and equipment used for R&D activities, and related operating lease expenses;
  • Depreciation of instruments and equipment used for R&D activities; and
  • Amortization of software, patents, and non-patent technology (license, technical know-how, design, and computation methods) used for R&D activities.

Effective from the 2017 tax year, the following expenses will also be eligible for the incentive:

  • Equity incentives provided to R&D personnel;
  • Wage and salary expenses included in payments made to labor dispatching companies for external R&D personnel;
  • Employee welfare expenses, supplementary pension funds, and supplementary medical insurance premiums;
  • Accelerated depreciation and amortization expenses for tangible and intangible fixed assets used for the R&D activities; and
  • R&D expense incurred for failed R&D activities.

In addition, expenses related to innovative design activities are eligible, including expenses related to:

  • The development of multimedia, animation, and game software;
  • The design and production of digital animation and games;
  • The design of construction projects meeting green building standards;
  • The special design of landscape projects; and
  • Industrial design and mold design.

For the following expenses, the amount eligible for the incentive is limited to 10% of total R&D expenses:

  • Costs for technical books and materials;
  • Translation fees;
  • Expert consulting fees;
  • Insurance premiums on high and new-tech R&D;
  • Expenses for retrieving, analyzing, evaluating, demonstrating, identifying, reviewing, assessing, and inspecting R&D results;
  • Application, registration, and agency fees for intellectual property; and
  • Related travel and meeting expenses.

Expenses for Outsourced R&D

For R&D activities outsourced to a domestic third-party entity or individual, 80% of the related services fees are eligible for the incentive. For the third-party provider, however, expenses incurred in the provision of the services are not eligible.

If outsourced to a foreign third party, the incentive is not available.

It is clarified that the R&D expenses by the subcontractor are eligible for the super deduction for the principal, and the incentive may not be transferred to the subcontractor.

Effective from 1 January 2018, the exclusion of expenses for R&D commissioned overseas from the increased R&D super deduction incentives has been abolished, and up to 80% of expenses incurred in relation to such outsourcing may be eligible, provided that the expenses do not exceed two-thirds of the Chinese enterprise’s total expenses and the amount incurred is at arm's length. Where the foreign company is related to the Chinese enterprise, a detailed breakdown of the project expenses must be provided. Further, a signed technology development contract must be registered with the administrative department of science and technology.

Cost-Sharing Arrangements

As long as expenses are reasonably allocated under a cost-sharing arrangement, each party to the arrangement may apply the incentive for the eligible expenses allocated to it. A formal written agreement between members of a corporate group is no longer explicitly required, although the tax authorities may still request such documentation for transfer pricing purposes.

Retroactive Application

Eligible enterprises that fail to claim the incentive for a period beginning after 1 January 2016 are allowed to retroactively claim the super deduction for up to three preceding years.

Tax Concession for Advanced Technology Service Enterprises

Enterprises deriving at least 50% of their income from the following advanced technology services are eligible for a number of benefits. The tax concessions were earlier available only for enterprises established in one of the China’s 21 model cities and subsequently expanded to 31 cities. Effective from 1 January 2018, the incentive is expanded nationwide in respect of pilot areas of service trade innovative development, particularly for enterprises engaged in:

  • Computer and information services, including information system integration services and data services;
  • Research and development and technical services, including research and experimental development services, industrial design services, and intellectual property cross-border licensing and transfer;
  • Cultural and technical services, including digital production of cultural products and related services, and foreign translation, dubbing, and production services for cultural products; and
  • Traditional Chinese medicine (TCM) medical services, including TCM healthcare and related services.

The benefits include:

  • A reduced tax rate of 15% through 31 December 2018;
  • An increased deduction cap for employee education expenses equal to 8% of total salaries, with the excess carried forward; and
  • VAT zero-rating for exported services (previously a business tax exemption).

In order to qualify for the concession, an enterprise must seek approval from its local competent authorities and meet the following conditions:

  • Must be incorporated in China (excluding Hong Kong and Macau);
  • Must have adopted advanced technology or have strong R&D capability to engage in one or more advanced technology-based service businesses, including information technology outsourcing (ITO), business process outsourcing (BPO), and knowledge process outsourcing (KPO);
  • At least 50% of the total number of employees of the enterprise must be college-educated;
  • The income from engaging in advanced technology-based service businesses must account for more than 50% of total revenue; and
  • The income from engaging in offshore service outsourcing business must account for at least 35% of total revenue.

VAT Refunds for R&D Equipment

VAT exemption in the form of refund (of input VAT credit) is granted on domestically-made equipment purchased by foreign-funded Research and Development (R&D) centers in China and by domestic-funded R&D institutions until 31 December 2023 (extended from 31 December 2020) subject to certain conditions.

The specific conditions for the VAT exemption (refund) depend on when the foreign-funded R&D center was established:

  • For R&D centers established on or before 30 September 2009, the following conditions apply:
    • total investment of at least USD 5 million as an independent legal person or total R&D investment of at least USD 5 million if not an independent legal person (a company's internal department or branch), and annual R&D expenses of at least CNY 10 million;
    • at least 90 full-time research and development personnel; and
    • total equipment purchases with an original value of at least CNY 10 million since the establishment of the center; and
  • For R&D centers established after 30 September 2009, the following conditions apply:
    • total investment of at least USD 8 million as an independent legal person or total R&D investment of at least USD 8 million if not an independent legal person (a company's internal department or branch), with no annual expense condition;
    • at least 150 full-time research and development personnel; and
    • total equipment purchases with an original value of at least CNY 20 million since the establishment of the center.

The standard time limit for filing the VAT refund request/ declaration is from the first day of the month following the purchase of domestically produced equipment until 30 April of the following year.

Tax Concessions for Technology Transfer

Gains of up to CNY 5 million from technology ownership transfers may be eligible for a corporate income tax exemption, with excess amounts eligible for a 50% corporate income tax reduction. The incentive applies for transfers of:

  • Patents (inventions, designs, and models);
  • Computer software copyrights;
  • Integrated circuit designs;
  • New biopharmaceuticals; and
  • Other technology as specified by the Ministry of Finance and the State Administration of Taxation.

The technology transferred must have been exclusively held for at least five years, and the related contracts for the transfer must be approved and registered. Technical advice, technical service, and technical training may also be treated as gains eligible for the exemption/reduction if included in the contract and price of the transfer.

In 2015, the China State Council announced that the tax concessions also cover nonexclusive licensing of technology from 1 January 2016.

Deduction for Investments in High-Tech SMEs

Legal entity shareholders and corporate partners in venture capital LLPs with investments in high-tech SMEs in certain zones are allowed to deduct up to 70% of the investment amount from their taxable income from the enterprise. In order for the incentive to apply, the invested enterprise must not be listed, and the shares must be held for at least two years. Any unutilized deduction may be carried forward. Effective from 1 January 2018, this deduction is available to investments nationwide.

Effective from 1 January 2019, the conditions for qualifying high-tech SMEs have been relaxed. The conditions include an increase in the maximum number of employees from 200 to 300 and an increase in the maximum total assets and annual sales from CNY 30 million to CNY 50 million. This incentive applies for investments made from 1 January 2022 to 31 December 2023 (previously from 1 January 2019 to 31 December 2021), as well as investments made in the two years prior to 1 January 2022 (previously 1 January 2019).

Advance Claim of R&D Expenses

China’s State Tax Administration issued a press release on 9 June 2022 in which it is clarified that from the year 2022 onwards, companies that are eligible for R&D incentives may make a claim for eligible expenses incurred during the first 3 quarters of the year 2022 in the month of October 2022. Previously a claim for R&D expenses could be made only as part of the annual tax return filing in the year following the year in which the eligible expenses were incurred.

Eligible companies may claim the R&D expenses incurred during the first 3 quarters of the year, either at the time of advance payment of tax for the third quarter or at the time of advance payment of tax for the month of September, both of which are due in October. Eligible companies that do not make an advance claim for the R&D expenses, may claim it in full at the time of filing the annual tax return.

The advance claim of R&D expenses that was first allowed in October 2021 as a temporary relief measure has been made permanent by the announcement of the State Tax Administration on 20 May 2022.